Carbon Credits, Carbon Offset, Emissions Reduction, Japan

Japan goes on an air spending spree

November 30, 2007 (Asia Times) – Increasingly feeling the heat over the Kyoto Protocol on curbing global warming, Japan is going on a spending spree to buy rights from around the world to emit carbon dioxide and other heat-trapping greenhouse gases.

With the clock ticking toward the start of the United Nations treaty’s “first commitment period” of 2008-2012, more and more dark clouds are hanging over Japan’s commitment to reach its protocol goal.

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Although Japan must reduce its annual greenhouse gas (GHG)emissions by 6% during that period on average from the 1990 levels, its emissions in fiscal 2006, which ended on March 31 this year, were 6.4% above the fiscal 1990 levels, according to preliminary government figures released recently.

In a desperate bid to reach its Kyoto goal, both the nation’s government and businesses are rushing to land emission rights, or credits, through the “Kyoto mechanisms.”

Under the Clean Development Mechanism (CDM), which is designed to help industrialized countries meet their reduction targets, firms from industrial countries can earn emission credits in return for GHG-reduction investments in developing countries and count them as cuts in their own emissions – and in turn, in their countries.

The two other Kyoto mechanisms are Joint Implementation (JI) and emissions trading. JI is similar to the CDM, but it covers GHG-reduction projects in industrialized countries that can afford to cut more gases than required by the protocol, such as Russia and other former Soviet republics and Eastern European countries. The emissions trading system allows countries to buy and sell credits between them.

The Japanese government has so far approved about 250 CDM and JI projects that are expected to reduce GHG emissions by a total of over 100 million tonnes CO2 equivalent per annum. Well over 90% of the government-approved projects are CDM ones. Some of these GHG-reduction projects have already been registered with the United Nations.

In mid-November, Japan became the first nation to link its national registry to the international transaction log (ITL) being managed by the secretariat of the UN Framework Convention on Climate Change (UNFCCC), which signed the Kyoto Protocol in 1997. The ITL allows emission credits generated through CDM and JI projects to be electronically transferred into national registries, which administer the holdings and transfers of credits.

Japan’s link with the ITL has made it possible for account holders in the Japanese national registry to file applications for emission credits transfers among themselves. International emission credits transfers are also expected to become possible in early January next year, when Japan expects to formally become eligible to participate in the Kyoto mechanisms. Among other industrial countries, New Zealand and Switzerland are also expected to link their national registries with the ITL by the end of this year. The European Union (EU)’s link with the ITL is also expected sometime next year.

Japan’s businesses, already among the world’s largest credit buyers, plan to further increase their purchases. The nation’s two major CO2 emitting industries, electricity and steel, for example, have announced recently they will significantly increase their credit purchases, to a total of 164 million tonnes CO2 equivalent. The Finance Ministry also said recently that the government alone may have to spend up to 1.2 trillion yen (US$10.9 billion) on credits.

To be sure, Japan boasts of the world’s most energy-efficient economy and is proud of the fact that the Kyoto Protocol was negotiated and born in the nation’s ancient capital just a decade ago. But failure to fulfill its commitment under the treaty would not only represent an embarrassing loss of face for the nation but deal a serious blow to its clout in the world of environmental diplomacy.

The issue is particularly sensitive for Japan because the world’s second-largest economy wants to take the leadership role in efforts to establish an effective international framework to replace the Kyoto Protocol, which expires in 2012. A key UN conference is to be held for 12 days starting on December 3 in the Indonesian resort island of Bali, formally kicking off negotiations on the post-Kyoto framework.

Japan will host an annual summit of the Group of Eight (G8) major countries in the Lake Toya hot-spring resort in its northernmost prefecture of Hokkaido next July, at which the post-Kyoto climate pact will be high on the agenda. Tokyo plans to invite leaders from other major CO2 emitters, such as China and India, to the summit.

In hot water
In early November, the Environment Ministry said in a preliminary report that Japan’s GHG emissions totaled 1.341 billion tonnes CO2 equivalent in fiscal 2006, down 1.3% from fiscal 2005 but up 6.4% from fiscal 1990.

Under the Kyoto Protocol, Japan must reduce its annual GHG emissions by 6% to 1.185 billion tonnes CO2 equivalent on average during the Kyoto Protocol’s “first commitment period” of 2008-2012 from 1.261 billion tonnes CO2 equivalent in 1990.

Under the current government plan, the 3.8% portion of the targeted 6% reduction is to be achieved by carbon “sink” plantation projects at home and the 1.6% portion – or about 20 million tonnes CO2 equivalent – is to be achieved by the government’s purchases of emission credits. The remaining 0.6% portion is to be achieved by GHG reduction efforts by companies and households.

