All rights reserved
Original article in Japanese was published on the “Environmental Economics and Policy Studies”,
Vol. 3, January 2009, Society for Environmental Economics and Policy Studies

Comparative Evaluation and development of
the Carbon Credit Utilization Policies of the Japanese Government:
Japan’s Domestic Emission Trading Schemes andKyoto Mechanism Credit Acquisition Program

December 17, 2008

Jusen ASUKA
Center for Northeast Asian Studies, Tohoku University
Kawauchi 41, Aoba-Ku, Sendai City, Miyagi, 980-8576 Japan
asuka@cneas.tohoku.ac.jp1Summary“Japan voluntary emission trading scheme (JVETS)”, “Credit trading scheme between the large
companies and the small/medium companies”, “Kyoto mechanism credit acquisition program (KMCAP)”“Experimental Nationally-Integrated Market for Emissions Trading” and “Offset Credit Scheme(J-VER)” were evaluated and compared from the viewpoints of policy formulation process, allocation
method, cost-efficiency and impacts on the achievement of the target defined in the Kyoto Protocol. The
result of this comparison study indicated that: 1) robust infrastructure for the emission trading scheme isbeing constructed in Japan, 2) the difference of cost-efficiency between the credit acquisition from theoverseas and that from the domestic GHG emission abatement projects may not be so large, 3) systemdesign of the domestic mitigation scheme will have a big impact on the achievement of the Kyoto target
both for the large companies in Japan and for Japan as a whole, and 4) considering the co-benefits,
mitigation measures utilizing such domestic emission trading scheme should be supported for further
development.

Keywords
Domestic emission trading scheme, domestic emissions reduction projects, Kyoto mechanism, Japan
Voluntary Emission Trading Scheme (JVETS), carbon offset mechanism

21. Background and Objectives
Domestic instruments to incentivize greenhouse gas emission reduction measures include:1) emission cap or carbon tax for corporations and other sources; and 2) project-based emissions
credits to corporations, which can be traded in the market or purchased by the government (domestic
offset).

In the US State of Oregon, for example, the State has imposed caps greenhouse gas

emissions of power plants, with the mandate to offset any non-compliance by the purchase of carbon
credits from greenhouse gas emission reduction projects verified by the third party. (Davis, 2007)
In Europe and Canada, discussion and proposals have been made for the utilization of credits fromgreenhouse gas emissions reduction projects of the businesses and corporations having no caps
under the European Union Emissions Trading Scheme (EU ETS), although the number of concrete
case studies is fewer in such field. (Gigler and Wytz, 2007; Environment Canada, 2008)

At thesame time, EU member countries, led by Dutch Government, are undertaking policies to acquire
Kyoto credits from overseas, in consideration of cost-efficiency.
In Japan, on the other hand, various studies, such as Asuka (2002) and Matsuo et al (2002),
have made independent reviews on the introduction of “domestic Joint Implementation (JI)” or“domestic Clean Development Mechanism (CDM)”, i.e. domestic offset systems to provide credits
to greenhouse gas emissions reduction projects, with or without the simultaneous introduction ofcaps on domestic entities.

However, at that time, the Government of Japan was very slow to adopt

such policies, and failed to seriously review the governmental acquisition of Kyoto credits fromoverseas as well, despite the proposal made by Asuka (2003, a) and Asuka (2003, b).
Later, in 2005 and afterward, the Ministry of Environment and the Ministry of Economy,
Trade and Industry (METI) started to launch carbon credit utilization measures, in concern of the
non-compliance of Kyoto Protocol.
credit acquisition from overseas.

Focused was on the domestic emissions trading system andAlready, some domestic credit trading and the government’spurchase of Kyoto credits have started, though they are smaller in scale.
At the same time, in Japan, the discussion on the actual designing of emissions trading
system is ongoing separately at various forum including committees and study groups under the
Ministry of Environment (MOE) and METI, yet there has not been sufficiently open discussion on
the contents of various systems.

Moreover, there have not been any studies in Japan that madequantitative comparison of cost efficiency between domestic measures and the overseas credit
acquisition programs.

