EMISSIONS TRADING – J-VETS (Japan)

Background
Under the 1997 Kyoto Protocol, Japan committed to reducing its greenhouse gas emissions by 6 per cent from 1990 levels by 2012. However, Japan is falling behind on this promise with greenhouse gas emissions for the 2002 fiscal year 7.6 per cent above 1990 levels. The Japanese government is in the process of assessing and reviewing the Climate Change Policy Programme. In August 2004, the Central Environment Council (CEC), an advisory body to the Environment Minister, published an interim report and assessment of the Programme.[1] The interim report released by the CEC indicated that the introduction of an emissions trading system and a carbon tax would be effective in reducing Japan's greenhouse gas emissions. Section III of the report, “Review of the Programme”, under the heading Cross-sectoral Measures and Policies sets out the current attitude towards a domestic emissions trading scheme and the future potential for implementation of such a scheme. According to the report, if Japan is to introduce a mandatory domestic trading scheme, further discussions will be needed on such subjects as the type of institution, means by which to distribute allowances, and measures against non-compliance. When developing such a scheme, studies will be necessary to ensure fairness among industrial sectors and among companies. If mandatory emissions trading is introduced the report highlights the importance of linking the domestic scheme with the Kyoto Mechanisms and emission trading schemes of other countries such as the EU scheme in order to allow participants access to a larger carbon market, thus making it more cost effective for them to attain their emissions reductions. The report recommended that it is appropriate for Japan to introduce a voluntary emissions trading scheme during the second step of the Programme (2005-2007) so that it can build experience with emissions trading and realise additional reductions. Such a voluntary scheme should not only be limited to carbon dioxide but should also include the three CFC alternatives. Inclusion of these gases will be an incentive to further reduce their emissions. The interim report sees a voluntary emissions trading scheme as a “social experiment, creating a new business model in which innovative efforts to tackle climate change generate additional values.” In the Japanese Fiscal Year (JFY)[2] 2003 & 2004, the Ministry of Environment (MOE) conducted a Pilot Project for Domestic Emissions Trading.

Design of Pilot Project
The aims of the project were to provide private companies with opportunities to build experience and technical skills regarding emissions trading procedures, demonstrate that a cross-sectional emissions trading scheme is feasible in Japan and establish an infrastructure for domestic emissions trading in Japan. The project included all six greenhouse gases (GHG) covered by the Kyoto Protocol.[3] In the Pilot Project, 31 parties (private companies) from a broad range of industries that voluntarily participated set their corporate-wide GHG reduction targets for fiscal year 2003 at their discretion and tried to achieve their own targets. Participants chose their reduction targets from the following types:
·         Absolute targets: with this kind of target participants set absolute reduction targets for fiscal year 2003. Participants received allowances matching their emissions cap from the start. They were free to sell their allowances if they wished but needed to ensure that they held enough allowances to cover their actual verified emissions by the end of the reconciliation period (cap-and-trade).
·         Relative target: participants opting for this kind of target set an emissions target per unit of output (production or total floor space). Credits were issued to participants when they reduced their emissions below their targets (baseline-and-credit).
·         Absolute reduction target: participants declared a targeted-reduction that would be realised by their emission reduction efforts. Credits were issued to participants when they reduced emissions below their targets (baseline-and-credit).

Future of Emissions Trading in Japan
Based on the interim report and the conclusion of the Pilot Project for Domestic Emissions Trading (DET), the Ministry of Environment (MOE) is planning to introduce a large scale voluntary emissions trading scheme (Japan’s Voluntary Emissions Trading Scheme – J-VETS) in JFY 2006, with preparations beginning in April 2005.

