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Emissions Trading and Voluntary Action Plan

What is Emissions Trading?
Emissions trading scheme is a climate policy instrument that can be established at international, national and regional levels. It allows parties that have emission units to spare--emissions permitted them but not “used”-- to sell this excess capacity to parties that are over their targets.

Currently, the European Union emissions trading scheme is the largest in operation. Countries including France, China and Korea are also examining the possibility of introducing emissions trading scheme on the national level. In the United States, some states are also considering the use of emissions trading scheme to address climate change.

Japan has recently started a trial run of the domestic emissions trading scheme. Of the participating companies, some set their own reduction targets, and some reduce emissions based on the domestic cap-and-trade system introduced by the government.

Voluntary Action Plan (VAP) under the Emissions Trading Scheme

Japan Business Federation (Japan Keidanren) in 1997 produced the "Keidanren Voluntary Action Plan on the Environment," a program in which 43 industries currently participate. Keidanren has adopted as a common goal "to endeavor to reduce CO2 emissions from the industrial and energy-converting sectors in fiscal 2010 to below the levels of fiscal 1990."

Under the Emissions Trading Scheme, member firms of the Voluntary Action Plan (VAP) set their emission targets consistent with the VAP, while non-members of the VAP set their own targets based on target setting methods established by the government.

Under the domestic emissions trading scheme, each company sets their own target (with the exception of the steel and automobile industries), whereas under the VAP, each industry sets their target as a whole. Thus the domestic emissions trading scheme now not only includes companies that didn’t join the VAP before, but also leads each company to specify their target.

Also thanks to the forming of the integrated domestic market, companies are now able to use both the Kyoto mechanism credits and the domestic trading credits.

Improving the current scheme

Some cast doubts on the effectiveness of Japan’s domestic emissions trading scheme. It is urgent to assess the trial run and strengthen the emissions trading scheme. It is necessary for LDP to consider the following issues to further improve the emissions trading scheme in Japan:

International competitiveness
The steel and electric power industries that bought overseas emissions credits have complained that they were unable to meet the domestic restrictions, especially the steel industry that is exposed to fierce international competition.

Strengthening the VAP
On the one hand, stricter targets and broader participation are needed. On the other hand, in order to gain more international understanding, it might be necessary to redefine voluntary action plan as an official agreement between the government and industries.

Cap-and-trade proposed by DPJ
In the manifesto, the Democratic Party of Japan (DPJ) pledged to “establish an effective domestic emissions trading market using the cap-and-trade formula”, which means that the voluntary setting of reduction targets in the current trial run will no longer be used. The DPJ also specifies in the Global Warming Countermeasure Basic Bill that the domestic emissions trading scheme will begin in 2011.

The DPJ hasn’t yet unveiled the details of the cap-and-trade emissions trading scheme. However, there are a few problems to consider, in order to construct a fair and effective system.

Competitiveness concerns
If the Japanese government makes companies set stricter reduction goals than foreign countries, then the burden could impair the international competitiveness of Japan’s businesses.

Excessive money game and speculation
In the face of the financial crisis, not only is there threat of speculation in emissions trading, it is also likely that developers of environmental technologies face big loss in the competitive market.

Permit Allocation
Grandfathering is hard to ensure the fairness among domestic businesses. However, auctioning permits involves concerns of international competitiveness. Moreover, auctioning permits would add burdens to energy-intensive industries. The threat of speculation and inflation of emission credit price are also problems to consider.


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