Even internationally, a number of studies in such area are limited, except theone by CE, a think tank in Netherlands, which quantitatively compare the effects of domestic3

measures of the Dutch Government, and the overseas credit acquisition measures.1 (Faber and Wit,
2005, De Bruyn et al.2005)
In this study, we shall study various systems for carbon credit utilization: a voluntary
domestic emission trading system under review by the Ministry of Environment; a system reviewed
by the Ministry of Economy, Trade and Industry for the credit trading between small to medium
companies and big companies; a Kyoto Mechanism credit acquisition system proposed by theGovernment of Japan; experimental introduction of domestic integrated market for emissions trading
to be started from October 2008; and an offset-credit system.

The study will assess and compare

these systems from the viewpoints of policy-making processes, allocation and trading methods,
stringency of credit certification, effectiveness, cost-efficiency, relationship with the Kyoto Target
Compliance Plan, differences from various overseas systems, etc.

By identifying the issues

involved in the development and designing of these systems, we shall comprehensively discuss thecurrent situation and issues of carbon credit utilization measures in Japan.

2. Methods
This study shall address the following six systems:
No. 1: Japan Voluntary Emission Trading Scheme of the Ministry of Environment (hereinafterreferred to as MOE’s JVETS)
No. 2: CO2 emission reduction certification and subsidy projects for small to medium companies
contemplated by the Ministry of Economy, Trade and Industry (hereinafter referred to as METI’s
old)
No. 3: Credit trading system for small to medium companies by the Ministry of Economy, Tradeand Industry (hereinafter referred to as METI’s new), which is based on the system proposal
discussed at the “review meeting for CO2 emission reduction in small to medium companies” heldby the Ministry of Economy, Trade and Industry in 2007
No. 4: Kyoto Mechanism Credit Acquisition Program by the Ministry of Environment, Ministryof Economy, Trade and Industry, and NEDO (hereinafter referred to as KMCAP)

1

De Bruyn et al. (2005) considered five cost items involved in governmental measures: 1) investment cost, 2)
operating cost, 3) administrative cost, 4) subsidies, and 5) revenue (negative costs such as energy saving). The
study identified actual cost efficiency of governmental measures in each industry sector, calculated from the sum ofthese costs and the emissions reduction attained by such governmental measures.

4No. 5: Experimental introduction of domestic integrated market for emissions trading by the
Ministry of Economy, Trade and Industry, Ministry of Environment, and the Ministry ofAgriculture, Forestry and Fishery (hereinafter referred to Domestic Integrated Market)
No. 6: Off-set credit system by the Ministry of Environment (hereinafter referred to as J-VER,
which stands for Japan Verified Emission Reduction)
The author conducted interview and survey of persons in charge at relevant ministries aswell as the study of literature published about these systems, and identified the following points,
while comparing them and contemplating on the issues involved.
1) Policy-making process in designing the systems- Changes in social environment surrounding emissions trading systems- Measures taken by each stakeholders and their incentives2) Details of system designing- Allocation of emissions and trading methods- With or without subsidies or penalties- Stringency in credit certification (criteria for additionality and verification methods andverification costs)- Governance structure3) Details of participating companies and implemented projects- Number of participating companies- Sectors of participating companies- Contents (types) of greenhouse gas emissions reduction projects
4) Cost-efficiency-

Government budget amount-Emission reduction volume-

Cost per unit emission reduction-

Credit trading prices-

Co-benefits (auxiliary effects such as energy-saving, air pollution prevention, job
opportunities, etc.)
Note that the Domestic Integrated Market (No. 5) is based on the Japanese Government’s

5

proposal announced on October 21, 2008, while the J-VER (No. 6) is based on the Government’s
proposal set forth for public comments on October 25, 2008.

6

3. Results
3.1 Policy—making process in designing the system
3.1.1 Domestic Emissions Trading System
Since the Third Conference of Parties of the United Nations Framework Convention on
Climate Change (UNFCCC) held in 1997, the Ministry of Environment made efforts to introduce
carbon tax as one of Japan’s domestic measures.

However, the industries and businesses alongwith the Ministry of Economy, Trade and Industry strongly opposed any introduction of a new tax
that might lead to production cost increase.

As of year 2008, no clear indication is given to theactual introduction of environment tax, although the discussion of such measures along with thereform of consumption tax and the continuation of temporary tax rate on gasoline is ongoing among
multiple numbers of political parties. Emissions trading system, on the other hand, is a new system
for Japan with many uncertainties.

Japanese policy-makers used to observe the progress of EU

ETS, and provide fewer prospects in the introduction of its Japanese version in Japan.