Design
Under the envisioned scheme participating companies would be obliged to cut their greenhouse gas emissions to self-imposed maximum emission levels. In return for committing to emissions reductions participants will receive government subsidies for 1/3 of the cost of installing new facilities to improve efficiency or to promote renewable energy that would help them to achieve their targets. In April 2005 the process of participant application for the government subsidy and the screening of these applications began. The total budget for subsidies is 3 billion Yen. Participant applications must include information on the new facilities, their installation costs and the expected amount of emissions reduction in JFY 2006. Screening of subsidy applications is on the basis of “cost-efficiency” optimisation. While the subsidy rate is 1/3 of the installation cost, it is limited to a maximum of 200 million Yen per site. At the start of April 2006, participants will be allocated their emissions allowances. Allowances will be allocated to the amount of “base year emissions minus promised reduction”. Base year emissions will be the average emissions of the past 3 years. The J-VETS will operate between the 1^stof April 2006 and the 31^st of March 2007[4]. Participants can trade allowances throughout this period. At the end of this period the Ministry of Environment will calculate and verify the actual GHG emissions for JFY 2006 of each participant. By June 2007 all participants shall retire a sufficient quantity of allowances in the registry to cover their actual GHG emissions for FY 2006. The interim period between the end of March and beginning of June will act as a “true-up” period allowing those that need to purchase additional allowances to enter the market and do so. In addition, to assist with meeting their emissions reduction targets, participants will be allowed to use credits (CERs) from CDM projects, e.g. afforestation, to cut greenhouse gases overseas, as substitutes for emissions reduction. If by mid-June 2007, participants find that they still do not have enough allowances to cover their actual JFY 2006 GHG emissions, the MOE will allow one final trading period (expected to be one week in duration) in which participants can attempt to cover their shortfall. The Ministry perceive this as giving participants the maximum opportunity to cover their actual emissions. If after this, participants still find themselves in a short position then they will be forced to the subsidy that they received to the government.


[1] The Climate Change Policy Programme was formulated in 1998 following the adoption of the Kyoto Protocol. It was revised in March 2002, prior to Japan’s ratification of the Kyoto Protocol. In order to fulfil the 6% reduction commitment of the Kyoto Protocol in the first commitment period, while taking into consideration changes in the socio-economic situation and conditions related to the development and diffusion of technology, the Programme adopted a step-by-step approach. The first steps refer to the years between 2002 and 2004, the second step refers to the three years between 2005-2007, and the third step refers to the three years between 2008 and 2012. The Programme is scheduled for two assessments and reviews – the first is currently taking place with the second due to take place in 2007. Ministry of the Environment, Japan. (Aug ’04)
[2] The Japanese Fiscal Year (JFY) runs from April to March.
[3] The 6 GHG covered by the Kyoto Protocol are carbon dioxide, methane, nitrous oxide and fluorinated gases (hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride).
[4] This time period represents the 2006 Japanese Fiscal Year

Written by admin

Background

Under the 1997 Kyoto Protocol, Japan committed to reducing its greenhouse gas emissions by 6 per cent from 1990 levels by 2012. However, Japan is falling behind on this promise with greenhouse gas emissions for the 2002 fiscal year 7.6 per cent above 1990 levels. The Japanese government is in the process of assessing and reviewing the Climate Change Policy Programme. In August 2004, the Central Environment Council (CEC), an advisory body to the Environment Minister, published an interim report and assessment of the Programme.[1] The interim report released by the CEC indicated that the introduction of an emissions trading system and a carbon tax would be effective in reducing Japan's greenhouse gas emissions. Section III of the report, “Review of the Programme”, under the heading Cross-sectoral Measures and Policies sets out the current attitude towards a domestic emissions trading scheme and the future potential for implementation of such a scheme. According to the report, if Japan is to introduce a mandatory domestic trading scheme, further discussions will be needed on such subjects as the type of institution, means by which to distribute allowances, and measures against non-compliance. When developing such a scheme, studies will be necessary to ensure fairness among industrial sectors and among companies. If mandatory emissions trading is introduced the report highlights the importance of linking the domestic scheme with the Kyoto Mechanisms and emission trading schemes of other countries such as the EU scheme in order to allow participants access to a larger carbon market, thus making it more cost effective for them to attain their emissions reductions. The report recommended that it is appropriate for Japan to introduce a voluntary emissions trading scheme during the second step of the Programme (2005-2007) so that it can build experience with emissions trading and realise additional reductions. Such a voluntary scheme should not only be limited to carbon dioxide but should also include the three CFC alternatives. Inclusion of these gases will be an incentive to further reduce their emissions. The interim report sees a voluntary emissions trading scheme as a “social experiment, creating a new business model in which innovative efforts to tackle climate change generate additional values.” In the Japanese Fiscal Year (JFY)[2] 2003 & 2004, the Ministry of Environment (MOE) conducted a Pilot Project for Domestic Emissions Trading.