The preliminary report on fiscal 2006 emissions show that Japan must actually slash its GHG emissions by 7% from the fiscal 2006 levels if it is to reach its Kyoto goal.

Of the six GHGs controlled by the Kyoto Protocol, CO2 accounted for 95% of Japan’s total GHG emissions in fiscal 2006. CO2 emissions amounted to 1.275 billion tonnes, down 1.3% from fiscal 2005 but up 11.4% from fiscal 1990. Emissions of all the other controlled five GHGs, including methane and N2O, in fiscal 2006 declined sharply from the fiscal 1990 levels.

CO2 emissions resulting from energy generation, such as burning fossil fuels for electricity and consuming gasoline for running cars, totaled 1.184 billion tonnes, or 92.9% of the nation’s total CO2 emissions, in fiscal 2006. CO2 emissions resulting from energy generation in fiscal 2006 were down 1.4% from fiscal 2005 but up 11.8% from fiscal 1990.

Of the nation’s total CO2 emissions resulting from energy generation in fiscal 2006, 455 million tonnes came from the industrial sector, such as factories, up 0.6% from fiscal 2005 but down 5.6% from fiscal 1990. The transport sector produced 254 million tonnes of CO2, down 0.9% from fiscal 2005 but up 17.0% from fiscal 1990. Office buildings and other commercial facilities produced 233 million tonnes of CO2, down 2.6% from fiscal 2005 but up 41.7% from fiscal 1990. The household sector emitted 166 million tonnes of CO2, down 4.4% from fiscal 2005 but up 30.4% from fiscal 1990.

According to estimates released in early August by a joint council of the Environment Ministry and the Ministry of Economy, Trade and Industry (METI), Japan’s GHG emissions are likely to rise by a minimum of 0.9% and a maximum of 2.1% in fiscal 2010 from the fiscal 1990 levels because the economy is expected to grow stronger than expected earlier. This means Japan might actually need to make an additional cut of between 1.5% and 2.7%, or between about 20 million and 34 million tonnes CO2 equivalent per annum, possibly all through government credit purchases.

Based on the new estimates for fiscal 2010 GHG emissions, the Finance Ministry said in late October that that the government might eventually have to spend at least 220 billion yen and up to 1.2 trillion yen on credits to achieve Japan’s Kyoto goal. The ministry’s estimates for credit purchase costs are based on the lowest and highest transaction values in the EU’s past emissions trading – of $9 and $36 per tonne, respectively.

The joint council, comprising the Environment Ministry’s Central Environment Council and METI’s Industrial Structure Council, is reviewing the government’s program to attain the Kyoto target, which was adopted soon after the Kyoto Protocol took effect in February 2005. The joint council is expected to issue a final report by the end of the year that contains additional measures to reduce GHG emissions. Based on the final report, the government plans to revise the 2005 program next March.

Highly alarmed by the August estimates for fiscal 2010 GHG emissions, the government has pressed domestic industries to do more to produce less such gases. For Japan to reach its Kyoto goal, each of most major domestic industries has mapped out a voluntary action plan to cut GHG emissions.

The nation’s 21 industries raised their voluntary GHG reduction targets and pledged at the joint council of the Environment Ministry and METI in October to make additional emission cuts totaling about 20 million tonnes CO2 equivalent per annum, the amount seen as the minimum necessary, based on the council’s August estimates for fiscal 2010 emissions, for Japan to achieve its Kyoto target.

Still, the question is that the council’s August estimates themselves are widely seen as being overly optimistic. Even some council members question the credibility of the estimates, which do not fully take into account an anticipated effect on nuclear power generation of a powerful earthquake that hit Niigata Prefecture, central Japan, in July.

The 6.8-magnitude temblor damaged and shut down indefinitely the Kashiwazaki-Kariwa nuclear plant, the world’s largest nuclear power station in terms of output capacity. The plant operator, Tokyo Electric Power, estimates that the suspension will lead to a 2% rise in Japan’s GHG emissions in the current fiscal year alone.

Resource-poor Japan, which imports almost all of its oil and natural gas, attaches great importance to nuclear power as a key to ensuring national energy security, as well as to reducing GHG emissions. Japan is already the world’s third-largest nuclear power nation, after the United States and France, in terms of the number of civilian nuclear reactors. At present, Japan’s nuclear plants supply about 30% of the country’s electricity, significantly up from just 6.5% three decades ago.

