In July this year, the G8 group meets in Japan, and during a parallel climate change summit, the Japanese host government will be keen to announce some breakthrough. ItÆs perceived as embarrassing that Japan is not keeping to its Kyoto Protocol commitment of reducing its greenhouse gas emissions to 6% below 1990 levels by 2012, a year which marks the end of the Kyoto Protocol and the start of a new round of efforts.
The Japanese government is looking enviously at Germany, whose chancellor Angela Merkel, reaped international approval at last yearÆs G8 summit on the back of GermanyÆs excellent environmental record. Germany has already lowered its emissions by 20% from 1990 levels.
ôWhen the European Union and the United States are setting the global trend, I think itÆs not good that Japan does not consider the trading system,ö said Hiroshi Okuda of Toyota and member of a new government advisory panel on climate change. The panel comprises senior personnel from industry, including Nippon Steel and Tokyo Electric Power.
Japan is divided about whether to accept carbon trading. Because the country is already highly energy efficient, there is a feeling that Japan should have to meet much less stringent targets. EuropeÆs target is 8% and AmericaÆs target is 7%, although AmericaÆs contribution is not binding. In fact, Japan enjoys generous carbon offsets from its forests and from investing in environmentally friendly projects overseas. According to the business newspaper Nikkei Weekly, JapanÆs actual goal amounts to cutting emissions to just 0.3% of 1990 levels.
The influential business lobby, Keidanren, reluctantly came out in favour of carbon trading at the end of February û but wants to delay the start until 2012. Privately, many companies are unhappy, preferring a system of voluntary reductions. Voluntary reductions are not going far enough, however, because of accidents in the nuclear industry, which has reduced the roll-out of nuclear plants. In turn, this has slowed the reduction in emissions.
ôJapanese companies want a more flexible system, without the complexity of trading, which many of them donÆt understand,ö says a source who has worked with the government on the topic of climate change. ôJapanese companies think that a system whereby different industry sectors make reductions at different times (depending on circumstances) is more suitable. So this year, for example, the auto companies could make a big effort, while next year, the power companies could make a similar effort and let the auto companies off the hook,ö he says.
The Ministry of the Environment has come out in favour of carbon trading, but the Ministry of Economic, Trade and Industry (METI), although publicly in favour, is against it. According to sources close the government, METI had previously promised companies that carbon trading would not be launched.
The carbon trading scheme which has taken root in Europe is far from being achieved in Asia. European countries are already trading across borders in the second phase of the European Union Emission Trading Scheme, which kicked off in 2007. EU ETS is the biggest scheme in the world, with a market worth $60 billion last year. In contrast, Japanese companies currently donÆt have national carbon trading, which was the first part of the scheme in Europe, and which started in 2005.
Foreign investment banks are keen to launch the emissions trading scheme, since they would be major traders in such a market. ôJapan needs lots of credits, and itÆs likely it would buy them from China, so there could be a lot of business for the investment banks,ö notes the source.
Carbon trading would impose extra costs on Japanese companies, something they are reluctant to accept in todayÆs climate of a strong yen, poor consumer sentiment and a slowdown in important export markets such as the US. The cost arises in the first instance because carbon allowances, the total amount of which corresponds to the cap, would likely be auctioned off by the government to the companies. The allowances were given away in Europe, but in retrospect this is considered a mistake. Some European countries created allowances that were in excess of the cap û which meant it encouraged companies to pollute more.
Once the companies have their allowances, they can start trading them. Under a cap and trade system, a company gets a credit for any reduction in emissions below the cap. It can sell these credits to a second company which is not able to reduce its emissions, and will have to pay a market price for the pollution. Previously, the problem with reducing emissions was quantifying the ownership and the cost of the emissions. With close monitoring of emission outputs and a market in credits, both problems are solved.
Trade with China is a promising area, although probably many years away. The theory is that itÆs cheaper for China to reduce emissions than for Japan. China is starting from a low managerial and technological base û so improvements are readily and cheaply available. Japan is far more efficient, so achieving further reductions would be difficult. Under an international carbon trading system, Japan would buy the credits created by reductions in China.
For the time being, thatÆs all theory. To get there, Japan will have to venture out of its comfort zone, or its blue-chips will have to prove they can achieve their targets on a voluntary basis alone. So far, that doesnÆt look likely.
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