As the EU

ETS and Clean Development Mechanism (CDM) are operating smoothly since their introduction in
2005, the emissions trading is slowly and passively, in principle, winning social recognition among
businesses in EU and Japan.
In view of such situation, the Ministry of Environment started the experimental
introduction of emissions trading system since fiscal 2004, and, after fiscal 2005, it introduced the
JVETS, which is a small scale and voluntary, but serious emissions trading system equipped with theemissions volume management system and registry system.

The system design of JVETS wasquickly developed as, unlike carbon tax, it was essentially the voluntary system inviting lessinterference from other ministries and agencies.

Moreover, some of Energy Special Accountbudget under the jurisdiction of the Ministry of Economy, Trade and Industry was designated as thebudget for greenhouse gas reduction measures and transferred to the account under the Ministry ofEnvironment since 2003, expanding the MOE’s revenues for subsidies.

The revisions of “ActConcerning the Rational Use of Energy (Energy-saving Act)” and “Law Concerning the Promotionof Measures to Cope with Global Warming (Warming Measures Law)” in 2006 set the measurement
and reporting of greenhouse gas emissions obligatory to emission sources, which plays an importantrole for the development of infrastructure necessary for the introduction of emissions trading system.
This is because the standards and verification methods to measure emission quantities should beestablished before the introduction of emissions trading system.

In turn, the progress in thedevelopment of MOE’s JVETS clarified the issues involved in the emission measurement methods
under the “Energy Saving Act”and “Warming Measures Law”.

7

In 2007, the Global Environmental Sub-Committee at the Central Environment Council of
MOE and the Industrial Structure Council of METI held joint council meeting on the review of
Kyoto Protocol Target Achievement Plan to focus on the possible introduction of mandatory
emissions trading.

At their joint meeting on November 30, 2007, four advocates of emissions

trading schemes and four opponents had a “debate” on the pros and cons of emissions trading
scheme introduction.

The Ministry of Environment itself started to move toward the expansion ofvoluntary type emissions trading and the possible introduction of mandatory type schemes as
indicated in their decision to establish a new Office on Market Mechanisms in July 2007.

In

August 2008, the Prime Minister Fukuda (at that time) announced the experimental introduction ofdomestic emissions trading scheme to be started from October 2008.

The Ministry of Environment

also introduced the concept of the “carbon offset”, creating a system to offset greenhouse gas
emissions from goods production and activity with credits purchased by event hosts and consumers.
In February 2008, the Ministry of Environment announced the “Way of carbon off-setting in Japan(Guideline)” and continued to hold review meetings to set rules for the system.
The traditional stance of the Ministry of Economy, Trade and Industry was to oppose, in
principle, to introduce stringent policy.

Therefore, in stead of the introduction of cap and trading

system that would set a cap on emissions of corporations and industries, promotion of the domestic
global warming measures by the revision of Energy Saving Act and the expansion of emission
sources subjected to this Act were proceeded.
However, the METI noted higher energy saving potentials among small to medium
enterprises in Japan, and introduced subsidy systems for the greenhouse gas emission reduction
projects of small to medium enterprises since fiscal 2005.

The Ministry also consigned to its

affiliated organization, the Global Industrial and Social Progress Research Institute, to form
“Research Committee on the promotion of global warming measures among small to medium
enterprises” to discuss appropriate design of such a system.

This Research Committee focused on

the “System under which big companies purchase credits from small to medium companies to use
for their compliance with Voluntary Action Plan (Small to Medium Enterprise CDM)”, which led tothe establishment of “Domestic Crediting System” in the domestic integrated market announced on
October 21, 2008.
For this domestic integrated market, the Cabinet Office and the Ministry of Environment
took a central role in the discussion following the announcement of Fukuda Vision in June 2008.
As mentioned above, the result of their discussion culminated to the “experimental introduction ofdomestic integrated market for emissions trading” announced on October 21, 2008, which did not8solicit any public comments before the announcement.
According to the published document, the system allows the issuances of emission
allowances and credits to be used for the achievement of the Voluntary Action Plan through foursystems of: 1) Cap and Trade system for corporations under which corporations set their own target
that can conform to the Voluntary Action Plan target, 2) JVETS, 3) Cap and Trade system forcorporations not participating in the Voluntary Action Plan, but setting own target in reference to
JVETS system, and 4) domestic crediting system developed from METI New.

Adding the Kyoto

credits to above-mentioned systems, they will comprise domestic integrated market.

