Japanese firms in carbon reduction
rush By Hisane Masaki
TOKYO - Japanese businesses are on an
investment spree of greenhouse-gas reduction
projects abroad, especially in Asia, as the nation
is in hot water over its target for slashing
emissions of such gases under the Kyoto Protocol
on global warming.
The "credits" these
firms earn in return for gas-reduction investments
in developing countries can be counted as cuts for
their own emissions - and in
turn, for Japan - under a system called the Clean
Development Mechanism (CDM), one of the three
so-called Kyoto mechanisms introduced under the
protocol to help industrialized countries meet
their reduction targets. Developing nations that
take part can receive technology transfers from
their industrialized partners.
The two
other mechanisms are the Joint Implementation (JI)
and international emissions trading. JI is a
scheme similar to CDM but it covers gas-reduction
projects in industrialized countries that can
afford to cut more gases than required by the
protocol, such as Russia and some former Soviet
republics. In international emissions trading,
greenhouse-gas emission credits are traded.
The Ministry of Economy, Trade and
Industry (METI) and the Environment Ministry have
supported CDM projects conducted by Japanese
companies and approved by the government. As of
February 7, the government had approved a total of
41 CDM and JI projects since the end of 2002;
almost all the approved projects are in the CDM
category.
The number of CDM projects
approved by the government has been rising sharply
since the Kyoto Protocol entered into force on
February 16 last year. And the number has been
growing at an accelerated pace in recent months.
More than half of the 41 projects approved by the
government - 22 - have been approved since
October. Of those, 13 are CDM projects in Asian
countries, including Malaysia, India, South Korea,
Indonesia, China and Vietnam. Some of the projects
approved so far by the government have already
been registered with the United Nations' CDM
executive board, which screens and approves CDM
projects.
At an international conference
in Montreal in December, delegates finalized a
rule book for implementing the Kyoto Protocol,
including CDM and other mechanisms, formally
making it fully operational after years of
negotiations and ratification. Taking their cue
from the agreements reached at the Montreal
conference, Japanese firms are expected to step up
investment in CDM projects.
Meanwhile, the
Japanese government this month approved bills to
revise two laws for submission to and approval by
the diet (parliament) to make full-scale use of
the CDM and other Kyoto mechanisms starting in
fiscal 2006. Under the revised laws, the
government-affiliated New Energy and Industrial
Technology Development Organization (NEDO) will
engage in efforts to acquire greenhouse-gas
emission credits abroad. The credit-purchase
expenses will come from the government's special
oil account. The government earmarked 5.4 billion
yen (US$45.9 million) in the fiscal 2006 budget
plan, now pending in the diet, for purchasing
credits.
Firm commitment The
Kyoto Protocol entered into force more than seven
years after it was adopted at the third Conference
of Parties to the UN Framework Convention on
Climate Change, or COP3, in the ancient Japanese
capital in late 1997. Under the protocol,
industrialized countries must reduce their
emissions of carbon dioxide and several other
greenhouse gases, widely blamed for the warming of
Earth, by an average of 5.2% from 1990 levels
during the first commitment period of 2008-12. The
protocol sets separate gas-reduction targets for
individual industrialized countries - 6% in
Japan's case.
The Kyoto Protocol's
effectiveness is in doubt, though, since the
United States, the world's largest emitter of
greenhouse gases, withdrew from the pact in early
2001, and China, the second-biggest emitter, is
classified as a developing country and therefore
exempt from the reduction requirement. Australia
followed the US lead by opting out of the
protocol.
The 1997 Kyoto agreement set
gas-reduction targets for its first commitment
period of 2008-12. Only industrialized countries
are bound by them. In December, COP11 and the
first meeting of parties to the Kyoto Protocol
(MOP1) were held in Montreal. The focus was how to
secure the involvement of the US and the
developing countries refusing to accept binding
targets for the post-2012 second phase. In the
end, delegates agreed to set up a "dialogue" on
steps to combat global warming that includes the
US and developing countries. Industrialized
countries, meanwhile, promised to work out
post-Kyoto targets. The agreement was reached only
after the text was watered down to accommodate the
positions of the US and developing nations. The
final text says the dialogue forum "will not open
any negotiations leading to new commitments".
Still, the Montreal agreements, which were
reached amid strong pressure from thousands of
members of environmental and citizens' groups who
flocked to the conference, are widely seen as a
significant step forward. The alarming effects of
harmful climate changes are increasingly becoming
clear; for example, rising global temperatures and
violent hurricanes such as Katrina are seen by
many as manifestations of global warming, although
it is not possible conclusively to attribute any
single adverse weather event to the phenomenon.