The electric power industry’s action plan for GHG emission reductions, which is reflected in the current government program to achieve Japan’s Kyoto target, sets a specific goal of reducing CO2 emissions intensity (emissions per kWh of energy used by the end user) by approximately 20% from the fiscal 1990 level to about 0.34 kg-CO2/kWh by fiscal 2010.

The 20% reduction target is based on the assumption that nuclear power plants will operate at more than 80% of capacity. But the actual operation rate is now stuck below 70% because of a series of accidents and mishaps at many plants – and their cover-ups by power companies. In fiscal 2006, the rate was 69.9%, compared with 84.2% in fiscal 1998.

The Environment Ministry said that if the operation rate of nuclear power plants had been at the same level as fiscal 1998, Japan’s GHG emissions in fiscal 2006 would have been 1.302 billion tonnes CO2 equivalent, up only 3.3% from the 1990 levels, instead of up 6.4% as preliminarily reported.

In a rush
Japanese companies are racing against the clock and further accelerating their hefty investments in CDM and JI projects abroad. As of October 24, the Japanese government had approved a total of 247 such projects since the end of 2002. Of the 247 projects, 149, or 60%, were approved this year alone. China is by far the largest host nation of CDM projects involving Japanese firms, followed by such other major developing countries as Brazil and India.

The electricity and steel industries, two major CO2 emitters, reported to the joint council of the Environment Ministry and METI in October plans to significantly increase their emission credit purchases, to a total of 164 million tonnes CO2 equivalent. The electricity industry plans to increase the amount of credit purchases it makes by 2012 to around 120 million tonnes CO2 equivalent from the previously planned 70 million tonnes, while the steel industry plans to purchase 44 million tonnes by 2012, compared with the previously planned 28 million tonnes.

Energy-related firms such as electric-power, oil and gas companies, and steelmakers are not alone in rushing to gas-reduction projects abroad. Since firms that buy cheap credits only to sell them off for higher prices could reap profits, major Japanese trading firms are intent on cashing in on the new business bonanza. They have already actively participated in GHG-reduction projects abroad, acquired emission credits generated from the projects and sold the credits to Japanese clients.

Mitsubishi Corp, Japan’s biggest trading house, is by far the most aggressive Japanese investor in CDM and JI projects. Mitsubishi is involved in 44 – or about 18% – of the 247 such projects approved by the Japanese government as of October 24, either alone or in partnership with other Japanese companies. At present, the total amount of emission credits Mitsubishi has already acquired or plans to acquire through CDM and JI projects is estimated at around 14 million tonnes CO2 equivalent per annum.

Another major trading house Marubeni Corp is preparing to launch up to 10 JI projects in Kazakhstan in hopes of acquiring emission credits worth several million tonnes CO2 equivalent per annum. Kazakhstan is not a signatory to the Kyoto Protocol, but is expected to ratify the treaty in the near future, paving the way for JI projects in the resource-rich Central Asian country.

Marubeni specifically plans to launch between five and 10 methane recovery JI projects at Kazakh coal mines and landfills. Methane is one of the six GHGs controlled by the Kyoto Protocol. Marubeni has apparently set its sights on Kazakhstan because new opportunities for large-scale GHG-reduction projects in the Organization (NEDO). In fiscal 2006, the government purchased credits worth a total of 6.38 million tonnes CO2 equivalent at a total cost of 12.2 billion yen. Since the current fiscal year began in April, the government has so far purchased credits worth at least about 2.2 million tonnes CO2 equivalent in total at an undisclosed cost.

The Environment Ministry and METI are jointly contributing funds to the Kyoto Mechanisms Credit Acquisition Program NEDO has been commissioned by the government to implement. The two ministries plan to together contribute about 31.5 billion yen to the program for the next fiscal year starting in April 2008, compared with the 12.9 billion yen earmarked for the current fiscal year.

The government also plans to buy surplus emission credits, dubbed “hot air,” from other nations. As a starter, the government plans to buy emission credits, possibly worth up to 10 million tonnes CO2 equivalent, from Hungary. It will be the first time for the Japanese government to purchase carbon credits directly from a foreign government through emissions trading, one of the Kyoto mechanisms.

Although Hungary is required by the Kyoto Protocol to slash its annual GHG emissions by 6% from the 1990 levels, the Eastern European country’s emissions are now hovering at levels more than 100 million tonnes below the target ones because its domestic industries, mainly the heavy chemical industry, have stagnated since the introduction of a market economy.

Hungary is expected to offer around 10 million tonnes of surplus credits for sale to foreign countries next year. If Japan purchases all the credits, it is estimated that the amount of money paid to Hungary will be around 20 billion yen.

