Japan may be moving towards introducing a wide-ranging emissions trading system (ETS). On 17 September 2008, a blueprint for a new ETS for Japanese industry was considered by a panel of experts and representatives of the government.

The proposals represent a significant step forward in Japanese government thinking. They are part of a wide suite of measures that the Japanese government has developed to meet its Kyoto Protocol and broader climate change commitments (see box) but they will be closely linked to voluntary action plan first established in 1996 with the Keidanren. They also build on a small-scale voluntary emissions trading scheme, JVETS, but while any new scheme will also be voluntary (at least initially), it could bring into the emissions trading ambit a much broader set of companies than its predecessor.

JVETS has been in place since 2005, and operates on a very small scale – around 150 Japanese companies have participated in the scheme so far. The incentive for companies to take part in the scheme lies in the government subsidies on offer for participants. Once a participating company has agreed to a target quota under JVETS (an agreed absolute emissions reduction or emissions intensity reduction), it receives a subsidy from the Ministry of Environment to cover portion of the estimated costs of meeting its emissions target. If the quota is not met (either through internal abatement, purchasing quotas from other participants or buying Kyoto credits), the subsidy must be returned to the Government.

There have been very few trades under JVETS to date, and it has acted more as a technology funding programme rather than an emissions trading programme. Notwithstanding the introduction of a new ETS, JVETS will continue into another year and will act in conjunction with the new scheme.

Under the new proposals, companies (or groups of companies) within industries covered by the Keidanren plan will set their own voluntary emission reduction or efficiency intensity targets (or a combination of the two) for carbon dioxide (CO2) in a similar way to under the JVETS. The other greenhouse gases will not be covered by the new ETS in the initial stages, but consideration will be given to including these at a later stage. Whilst the blueprint for the ETS does not prescribe how targets are to be set by companies, it does suggest that a company's target should reflect the targets adopted by the relevant industry under the Keidanren plan (representing a commitment to achieving an industry-specific target by 2010) or the target adopted by Japan under the Kyoto Protocol.

Once a company has set a target for itself under the proposed ETS, it may comply by:

  • reducing its absolute CO2 emissions;
  • reducing emissions intensity;
  • buying emission quotas from other participants in the ETS;
  • buying emission quotas from participants in JVETS;
  • buying Kyoto project credits; or
  • buying credits from a newly proposed "domestic CDM scheme"

Banking and borrowing of quotas between years of the scheme is contemplated by the blueprint but very few details have been included at this stage. Details of the domestic CDM scheme are also sketchy, but it appears from diagrams included with the blueprint that larger companies could invest in or provide abatement technology to small or medium-sized Japanese enterprises in exchange for credits to apply against its voluntary quota. The blueprint also contemplates forestry and biomass projects in Japan generating domestic CDM credits. However, there do not appear to be any plans for the scheme to interact with the EU ETS or other emissions trading schemes, or for emission allowances to be traded between this and other international schemes.

The blueprint for the proposed ETS contains very few details on the monitoring of emissions and the verification of reductions, and contemplates that detailed measures will need to be introduced to deal with this. However, JVETS has provided the government with useful experience in designing these measures. Companies within industries covered by the Keidanren plan have also had experience of monitoring and reporting on their CO2 emissions.

Trading of quotas and credits will initially be done by way of private negotiation between participants but contemplates that there may be a Japanese exchange established to act as a clearing house for quotas and credits. The blueprint also mentions measures to be introduced to stop abuses of the trading scheme by market speculators and participants – it provides no detail of what these measures may be.

Unlike the JVETS or other mandatory schemes such as the EU ETS, the blueprint for the ETS does not contemplate any incentives or penalties to encourage companies to join or to comply. It seems from these initial documents that the ETS will be an entirely voluntary system, relying on the natural desire of companies within an industry to compete on a level playing field.

In its international negotiations, Japan has long favoured a sector-based approach to climate change with industry-based targets. A broad-based emissions trading system which complements the existing plans of Japanese industry could therefore give Japan the opportunity to demonstrate one of its proposed climate change solutions to the world.

Japan's efforts to reduce its greenhouse gas (GHG) emissions predate the signing of the Kyoto Protocol, with the agreement in 1996 of the Voluntary Action Plan with the Keidanren, Japan's powerful industry association. Under this plan, 35 Japanese industries (including the power, steel and manufacturing sectors) voluntarily committed to achieve industry-specific emission reduction targets or emission intensity targets (ie reduction in CO2 emissions per unit of output) with the ultimate aim of achieving a collective goal of reducing the emission across all industries within the Keidanren to "below 1990 levels by 2010". It covers around 45% of Japan's total CO2 emissions and is designed to complement a number of other strategies aimed at helping Japan meet its Kyoto target of 6% below 1990 emission levels by 2012 and its longer-term target of reducing Japan's emissions by 60-80% below 1990 levels by 2050.

The various strategies for meeting the Kyoto target are set out in the country's recently revised Kyoto Protocol Target Achievement Plan (KPTAP) and the Action Plan for Achieving a Low-Carbon Society, released in July 2008.

The KPTAP focuses heavily on the reduction of the CO2 emissions from energy, which accounts for the majority of Japan's GHG emissions. Key features of the KPTAP are the voluntary nature of most of the measures and the importance given to the Keidanren plan within Japan's overall approach.

The Action Plan for Achieving a Low Carbon Society focuses more on long-term measures such as the development of efficiency improvement and emissions reduction technology in Japan and in exporting this technology to the developing world. It also contemplates a possible expanded role for emissions trading and environmental taxes in future domestic measures and puts forward broad policies for encouraging greater involvement of communities and citizens in emission reduction measures.

Notwithstanding the range of domestic strategies that are in place or planned, Japan expects to fall well short of meeting its Kyoto target through these domestic measures and intends to supplement them with the acquisition of Kyoto project credits. As a result, the Japanese government places considerable importance on the Kyoto mechanisms and has taken a number of measures designed to increase the flow of Kyoto credits from the rest of the world to Japan. It actively supports host counties in their efforts to develop the necessary structures to establish Clean Development Mechanism and Joint Implementation projects and is providing finance to Japanese business to undertake them.

In addition, the Japanese government, through the New Energy and Industrial Technology Development Organisation (NEDO), acts itself as a buyer of Kyoto credits. Japan has proved to be the biggest purchaser of Kyoto credits outside Europe, accounting for 11% of Kyoto credit acquisitions in 2007, according to World Bank figures. NEDO (through its credit acquisition programme) and Japanese companies have announced future plans to buy very large quantities of Kyoto credits. The level of activity by Japanese companies demonstrates that they are taking their commitments under the Keidanren plan very seriously.

A more extensive version of this Article can be found in the October 2008 edition of "Environmental Finance" where it was originally published.