In addition tothese systems of domestic integrated market, a system called J-VER will be created, which provide
tradable credits that cannot be used for the compliance with Voluntary Action Plan target.

Not available
compliance

Available for VAP compliance(Fig.-1)

for VAP

J-VER

Dom estic Integrated M arket
Cap and Trade
Domestic Crediting system
1. VAP member companies (Developed from METI New)
with target conforming to
VAP target
2. Non member companies
to participate in JVETS or
to set target conforming to
JVETS target

1.
2.

Credits from domestic emission reduction projects(domestic credits)
Credits from overseas emission reduction projects (overseas
credits)

Fig. 1

1.
2.

Credits from domestic
emission reduction projects
Green Power Certificate

Overall image of domestic emissions trading schemes in Japan

Source: above figure prepared by author

It should be noted that Operational Entity (OE) to verify the emission quantity would takean important role in the introduction of emissions trading schemes in Japan.

As several Operational

9

Entities monopolize validation works on many CDM projects around the world, it was extremely
important for Japanese Operational Entities to conduct verification works on greenhouse gas
emission reduction projects in Japan, for developing experiences in such works.

Therefore, many

Operational Entities have been involved as secretariat and the policy proposal advocates for thedesigning of emission trading systems studied at the Ministry of Environment and the Ministry of
Economy, Trade and Industry.
As seen here, Japan seems to have discretely but steadily advanced toward thedevelopment of key infrastructure for emissions trading schemes, especially those that would beneeded to measure and verify emission quantities, and to manage and trade credits, through thereviews conducted at the Ministry of Environment and the Ministry of Economy, Trade and Industry,in addition to legislative reforms and the activities and presence of Operational Entities, as well as
intense discussion on pros and cons of emissions trading introduction at Councils and Committee
meetings.

3.1.2 Kyoto Credit Acquisition from Overseas
The Kyoto Mechanism Credit Acquisition Programme (KMCAP) is a system of theGovernment of Japan (co-sponsored by the Ministry of Environment and the Ministry of Economy,
Trade and Industry) to acquire Kyoto credits from abroad.

As the Government’s Kyoto Protocol

Target Achievement Plan called for the acquisition of overseas credits to the amount equivalent to
1.6% of Japan’s base year emissions (about 100 million ton-CO2), this KMCAP is an essential
system for Japan’s compliance with the Kyoto Protocol.

Since 2005, the Market Mechanism

Committee under the Global Environmental Sub-Committee of the Industrial Structural Council of
METI continued to review the KMCAP system designs.

Main issues there included how topurchase credits, credit prices and types, and the disclosure of purchase prices.

Except the issue of

selecting purchaser organizations (ultimately decided on the New Energy and Industrial Technology
Development Corporation : NEDO), however, there were no major controversies on issues between
the Ministry of Economy, Trade and Industry and the Ministry of Environment.

Moreover, theCommittee did not enter into in-depth discussion on actual purchase methods (for example, whether
to purchase higher quality credits at the prices different from market prices).

At present, there has

not been any specific rule on the purchase methods, except the basic policy of not purchasing any
credits from forestation CDM projects that would require supplement credits in the future.

Under

this KMCAP, the purchasing organization is purchasing Kyoto Credits from the market, with its own
discretion in view of market situation, at the prices approved by the Ministry of Economy, Trade andIndustry and the Ministry of Environment.

However, it is highly likely that Japan needs topurchase more credits than originally planned amount of 1.6% of gross emissions in 1990,

10

anticipating the need to significantly increase the budget amount for credit purchases.

3.2 Analysis of actual scheme designs
3.2.1 Fundamental structure of various schemes
Table 1 compares the fundamental structures of aforementioned domestic schemes (No. 1,
No. 2, No. 3, No. 5 and No. 6) and overseas Kyoto Credits acquisition scheme (KMCAP, No. 4).

<Analysis>
Participation and allocation and trading methods
All these schemes are for voluntary participation.

In regards to allocation and trading

methods, domestic crediting schemes of the METI old, METI new, domestic integrated market and
J-VER determine the difference between the case with greenhouse gas emission reduction project(project scenario) and the case without them (baseline scenario) as the emission reduction quantity,
as in the case of CDM.
MOE’s JVETS, on the other hand, presume the implementation of greenhouse gas
emission reduction projects, and the credits are given to the emission reduction quantity, which will
be calculated as the difference in emission quantities within the boundary of a unit entity, which iscomprised of plants and offices, between the base year2 and project start-up year.

