Despite strong indications that Japan may miss its target for greenhouse gas (GHG) emissions reductions under the Kyoto Protocol, the Japanese government appears to be taking a soft and gradual approach to the regulation of emissions reductions and is still hesitating to implement compulsory measures to reduce emissions in the domestic market. Analysts have predicted that Japan will need to purchase approximately 587 million credits in order to meet its target for the 2008 to 2012 period. However, with the Japanese economy still in a fragile state, industry groups are opposed to any measures that may sacrifice or stunt economic growth. The Japan Business Federation (Keidanren) has opposed the introduction of a European Union-style cap and trade emissions trading system and has questioned both the fairness of allocation of emissions credits and the effectiveness or need for such a scheme.
The Japanese Ministry of Environment runs a voluntary emissions trading scheme (JVETS) that has been in place since 2005. At the time it was thought that the voluntary scheme would serve as a small-scale experiment that could be used to investigate the feasibility of a national emissions trading scheme. However, as participation is purely voluntary the scheme has attracted very few participants and it is questionable whether any significant results have been achieved. Keidanren has also introduced their own voluntary environmental action plan under which participating industry sectors have formulated plans for the reduction of CO2 emissions, but these action plans merely set out voluntary goals for each sector and do not provide specific goals for individual entities. The Keidanren action plan makes no commitment to the government that targets will be met, but it has been incorporated into the Japanese government's formal action plan to achieve the target under the Kyoto Protocol and it is believed that Keidanren will observe its action plan.
It is a common practice of the Japanese government to implement new rules on a voluntary or small-scale basis in order to gain social exposure and understanding before making the rules compulsory. A related practice is to pass new laws that lack any sanctions, with sanctions being introduced after an appropriate introductory period. Observers are therefore keenly watching the voluntary emissions trading scheme and other government initiatives to discern whether a national emissions trading scheme or other compulsory measures may be introduced in future. The recent launch of a trial emissions trading scheme (which will operate on a wider basis than JVETS) and other climate change initiatives certainly follow these trends, as further discussed below.
Trial emissions trading scheme
Coinciding with the G8 summit held in Japan in July 2008, the Japanese Cabinet adopted an Action Plan for Creating a Low-Carbon Society on July 29 2008. The Action Plan states that trial emissions trading should begin in the integrated domestic market from October 2008. An outline of the emissions trading system has also been published and applications from participants are now being solicited.
Under the new Action Plan, the government plans to introduce:
- a trial emissions trading scheme; and
- a domestic credit market.
Emissions credits produced under the Kyoto Protocol (Kyoto Credits) will be able to be used in the domestic market. However, participation in the integrated domestic market is completely voluntary and for the time being there will be no penalties for any participant that fails to achieve its target reduction in GHG emissions. The only GHG regulated under the scheme so far is CO2 of energetic origin.
With regard to the trial emissions trading scheme, there will be:
- target-holding participants, which will have a specific target to reduce GHG emissions (including companies covered by the Keidanren Voluntary Action Plan); and
- trading participants (trading houses, financial institutions and carbon brokers, among others) that intend only to trade emissions and that will not have their own emissions reduction target.
Target-holding participants can be an individual facility, a company or a group of companies. They can set their target for one or more years during the period from 2008 to 2012 and can select either a target for the total amount of emissions or a target for emissions per product unit. Each target year starts from April 1 and ends on March 31 of the following year. Target-holding participants can purchase or sell emission credits during the adjustment period starting from April 1 of the year following a relevant target year and ending on the retirement due date of mid-December of the same year.
Target-holding participants that have selected a target for total emissions may receive emissions allowances during the target year or after the end of the target year, at their option. Target-holding participants that opt to receive emission allowances during a target year can sell their emission allowances before the end of a relevant target year, but they must maintain at least 90% (commitment reserve) of the total emission allowances that have been allocated to them. If a target-holding participant elects to receive emission allowances after a relevant target year, they can receive emission allowances equivalent to the difference between their target amount and the amount of their actual emissions.