Japan joined the first ministerial meeting
of what is widely seen as the Kyoto Protocol's
US-led rival, the Asia-Pacific Partnership on
Clean Development and Climate, in Sydney last
month. The Sydney powwow brought together
politicians and industrialists from Australia,
China, India, Japan, South Korea and the US. The
partnership aims to develop and promote
technologies such as "clean coal" and nuclear and
renewable energy. It involves four of the world's
top five coal-producing countries, which all
depend heavily on that fuel for their domestic
energy. Environmental groups criticize the
partnership as emasculating the Kyoto Protocol and
being merely a business deal between producers and
consumers of coal and uranium.
Japan has a
foot in both camps, but remains firmly committed
to the Kyoto Protocol. There has been a strongly
shared feeling among many Japanese people that as
the country where the protocol was born, Japan has
a special mission to keep the pact afloat and
rally international efforts to build on it toward
the common goal of saving Earth. Even Japanese
businesses have come to realize the risks of
losing their competitiveness on the global markets
if they lag behind in prevention of global warming
and energy-saving technological development.
Uphill battle Despite its firm
commitment to the Kyoto Protocol, however, Japan's
gas emissions are on the rise. Although Japan must
cut its emissions of carbon dioxide and other
greenhouse gases to 6% below the 1990 levels, the
emissions have actually risen by more than 8% from
1990.
Resource-poor Japan, which imports
almost all of its oil, has made strenuous
energy-saving efforts and technological innovation
since the two oil crises of the 1970s. The country
is now the most energy-efficient in the
industrialized world and faces great difficulties
making further dents in greenhouse-gas emissions
through domestic measures alone, such as further
energy-saving efforts and carbon "sink" plantation
projects. According to one estimate, it costs
Japan about $110 to eliminate a ton of carbon
dioxide, compared with about $80 for Europe and
$50 for the US, on average.
Although the
Environment Ministry has tenaciously pushed for
the introduction of an environment tax on fossil
fuels - which would be equivalent to 1.5 yen per
liter in the case of gasoline - METI and domestic
industry have opposed the idea, claiming that any
such extra tax burden would erode corporate
Japan's international competitiveness. Therefore,
the government and businesses are increasingly
turning to the Kyoto mechanisms as attractive
means of achieving the reduction target at a lower
cost while maintaining international
competitiveness.
New
horizon Many Japanese companies not only
feel the necessity to hedge against future risks
but also see new - and potentially lucrative -
business opportunities in CDM, since demand for
the right to emit greenhouse gases is growing.
Firms that earn greenhouse-gas emission credits
through CDM projects abroad can count them in
their reduction efforts, and surplus credits can
be sold through an emissions transaction on the
market. If credits start being traded as a
commodity such as gold and soybeans, analysts
predict a huge market could emerge. Firms that buy
cheap credits only to sell them off for a higher
price would reap profits.
The global
emissions-trading market is expected to top $222
billion by 2010 and eventually reach $854 billion.
The 25-nation European Union established the
world's first multilateral emissions-trading
market in January last year. In Japan, an
emissions-trading market will be introduced on a
trial basis this year. The Environment Ministry
has set up Japan's Voluntary Emissions Trading
Scheme (J-VETS). It will start operation in April,
with emission allowances allotted to each
participant and participants allowed to trade
allowances. Asia Carbon International BV, a major
emissions-trading broker headquartered in the
Netherlands, reportedly plans to open an emissions
exchange in Tokyo as early as this summer in
cooperation with Japanese firms.
Energy-related firms such as
electric-power, oil and gas companies are not
alone in rushing to gas-reduction projects abroad.
Major Japanese trading firms are also intent on
cashing in on the new business bonanza.
Marubeni Corp, for example, signed a
comprehensive business alliance in November with
Britain's ICECAP, one of the largest
private-sector providers of emission credits from
the developing world's CDM and JI projects in the
emissions-trading markets. Mitsui & Co also
signed a contract to set up a joint venture with a
firm in Chile in November to implement
greenhouse-gas-reduction projects. A gas-reduction
joint project in India between Sumitomo Corp and a
British firm in India was registered with the CDM
executive board early last year as the first
Japanese government-approved project to be
included in the board's list.
Manufacturing firms are also making
inroads into gas-reduction business abroad.
Matsushita Electric Industrial Co, for example,
has had three projects in Malaysia approved by the
Japanese government as CDM projects this month
alone.
Thriving funds There are
three ways of acquiring greenhouse-gas emission
credits: participation in CDM projects,
participation in funds, and participation in
trading. Among the three, acquiring credits
through funds is becoming particularly popular in
Japan, as project-hosting countries tend to prefer
large-scale customers and it is becoming difficult
for individual Japanese businesses to strike deals
there.