Design of Pilot Project

The aims of the project were to provide private companies with opportunities to build experience and technical skills regarding emissions trading procedures, demonstrate that a cross-sectional emissions trading scheme is feasible in Japan and establish an infrastructure for domestic emissions trading in Japan. The project included all six greenhouse gases (GHG) covered by the Kyoto Protocol.[3] In the Pilot Project, 31 parties (private companies) from a broad range of industries that voluntarily participated set their corporate-wide GHG reduction targets for fiscal year 2003 at their discretion and tried to achieve their own targets. Participants chose their reduction targets from the following types:

· Absolute targets: with this kind of target participants set absolute reduction targets for fiscal year 2003. Participants received allowances matching their emissions cap from the start. They were free to sell their allowances if they wished but needed to ensure that they held enough allowances to cover their actual verified emissions by the end of the reconciliation period (cap-and-trade).

· Relative target: participants opting for this kind of target set an emissions target per unit of output (production or total floor space). Credits were issued to participants when they reduced their emissions below their targets (baseline-and-credit).

· Absolute reduction target: participants declared a targeted-reduction that would be realised by their emission reduction efforts. Credits were issued to participants when they reduced emissions below their targets (baseline-and-credit).

Future of Emissions Trading in Japan

Based on the interim report and the conclusion of the Pilot Project for Domestic Emissions Trading (DET), the Ministry of Environment (MOE) is planning to introduce a large scale voluntary emissions trading scheme (Japan’s Voluntary Emissions Trading Scheme – J-VETS) in JFY 2006, with preparations beginning in April 2005.

Design

Under the envisioned scheme participating companies would be obliged to cut their greenhouse gas emissions to self-imposed maximum emission levels. In return for committing to emissions reductions participants will receive government subsidies for 1/3 of the cost of installing new facilities to improve efficiency or to promote renewable energy that would help them to achieve their targets. In April 2005 the process of participant application for the government subsidy and the screening of these applications began. The total budget for subsidies is 3 billion Yen. Participant applications must include information on the new facilities, their installation costs and the expected amount of emissions reduction in JFY 2006. Screening of subsidy applications is on the basis of “cost-efficiency” optimisation. While the subsidy rate is 1/3 of the installation cost, it is limited to a maximum of 200 million Yen per site. At the start of April 2006, participants will be allocated their emissions allowances. Allowances will be allocated to the amount of “base year emissions minus promised reduction”. Base year emissions will be the average emissions of the past 3 years. The J-VETS will operate between the 1^stof April 2006 and the 31^st of March 2007[4]. Participants can trade allowances throughout this period. At the end of this period the Ministry of Environment will calculate and verify the actual GHG emissions for JFY 2006 of each participant. By June 2007 all participants shall retire a sufficient quantity of allowances in the registry to cover their actual GHG emissions for FY 2006. The interim period between the end of March and beginning of June will act as a “true-up” period allowing those that need to purchase additional allowances to enter the market and do so. In addition, to assist with meeting their emissions reduction targets, participants will be allowed to use credits (CERs) from CDM projects, e.g. afforestation, to cut greenhouse gases overseas, as substitutes for emissions reduction. If by mid-June 2007, participants find that they still do not have enough allowances to cover their actual JFY 2006 GHG emissions, the MOE will allow one final trading period (expected to be one week in duration) in which participants can attempt to cover their shortfall. The Ministry perceive this as giving participants the maximum opportunity to cover their actual emissions. If after this, participants still find themselves in a short position then they will be forced to the subsidy that they received to the government.

[1] The Climate Change Policy Programme was formulated in 1998 following the adoption of the Kyoto Protocol. It was revised in March 2002, prior to Japan’s ratification of the Kyoto Protocol. In order to fulfil the 6% reduction commitment of the Kyoto Protocol in the first commitment period, while taking into consideration changes in the socio-economic situation and conditions related to the development and diffusion of technology, the Programme adopted a step-by-step approach. The first steps refer to the years between 2002 and 2004, the second step refers to the three years between 2005-2007, and the third step refers to the three years between 2008 and 2012. The Programme is scheduled for two assessments and reviews – the first is currently taking place with the second due to take place in 2007. Ministry of the Environment, Japan. (Aug ’04)

[2] The Japanese Fiscal Year (JFY) runs from April to March.

[3] The 6 GHG covered by the Kyoto Protocol are carbon dioxide, methane, nitrous oxide and fluorinated gases (hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride).

[4] This time period represents the 2006 Japanese Fiscal Year