Japan Economic Foundation

Chairman's Article
(excerpts from JEF's Magazine "Japan Spotlight")

58 . Post-Kyoto Protocol Approach

Post-Kyoto Protocol Approach
September/October 2007
Noboru hatakeyama
Chairman and CEO,
Japan Economic Foundation

The Kyoto Protocol covers the period until 2012. Therefore, formulating a
Post-Kyoto Protocol Framework (PKPF) is a big issue as of now. There are
five important points in considering PKPF.

The first point is to establish a global numerical target for reduction of
"greenhouse gases not controlled by the Montreal Protocol" (hereafter
referred to as CO2). Prime Minister Abe Shinzo proposed to reduce global
emissions by half by 2050. The economic summit meeting in Heiligendamm
last June agreed to study seriously similar ideas, including the Abe
proposal. Since PKPF will not cover the period up to 2050, we will need a
target year closer to now. Of course, this global target should be
established taking into consideration the CO2 absorption capacity of the
globe scientifically. The global target has to be identical to accumulated
CO2 emission rights of member countries of PKPF.

The second point is to secure the participation of all major CO2-emitting
countries in a binding framework in terms of CO2 emissions. The share of
countries whose CO2 emissions are controlled numerically by the Kyoto
Protocol is only 30%. This share will go down to 20% in 2030. China and
India, the second and fifth largest CO2-emitting countries, are not bound
by the Kyoto Protocol numerically. The United States, the largest CO2
emitter, used to be bound by the Kyoto Protocol that obliged the country to
reduce CO2 emissions on the five-year average between 2008 and 2012 to 93%
of its emission level in 1990, but got out of it later and has no
obligation to abide by it. Those free countries' share in CO2 emissions is
70% as of now and will increase to 80% in 2030. Obliging the rest of
countries does not make any sense. In PKPF, all major CO2-emitting
countries should manage their economies, without emitting more CO2 than
their emission rights distributed by PKPF and transferred by other
countries based on "Cap & Trade," mentioned later.

The third point is the way for PKPF to distribute emission rights to member
countries. There are many ways of distributing emission rights, including
selling them to member countries or allocating them free of charge based on
the size of GDP or population of each country and so forth. The most
equitable way to distribute should be found.

The fourth point is to enable our economies to enjoy relatively high growth
rates even under the constraint of global CO2 reduction. For this purpose
admitting transfer of CO2 emission rights seems to be worth considering.
If the transfer is not admitted, a country that is not given enough CO2
emission rights to grow its economy cannot achieve high growth, while other
countries which happen to be given excessive emission rights cannot make
use of them.

As a matter of fact, the Kyoto Protocol admits three types of transferring
CO2 emission rights, namely the CDM (Clean Development Mechanism), JI
(Joint Implementation) and Cap & Trade. The CDM is for a company in a
developed country to acquire additional CO2 emission rights in exchange for
the reduction of CO2 emissions that the company achieves in a developing
country. The JI is similar to the CDM but everything happens within
developed countries. In the cases of the CDM and JI, however, the process
of verification conducted by the United Nations as to how much reduction
will take place is said to be very cumbersome. Cap & Trade is a mechanism
for a company in one developed country to purchase additional CO2 emission
rights from another developed country whose emission rights happen to be
plenty. Regarding Cap & Trade, there is no need for the verification
process for the amount of reduction because this is just transferring one's
emission rights to another. Thus, if Cap & Trade, which is limited just
between numerically controlled developed countries, is expanded to every
country in PKPF, each country can maximize economic growth potential under
the constraint of reduction of CO2 emissions and also can eliminate the
cumbersome verification process. In addition, what should be noticed here
is the fact that the cost of transfer (the price of emission rights) is
relatively cheap though it will change reflecting supply and demand. It is
approximately $15 to $20 per ton of CO2 as compared to $500 per ton of oil.

The fifth point is to introduce a most efficient and effective
implementation method of the Cap & Trade system. As of now the European
Union is implementing Cap & Trade. But since the EU system is to measure
emission volume at the stage of emission, measurements are conducted only
for big companies and are much more costly than the "upstream measurement
system" (UMS) proposed by a former MITI official, Yasumoto Akinobu. The
UMS measures the volume of oil and gas at the stage of production, export
and import, and is much easier and comprehensive than to measure at the
stage of emission.

I wish these five points can serve as food for thoughts for PKPF.