Carbon Trading -- The Politics of Eco-Commerce

By Anna Kitanaka

With carbon trading schemes being adopted throughout the world, what will this mean for Japanese businesses?

Could carbon emissions trading become a highly lucrative market?

During history’s most eco-friendly G8 summit in July this year, then Prime Minister of Japan and summit host Yasuo Fukuda made grandiose speeches about the need to tackle climate change. “The world needs to sever its reliance on fossil fuels” he said, compounding the leading nations requisite to “make a decisive turn toward a low-carbon society.”

The world leaders agreed, pledging to reduce greenhouse gas emissions by at least 50 percent by the year 2050. The summit and its announcements were hailed as a landmark success by many, and praises were given for finally getting the US administration on board, who up until that point had only agreed to “seriously consider” these environmental proposals.

However all were not happy. ‘Smokescreen,’ ‘ineffectual,’ and ‘an empty slogan’ were words on the lips of green groups who slammed the deal. But it’s not just the conservationists that were critical. Business leaders the world over criticized the policy as “short on specifics.” Some argued that they have already made significant decreases to their output of emissions, and should be allowed some flexibility, while others demanded that developing countries and emerging economies make bigger cuts in their emissions to offset the worst effects of global warming. And therein lies the rub.

Carbon markets
The world’s industrialized countries see emerging economies as the potential major gas-guzzlers of the future, and a proposed blanket emissions reduction for all countries, or even a suggested increase in emissions cuts from advanced countries compared to developing countries, to be unreasonable and costly for businesses of major economies.

As one solution, carbon emissions trading schemes have been gaining traction throughout the world, although not all industries have taken to it lightly, some favoring a carbon tax instead.

The Financial Times published an article earlier last year, dogmatically titled “Carbon markets create a muddle.” According to the FT’s investigation, “carbon markets leave much room for unverifiable manipulation” while trading schemes are more popular for governments than taxes because of their political advantages. “They are easy to sign into law and even easier to execute,” says the FT.

The EU approach has been to implement a “cap-and-trade” system, in which the government set mandatory ceilings for emission outputs. The cap-and-trade system has come under criticism from both environmental groups and world business leaders. The environmentalists say that as businesses are able to buy credits, it won’t lead to a sufficient reduction in emissions anyway. Meanwhile, the businesses say that too much responsibility for pollution will be placed on them.

The suggestion that this system could be put into practice in Japan has been met with fierce resistance. Some of Japan’s highest polluting companies have argued that it, along with political pledges of reductions in emissions, would burden them unfairly. Others call for a sector-by-sector reduction in carbon emissions, while businesses worry that carbon emissions trading would cost them a fortune.

Japan—big emitter
Amid all the excitement about reducing the global carbon emissions rate, G8 host Fukuda also made magnanimous announcements on behalf of his administration. “We can bolster Japan’s standing in international society and strengthen our economy further by taking a leading role in the CO2 reduction revolution,” said Fukuda in a policy speech addressing the world’s press. He went one step further for Japan, pledging to cut green house gas emissions by a substantial 60-80 percent by 2050, 10-30 percentage points more than those of the global emissions targets.

Great in theory, but how achievable is this? Perhaps not as much as we hope. Despite calls for more concrete and realistic short-term goals, Fukuda escaped committing to measurable interim targets, rebuffing demands for a 2020 target instead. Nevertheless, the Japanese government wants to show itself as the world leader in the fight against global warming, an important move considering its dire CO2 emissions.

The latest figures show that Japan emitted 1.371 billion tons of CO2 in 2008, compared to 1.340 billion tons from a year earlier, according to government data. Greenhouse gas emissions hit a record high in the year ended in March, with a 2.3 percent increase, compounded by the shutdown of some nuclear power plants and manufacturers emissions continuing to rise, according to Reuters Factbox.

In other words, Japan is the world’s fifth-largest polluter.

Manufacturers’ emissions rose by 16.4 million tons in 2007/08 due to an increase in industrial output and higher per-kilowatt emissions by utilities, according to a Reuters report, citing Hiroyasu Tokuda, director at the environment ministry’s climate change policy division.

Among these, Japan’s steel companies are some of the heaviest polluters, with FE Steel Corp. reportedly emitting 60.29 million tons of carbon dioxide in fiscal 2006. It is closely followed by Nippon Steel Corp., with 59.34 million tons, and Sumitomo Metal Industries Ltd with 22.14 million tons, according to a government report. The heavy industries sectors have, however, set themselves voluntary targets for reducing emissions, with steelmakers pledging a 30 percent cut in carbon emissions within the next 10 years.

The carbon market lands
Since the G8 summit, Japan has seen the demise of Fukuda and the replacement of Taro Aso, who after just a month in power on October 26, moved quickly to approve the adoption of a carbon trading trial in Japan—a voluntary non-cap-and-trade trading system. This comes as a huge relief to businesses who, for a long while, feared that a mandatory cap-and-trade system would be introduced after the government convened a panel of experts to discuss the matter earlier this year.

However, with so much opposition from the industry leaders, Japan has taken its steps in a more business-friendly way. In contrast to the EU’s cap-and-trade system, which aims to offset the difference in emissions for companies that need the credits and those that are able to sell them, the Japanese system will enable companies to decide their own emission reduction targets in a bid to attract big emitters that would otherwise be unlikely to join. In addition, there will be no penalty should they go over their limit. The large corporations that require higher emissions quotas will be able to receive an allowance from smaller companies that need it less, in return from capital or energy-saving technologies to these SMEs. The Nikkei reports that SMEs have the potential to cut carbon emissions overall by about 1.7 million metric tons.

Some concerns
However, this is not the first time that Japan has experimented with carbon trading. Launched in 2005, Japan tested the waters with a voluntary pilot scheme, which ended up being somewhat disappointing. Only 32 companies participated, and on top of this, there was a lack of involvement from major emitting industries such as electricity, steel and petrochemicals. “Mandatory emissions trading is NOT an option at this moment,” the Institute for Global Emissions Strategies said in a report in 2006.

“We don’t want a situation where, a few years from now, we suddenly realize that every other country is doing it, so we rush to implement [mandatory carbon trading] and make mistakes because we have no experience...If other countries are doing it, Japan has to do it too,” Aso was reported as saying.

Due to it being a relatively complicated and opaque system, the government will hold seminars on how it all works. The carbon trading scheme in Japan will at first be voluntary, although Aso suggested that it may become fully adopted if it succeeds. But its success depends largely on whether enough vital companies voluntarily take part. So far, Japan’s prime suspect—the steel industry— has not yet decided. “We still don’t believe emission trading will necessarily lead to a reduction of global-warming gases,’’ Nippon Steel spokesman Masato Suzuki said in an interview with Bloomberg News.

Despite the opposition and the criticism about the carbon trading scheme, one industry is certainly sure to benefit—the banking sector. According to the Nikkei Weekly, Mitsubishi UFJ Trust & Banking Corp. has joined forces with Mitsubishi Corp., and Chuo Mitsui Trust & Banking Corp. are working with Mitsui & Co. to start selling emission rights in small lots, as well as bolster its emissions rights brokerage business and administrative work on related matters. With corporate social responsibility moving further and further into becoming a corporate necessity rather than an option, emissions trading could prove to become a lucrative revenue stream, at least for the ones that use it wisely. JI