Target-holding participants that have opted for a target of emissions per product unit can receive emission allowances only after a relevant target year has ended. Under this scheme, banking and borrowing will be allowed for participants with multiple target years. In order to achieve the target, target-holding participants can use: (i) allowances purchased from other participants; (ii) domestic credits (as further explained below); and (iii) Kyoto Credits.
In the domestic credit scheme, which mirrors to some extent the Clean Development Mechanism (CDM) established under the Kyoto Protocol, large corporations will provide technology, funds or other assistance to medium or small companies for their emission reduction projects and large corporations will obtain domestic credits corresponding to the amount of emission reductions generated from such projects. Projects must be validated by accredited independent entities and registered by the Domestic Credit Accreditation Committee. The amount of emission reductions generated by registered projects must be verified by accredited independent entities and then the corresponding amount of domestic credits will be issued by the Domestic Credit Accreditation Committee. The processes of validation and registration of projects and verification of emission reductions are relatively simple and similar to those for small-scale CDM projects.
The integrated domestic market for emissions trading is intended as a trial scheme and would be quite different from cap-and-trade emissions trading schemes such as the EU-ETS, whereby the government allocates emission allowances to facilities emitting large amounts of GHGs. This scheme is scheduled to be reviewed periodically and further development (including expansion of the kinds of GHGs that are regulated and the introduction of penalties for non-compliance) will be explored. Applications from participants that want to set a target for 2008 must be submitted by mid-December 2008. At the time of writing, it is still unknown how many companies will participate in this scheme and how big the trading volume of emission reductions will be.
Other recent developments
Emissions trading by banks
Since the implementation of the Financial Instruments Exchange Law (FIEL) in September 2007, securities companies have gained the ability to directly trade, and to act as intermediaries in the trading of, emissions reductions and emissions reductions derivatives in Japan. Subsidiaries of banks are also now permitted to engage in the emissions reduction trading business, but banks themselves are still excluded. However, under revisions of the FIEL and other relevant laws and regulations, which are expected to come into effect in December 2008, banks themselves will be allowed to trade emissions reductions on their proprietary accounts. Due to these changes, we expect to see further development and expansion of emissions trading and related businesses by securities companies, banks and Tokyo offices of foreign financial institutions in the near future.
Carbon offsets
Foreign and Japanese carbon offset providers have started to provide their services in Japan, and many companies have started to engage in various kinds of carbon offset activities as part of their corporate social responsibility (CSR) programmes. In order to support these activities, the Japanese government has prepared Guidelines for Providing Information on Carbon Offsets and Standards for Accreditation of Carbon Offsets by Independent Accredited Entities, as a system for verifying and issuing carbon offsets that are generated in Japan. At present, the main source of carbon offsets is Kyoto Credits. As Japanese companies and consumers become more mindful of the environment, more entities are expected to start engaging in carbon offset activities.
Emissions trading at exchanges
The Tokyo Stock Exchange has started to explore the possibility of listing emissions trading by establishing a study group for that purpose. The Japan Electric Power Exchange started trial trading of Kyoto Credits from November 2008.
Emissions trading in Tokyo prefecture
Though participation in the emissions trading scheme to be implemented by the Japanese government will be voluntary, the Tokyo Prefectural Government has enacted legislation introducing a cap and trade-type emissions trading scheme that will come into force from April 2010 within Tokyo Prefecture. Under the Tokyo scheme, facilities that emit large amounts of CO2 will have legal obligations to reduce the amount of CO2 emissions, either by achieving actual reductions or by purchasing emissions allowances from other participants. Facilities that fail to achieve their targets will be ordered by the governor of Tokyo to reduce the amount of the shortfall, multiplied by 1.3. If the facilities fail to comply with this order, the governor may obtain emission allowances from the market on their behalf and claim the cost from the non-complying entity.
Acquisition of AAUs by Japanese government and Japanese companies
The International Transaction Log has been connected to the national registries of eastern European countries and Russia, which have a large amount of excess assigned amount units (AAUs). The Japanese government has executed agreements on AAU trading and Joint Implementation with the governments of Hungary, Ukraine, Poland and Czechoslovakia. The Japanese government and Japanese companies are expected to obtain a large amount of AAUs from Eastern European countries and Russia as a result of these agreements.