This is different

from EU ETS method (where boundary is the one enclosing an emission entity/installation that emitsa certain scale of emissions), or CDM method (where boundary is to enclose the range affected by anemission reduction project).

The reasons why MOE JVETS adopted a system to designate aboundary as the one to encompass an entity as a whole and to monitor emissions within theboundary were: 1) it is not a good warming mitigation measure, if gross emission amount of anentity increases as a whole; 2) to calculate and verify emissions of an entity as a whole is easier as itenables the monitoring at the point of raw material purchase; 3) it conforms with the Energy Saving
Act and Warming Measure Law of Japan, in terms of monitoring unit; and 4) since this system isrelatively smaller in scale, it is necessary to grasp power consumption at the demand end of target
factories and offices as major CO2 emission reduction volume (Ninomiya 2007, a).

Therefore, themonitoring would only target the projects in case of METI old/new, and in case of MOE’s JVET, themonitoring is done for the emissions from entire plant, facility, office, etc.

While MOE’s JVETS

would control credit by registry system, METI’s old had no registry as it did not presume the tradingof credits.

2 Basically, base year emissions are calculated by averaging emissions in the last three years before the starting

year of the project.

11

Table 1

Comparison of fundamental structures of various systems
Acquisition
from abroad

Domestic Emissions Trading
Names

MOE JVETSMETI old

METI newDomestic
integrated
market

MOE J-VER

KMCAPStarting year

Fiscal 2005
(pilot phasefrom fiscal
2004,
integrated into
domestic
integrated
market after
October 2008)

From fiscal
2005 till fiscal
2007

Since fiscal
2008(Integrated
into domestic
integrated
market after
October 2008)

Since October
2008

Since
November
2008

Since fiscal
2006

Participation

Voluntary

Voluntary

Voluntary

Voluntary

VoluntaryNA

Allocation/Trading
methodsMix of cap andtrade andbaselinecrediting Note 1with trading

Baselinecrediting, no
trading

Baselinecrediting, withtrading

Mix of cap andtrade andbaselinecreditingAllowances be
smaller of thevoluntary
action target or
actualemissions,with trading

Baselinecrediting, withtrading

Purchasing
credits

Registry

Yes

None

NA

Yes

Yes

Subsidies

Yes (1/3 ofreduction
project
investment, ormax. 200
Million Yen)

Yes (1/2 ofreduction
project
investment)

Under review

None

None

NA

PenaltyNone (May apart ofsubsidies to be
recovered, ordisclose thename ofnon-complianceentities)

NA

NA

None

NA

NA

Relationship withvoluntary action
plan

None

None

Yes (Plan used
for compliance
of VAP target)

Yes (Plan used
for compliance
of VAP target)

None

NA

Governance

CA (Competent
Authority)
Committee

METI andOperational
Entities

METI andOperational
Entities

CabinetOffice, METI,
MOE,
National
CreditCommittee

METI, J-VER
Certification
Committee,
etc.

METI, MOE,
NEDO

Source: above tables prepared by author
Note 1: Although the system mainly concerns emissions reduction by projects, this is entity-base system, different
from the baseline crediting system adopted by CDM and other mechanisms.
Note 2: The METI-new system has presumed the introduction from fiscal 2008. This is based on the reviews
conducted at the “Review Committee for CO2 emission reduction at small to medium companies” held by METI
since May 2007.

Note 112

Moreover, MOE JVETS prioritize projects with higher CO2 emission reduction quantity
per subsidy amount applied for by participating company (in other words projects with higher
cost-efficiency) within the range of overall subsidy amount.

Even in the international community,

it is rare to find a system that combines subsidies to greenhouse gas emission reduction project andcap and trade scheme as in the case of MOE JVET.
MOE JVETS sets following four types of participants (corporations):(i)

Participant with target Type A
Participants are to commit to a certain amount of emissions reduction in exchange for theissuance of emission allowances and subsidies for the installation of CO2 emission
control equipment. (Entity adopting equipment subsidies)(ii)

Participant with target Type B
Participants are to commit to at least 1% emission reduction from base year in fiscal 2008
without any equipment subsidy(iii)

Participant with target Type C
Participants are to commit to at least 1% emission reduction from base year in fiscal 2007,
and at least 2% emission reduction in fiscal 2008, without any equipment subsidy(iv)

Trading participant
In order to trade emission allowances, etc., participants are to open their accounts on theregistry and conduct trading.

