Japan Dips a Toe in Emissions Trading

Business - September 7th, 2009

by Darrell Nelson

Basically speaking, carbon trading is a market mechanism intended to tackle global warming. In fact emissions trading isn’t a new thing; the Kyoto Protocol is the first scheme that includes global trading in greenhouse gases, but the idea of trading pollutants was first tried in the 1970s when the US decided to trade sulphur dioxide and nitrous oxide to tackle acid rain.

There are two main ways to exchange carbon. The first is what is called a cap-and-trade scheme whereby emissions are limited and can then be traded. Under Kyoto, developed countries can trade between each other. The European Trading Scheme, or ETS (http://ec.europa.eu/environment/ climat/emission/index_en.htm) is an example of a cap-and-trade scheme and the largest companies-based scheme around. It is mandatory and includes around 12,000 sites across the 25 European Union member states. It came into effect in 2005 and covers heavy industry and power generation, including non-European companies. There are also voluntary cap-and-trade schemes, such as the Chicago Climate Exchange, or CCX (www.chicagoclimatex.com).

It is the latter voluntary markets that Japan joined in October of last year in a trial scheme that has since seen 200 companies join in. As I touched upon in a recent article, Japan pledged a pretty paltry CO2 emissions cut by 2012, and the voluntary reductions outlined make up a pretty hefty part of its plan to meet its commitments under Kyoto. So how much impact will trading actually have in a year when Japan, the world’s 5th biggest greenhouse gas emitter, saw its emissions rise 2.3 percent to a record 1.37 billion tons in CO2 equivalent? A government survey of applicants showed that only 20 percent of respondents are looking to take part in trading, with 40 percent saying they didn’t know and the remaining 40 percent stating they had no plans at all. Hiroshi Kamagata, the counsellor in charge of climate policy at the cabinet secretariat, recently commented that, “Most of the participants have not made up their mind yet, falling production recently is one factor to consider because that undermines energy efficiency in terms of CO2 per unit of production.” However with the state of the environment ever pressing and no huge turnaround in production expected, how long are we going to have to keep waiting before the leading polluters in Japan take some action?

Still far from a mandatory cap-and-trade scheme like in Europe, skeptics question Japan’s sincerity. The mandatory trading schemes, such as that under the Kyoto Protocol, are heavily regulated. For example, wind farms or landfill gas capture projects must be registered, certified to be actually in operation and producing emissions reductions, and then registered with the United Nations, the governing body for Kyoto. But there is no such mechanism in the voluntary markets—no independent body measuring how many projects are actually in operation and generating offsets, as opposed to in the planning stages. New Carbon Finance surveyed the voluntary markets in 2008, and the resulting data showed that 88 million tons of carbon dioxide or its equivalent were reduced through trading in 2008 on voluntary markets—that’s about the equivalent to the amount of CO2 added by human activity to the atmosphere in just six hours, according to one estimate! After these numbers it’s clear that to make any difference at all, trading must become mandatory across the board.