Japan’s directions in the Post-Kyoto carbon world

Good Bye Kyoto: This month, the Japanese Ministry of Environment announced that greenhouse gas emissions in Japan had increased in the year to 2010, reflecting the continued recovery of its economy. Further, Japan stated at the recently concluded UN conference on climate change in Durban that it would not go along with continuing the Kyoto Protocol’s system of cap and trade for greenhouse gas emissions but also said at the same time that it would continue efforts to reduce such emissions all means. So is it backtracking by Japan or is Japan “walking the talk” albeit in a different path?

Walking the Talk: In terms of “the walk”, both the Ministry and the powerful “Keidanren” (the national association of large businesses) have continued to confirmed their long-term commitments to reduce in its industrial membership base, such emissions. Beyond just words, starting in 1997, the Keidanren has been especially active in developing and implementing industry volunteer action plans in its 109 major industrial sectors and also individual company targets. According to the Keidanren, its manufacturing and electric power utilities have actually been able to implement overall, a 12% reduction below the Kyoto Protocol requirements and both the Japanese government and industry believe the country should be able to meet its Kyoto obligations by March 2013. Such an achievement is especially impressive in the electric power utility industry grouping given the huge hit the electric utilities took in taking offline their nuclear generation capacity which had supplied 30% of the country’s generation capacity and whose targeted move to 40% capacity was to be a major component of the country’s emissions reduction strategy.

The Next Competitive Platform? This “slowly but surely Japanese way” thus far has been similar to other Japanese industrial policy initiatives undertaken – through the methodical buildup of a sectoral consensus, continuing emphasis and re-emphasis of the objectives and rationales, and grinding and rolling execution of the policy. While it may appear at first to unknowing outsiders as possibly some CSR-driven “greenwash”, in reality, by such an approach, the Keidanren has made the emissions strategy into a corporate competitive business advantage platform.

The Domestic Practice Field: The Japanese government has set self-targets for 2020 and it has introduced 1) implementation of an integrated carbon emission right trading system (now in a trial period), and 2) a bilateral domestic carbon credit trading platform. Under such trial carbon trading system, Japan has introduced several new and Japan-specific emission reduction credits in addition to the UN’s standardized Kyoto credits. These new Japan-specific credits include:
Domestic Carbon Credits,
JVEST (Japan’s Voluntary Emissions trading Scheme) credits
J-VER( Verfied Emission Reduction) and off-set credits
Tokyo Cap&Trade by Tokyo Metropolitan Government credits
Certificates of Green Power

1 and 2 are eligible for contributing to Kyoto Protocol. Others are not. 3 and 4 are open to participation by anybody. But others are limited. For example, the Domestic Carbon Credit system is the most popular and largest thus far and is based like a mirror of the UN’s CDM system in terms of following standardized methodologies, monitoring, approvals, etc. However, it is purely designed for Japanese large corporations in the electric power generation sector who produce significant CO2 emissions to buy from domestic producers/sellers of credits who are too small to be in Keidanren.

Building Homegrown Champions: While such domestic trial systems are working through their teething issues such as some bottlenecks in supply generation, all domestic parties are getting valuable experience on the different roles in such a system rather than under the old Kyoto Protocol system where the Japanese had tended to be more buyers passively following the credits generated and confirmed by non-Japanese systems participants. Also, the new domestic systems emphasize a higher degree of cooperation and coordination amongst the various Japanese private sector companies in roles such as investors and buyers and also as equipment and technology suppliers, and government agencies in overseas development capacities. In sum, these new bilateral credit agreement systems will be increasingly important for Japanese companies in terms of working practice in getting the emission reductions processes right.

Building for New Markets, New Challenges: Believe it or not believe it, agree with it or not, global “climate change” related regulation is the reality the electric power sector must work within. Rather than be dragged grudgingly backwards, the pullout from the Kyoto Protocol by Japan should be seen as a possible “wake-up call” to the sector that through emphasizing domestic trial systems and entity coordination activities, Japanese policymakers and businesses are preparing to be competitive in such new “climate change challenged” regulatory markets. Interpreting even Japan’s Ministry of Economy and Industry figures, if just the coal plants in US, China and India only are brought to current Japanese emissions reductions levels, it is a US10+ billion market which will grow significantly. The quiet domestic policies and practice systems now being worked through within Japan, could then be the harbinger of where the next competitive challenge from Japanese companies may be. 

Mr. Hirokazu Suto, Representative Director - Japan, Greenpower Fuels

Mr. William I.Y. Byun, Managing Director, Asia Renewables - Singapore