In the face of a fragile domestic economy and vocal opposition from local industry groups, the Japanese government is following a softly, softly approach with regard to regulating GHG emissions. This does not mean that Japan will not adopt a domestic emissions trading scheme in the future, but it seems unlikely that any sudden changes will happen within a short period. If the government follows its usual pattern for rolling out potentially controversial new rules, there will likely be an adjustment period during which the trial emissions trading scheme will be studied and expanded, and other non-compulsory measures will be used to encourage emissions reductions in a gradual, cooperative manner. Thereafter, we may start to see some stronger measures being taken, particularly if the soft approach fails to yield sufficient reductions and Japan is faced with a big shortfall in its emissions reduction target under the Kyoto Protocol.
In contrast to the national government's approach, the start of the Tokyo Prefecture emissions trading scheme is an exciting new development that bucks the Japanese trend for a non-compulsory legislative approach. The approach is similar to initiatives by local governments in the US (by the state of California) and Australia before its ratification of the Kyoto Protocol. The Tokyo scheme will likely be the subject of scrutiny by the national government and industry bodies in order to examine both the practical outcome in terms of emissions reductions and the overall economic effect on participants.
| Author biographies |
Hideo Ohta
Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (Gaikokuho Joint Enterprise)
Hideo Ohta is a partner at Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office and specialises in the areas of environmental and employment law. Hideo's practice focuses on providing advice and legal advice for companies entering international agreements. His areas of specialisation include contract law concerning joint venture projects, partnerships, hotel and resort management, franchising, technical assistance, marketing, licensing, joint development, plant manufacturing and service, due diligence to mergers and acquisitions, international litigation and arbitration, employment law associated with corporate restructuring, early retirement packages, adjustment termination and selective termination, environmental law and union negotiations.
Hideo is a member of the Japanese Federation of the Bar Association and the Tokyo Bar Association (1977).
He graduated from the Chuo University Faculty of Law (1972) and received an LLM from the Faculty of Law, Queen's University in Ontario, Canada (1981). He serves as a professor of law at the Law School of Chuo University, teaching litigation practice law and environmental law.
Tsutomu Hiraishi
Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (Gaikokuho Joint Enterprise)
Tsutomu Hiraishi is a partner at Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (gaikokuho joint enterprise) and focuses his practice on the areas of emission trading, structured finance, banking, financial derivatives, bank compliance matters, offshore funds and cross-border investment.
His recent notable transactions include emissions trading (including the CDM and JI Projects, GIS, carbon funds, secondary transactions and derivatives transaction), structured finance transactions, international and domestic project finance deals, financing for MBOs, PFIs, off-balance sheet structured financing deals for software companies, syndicated loans, investment in offshore funds, debt restructuring for project finance in Indonesia and cross-border investments by big Japanese corporations (including their investments in Hong Kong, Singapore, Jakarta, Bangkok and Kuala Lumpur).
Tsutomu is a member of the Tokyo Bar Association (2000) and the New York Bar (1994).
Tsutomu received an LLB from the University of Tokyo Faculty of Law (1988), an LLM from the University of Pennsylvania School of Law (1993) and an LLM in corporation law from the New York University School of Law (1994).
Elizabeth Ticehurst
Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office (Gaikokuho Joint Enterprise)
Elizabeth Ticehurst is a member of the corporate/M&A practice group, specialising in the areas of environment (including climate change) and employment law. Her recent experience includes environmental due diligence of factory sites in Japan and advising a bidder for the decommissioning of an offshore oilrig in Japan's territorial waters. She has written many articles about and often participates in presentations and conferences on environmental legal issues in Japan.
Elizabeth is admitted as a legal practitioner in the Australian Capital Territory Supreme Court and the New South Wales Supreme Court. A member of the Australian Capital Territory Law Society, she holds a Graduate Diploma of Legal Practice from the Australian National University (2002), an LLB from the university's Faculty of Law (2000) and a BAS in Japanese studies from the University's Faculty of Asian Studies (2000). |