There is strong criticism, especially from environment groups, that unlike investing in GHG-reduction projects, just buying hot air from Hungary and other Eastern European countries as well as Russia will not result in cuts in GHG emissions. But Japan defends its plans to purchase hot air.

A top METI bureaucrat said on Monday that Japan accepted its legally-binding target to reduce GHG emissions by 6% on condition that each nation can use the three Kyoto mechanisms, including emissions trading. “We believe it [to buy hot air through emissions trading] is our legitimate right,” said Takao Kitabata, METI’s administrative vice minister.

Kitabata said that the Japanese government will ask Hungary to use the proceeds from the credit sales for domestic environment protection under the so-called Green Investment Scheme (GIS). Kitabata indicated, however, that the Japanese government will not necessarily make similar requests to other potential sellers of hot air. “We have not made any decision to do so as our policy, although it [the GIS] is more desirable,” he said.

In disarray
Meanwhile, debate is heating up within Japan over such drastic anti-global warming measures as a “cap and trade” mandatory emissions trading system and an environment tax levied primarily on fossil fuels such as oil, gas and coal. But any decision appears very unlikely anytime soon because of sharp differences, even within the government.

On the issue of a “cap-and-trade” mandatory emissions trading system, which has been in place in the EU, the Environment Ministry is favoring the introduction of such a system. But METI and the nation’s most-powerful business lobby, the Japan Business Federation (Nippon Keidanren), are vehemently opposing the idea.

Among other reasons, the Japan Business Federation, chaired by Canon Chairman Fujio Mitarai, cites the difficulty of allotting emission volumes to business entities fairly and increased government controls over the economy. It also argues that the introduction of a mandatory emissions trading system would restrict growth of companies.

The Finance Ministry has recently joined the tug-of-war over a mandatory emissions trading system, clearly siding with the Environment Ministry and calling for the introduction of such a system.

A key advisory panel to Finance Minister Fukushiro Nukaga also warned on November 19 of a possible “huge” public financial burden resulting from the government’s larger-than-expected purchases of GHG emission credits to reach the nation’s Kyoto goal.

The Fiscal System Council, headed by Taizo Nishimuro, chairman of Tokyo Stock Exchange, made the unusual warning in a recommendation submitted to the finance minister. The recommendation serves as a guideline for the Finance Ministry to draft a fiscal 2008 government budget in late December.

The warning reflects a growing sense of crisis among panel members over the ever-deteriorating fiscal condition of the world’s second-largest economy, which is the worst among major industrialized countries.

Citing Finance Ministry estimates made recently, the advisory panel said in the recommendation that the government might have to buy GHG emission credits worth up to 1.2 trillion yen. “Since this huge burden would not gain the public’s understanding, it is necessary for the nation to surely fulfill its 6% reduction commitment by mobilizing all possible domestic measures,” the advisory panel said.

The advisory panel then stressed the need to take drastic measures to rein in the continued sharp growth in GHG emissions from offices and other commercial facilities as well as from households. “In order to reach the Kyoto goal, the nation needs to take effective policy measures appropriately … without relying excessively on fiscal measures,” the panel said.

Noting various risks involved in emission credit purchases, including possible higher purchase costs due to price rises and a weaker yen against the euro or the US dollar, the panel also emphasized the need for the government to acquire emission credits “effectively and steadily” while gaining full public understanding.

On the equally controversial issue of an environment tax, the Environment Ministry has tenaciously pushed for the introduction of such a tax in recent years. But METI and the Japan Business Federation have vehemently opposed the introduction of an environment tax, claiming that any such extra tax burden would erode corporate Japan’s international competitiveness.

A recent government survey shows, however, that those who support the introduction of an environmental tax to fight global warming have outnumbered those who oppose the move for the firs time. Environment groups are also calling for the introduction as soon as possible of an environment tax as well as a mandatory emissions trading system.

Another controversial issue being hotly debated is daylight saving time. The government survey shows that 56.8% of the pollees want daylight saving time to be introduced as part of efforts to promote energy conservation, up from 51.9% in the previous survey in 2005. In contrast, 29.3% said they are against such a measure, down from 30.2% in 2005.

On November 21, the joint council of the Environment Ministry and METI kicked off a full-scale debate on whether to take such drastic measures as a “cap-and-trade” mandatory emissions trading system, an environment tax and daylight saving time.

Although the joint council wants to draw some conclusions on those measures by the end of the year, the odds are clearly against their proponents. The joint council appears likely to merely include the pros and cons of the controversial measures in its final report, due out in late December.

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