The World Bank set up the Prototype
Carbon Fund (PCF) in January 2000. It has since
set up two other funds, the Bio Carbon Fund (BCF)
and the Community Development Carbon Fund (CDCF).
In Japan, Natsource Japan Co plays a leading role
in credit transactions, as well as advisory
services, including feasibility studies of
greenhouse-gas mitigation projects, the
development of corporate risk management
strategies and the design of emissions-trading
schemes. Natsource Japan Co was created in May
2001 as a joint venture between several Japanese
firms and Natsource LLC, a New York-based energy
and environment solution provider.
Last
February, Natsource launched the Greenhouse Gas
Credit Aggregation Pool. GG-CAP is the world's
first operational private-sector mechanism
designed to help firms and governments manage
their greenhouse-gas compliance requirements.
GG-CAP purchases and manages the delivery of a
large pool of gas-emission reductions that GG-CAP
buyers can use to comply with the EU's
emissions-trading scheme and the Kyoto Protocol's
emission-reduction requirements. Participants in
GG-CAP's closing at the end of September comprise
26 companies, including nine from Japan. The
amount of money committed by the participants
exceeded $550 million.
In late 2004, two
government-affiliated banks and more than 30
private firms established the Japan Greenhouse Gas
Reduction Fund (JGRF). The two banks and several
major fund investors also set up Japan Carbon
Finance Ltd (JCF), Asia's first greenhouse-gas
reduction fund. JCF uses the funds from JGRF -
totaling about $140 million - to develop
greenhouse-gas reduction projects and purchase
gas-emission credits.
China and
India Among developing countries, China and
India, the world's two most populous nations and
emerging economic powers, are probably the most
attractive CDM investment destinations.
China is the world's second-largest
emitter of carbon dioxide. Although China, like
other developing countries, is adamantly opposed
to accepting legally binding greenhouse-gas
reduction targets, it has become increasingly
enthusiastic about energy saving and environment
protection as it faces a serious shortage of
energy sources to feed its high-flying economy and
is also struggling with environmental degradation.
India is the fifth-largest emitter of
carbon dioxide after the US, China, Russia and
Japan. Some Japanese firms have already embarked
on CDM projects in China and India.
In
China, JCF has signed an emission reduction
purchase agreement (ERPA) with Shanxi Jincheng
Anthracite Mining Group Co Ltd (JMC), a major
coal-mine development company in China, to acquire
greenhouse-gas emission reductions generated from
its Coal Mine Methane Power Generation Project.
This agreement was the first ERPA signed by JCF
and a Chinese company. From now to 2012, JCF will
purchase greenhouse-gas emission reductions
equivalent to about 2 million tons of carbon
dioxide generated from the project.
Another gas-reduction project being
carried out by JGC Corp, Marubeni Corp and Daioh
Construction was approved by the Chinese
government as a CDM project in late November,
after its approval by the Japanese government. The
project involves the recovery and decomposition of
the global-warming gas HFC23 emitted by Zhejiang Juha's HFC
(hydro-fluorocarbon) production plant in Chuchou,
Zhejiang, China. The aim of the project is to
acquire greenhouse-gas credits equivalent to a
total of 40 million tons of carbon dioxide over
seven years. This project is China's first
large-scale CDM business.
Mitsui & Co
signed a contract with Tiefa Coal Mining Group Co,
a coal miner in China's Liaoning province, in
late December to collect methane generated at
Tiefa's coal mines. Mitsui & Co plans to
acquire greenhouse-gas emission credits equivalent
to about 3.5 million tons of carbon dioxide by
2012 and sell them primarily to Japanese steel and
electric-power companies. Mitsui & Co plans to
register the CDM project with the CDM executive
board around April after getting approval from the
Japanese and Chinese governments.
Meanwhile, JCF has signed an ERPA with
Enercon India Ltd (EIL), a major manufacturer of
wind power generators in India, to acquire
greenhouse-gas emission reductions generated from
its Bundled Wind Power Project. JCF will purchase
greenhouse-gas emission reductions equivalent to
about 2 million tons of carbon dioxide generated
from the project by 2012. JCF and Indian Farmers
Fertiliser Cooperative Ltd (IFFCO), India's
largest fertilizer producer, have also signed an
ERPA for carbon credits generated by improving
energy efficiency at IFFCO plants.
Hisane Masaki is a Tokyo-based
journalist, commentator and scholar on
international politics and economics. Masaki's
e-mail address isyiu45535@nifty.com.
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