Trading participants will not have any subsidies, or initial

allocation of emission allowances.
Above Type B and Type C started since the 3rd period (fiscal 2007), as the first such
system to promote participation without incentives such as subsidies.
participating companies was fewer as expected.
companies participated as Type C.

As a result, the number of

Only 3 companies participated as Type B and 3

However, it is valuable to know that there are companies

willing to have caps without subsidies.
As mentioned above, the MOE JVETS is an entity-based cap and trade system, so that,
depending on the changes of production quantity and activity volume of an entity, some emission
reduction may be achieved regardless of the implementation of greenhouse gas emission reduction
project.

The credits issued in such case are, in a way, “windfall” credits, unfavorable in terms of

the significance of subsidies.

Still, MOE started this JVETS system with windfall credit

possibilities, in consideration of: 1) prioritizing the early introduction of easy-to-verify andeasy-to-participate system; 2) not adopting projects with smaller emission reduction ratio; and 3)

13

confirming the implementation of projects afterward.
On the other hand, METI’s old system was so-called baseline credit method, andcalculated emission estimates of project implementation scenario and baseline scenario (thedifference would be the amount of credits), by evaluating and estimating production plan,
specification of equipment introduced under the project, and operating conditions.

In the case of

METI old, amount of credit issued may not necessarily coincide with the actual emission reduction
quantity as the actual emissions and estimated emission would differ.

Still, METI old scheme did

not adjust credit amount as it did not assume any trading of credits.
In the case of domestic integrated market started its pilot phase in October 2008, all thoseparticipants of Voluntary Action Plan can voluntarily participate in this domestic integrated market.
If they are to participate, they can have allowances as a smaller of actual emissions or voluntarytarget.

Also, they can participate in a system using intensity target.

In principle, this market

prohibits the participation of industry as a whole, but it may become possible.

Subsidies
JVETS and METI old/new provide subsidies to project participants up to 1/3 to 1/2 ofproject’s investment amount (MOE JVETS sets 1/3 subsidy ratio with maximum amount of 200
million Yen, while METI sets 1/2 cap on subsidy ratio).

JVETS recruits participants without

subsidies from their third period, while METI new and domestic crediting scheme under domestic
integrate market assume that big companies are to pay for credits from small to medium enterprises
and small to medium enterprises as credit suppliers will receive such cash revenue in exchange for
credits.

However, credit revenues received after project implementation may not be sufficient as

incentives for the promotion of emission reduction projects. (Review Committee for CO2 emission
reduction at small to medium enterprises, 2007, B)

Penalty
In case of MOE JVETS, there is no fine like the case of EU ETS (40 euro/ton-CO2), or
penalty.

Still, companies not complying with their target may have their names disclosed, and berequested to return subsidies at the ratio relative to the amount of deficiency in credits.

Relationship with Voluntary Action Plan
METI new has two main purposes, 1) to identify energy saving projects among small to
medium enterprises with greater energy saving potentials, and 2) trading of credits generated fromsmall to medium enterprises with big companies. (Review Committee for CO2 emission reduction at

14

small to medium enterprises, 2007, b)

The latter purpose also implies that it will rescue big

companies with difficulty in achieving the Voluntary Action Plan targets.

As shown in Fig. 1, thisleads to the establishment of domestic credit scheme in domestic integrated market (Fig. 2)

Governance System
EU ETS and other schemes have each member country set own Competent Authority (CA)throughout the emissions trading schemes as a whole, which would govern the operational
management starting from the domestic allocation of emission allowances to verification andmonitoring.

Accordingly, MOE JVETS launched a CA Review Committee in fiscal 2006 as

JVETS governance organization, which was consisted of MOE officials, experts, and researchers at
think tanks. (The Committee was renamed as CA Committee from fiscal 2007.)the organization actually operates and manages the MOE JVETS as a whole.

This Committee is

In case of METI old,the scheme was operated and managed with Operational Entity acting as a secretariat under theguidance of Ministry of Economy, Trade and Industry, since the scheme itself was smaller scale than
MOE JVETS.

The governance systems for domestic integrated market and J-VER are notestablished yet, but the government plans to create a domestic credit management committee in caseof domestic crediting scheme involved in the former, and J-VER certification and operationcommittee in case of the latter as operational and management organizations.

15

Implementation of domesticenergy saving projects by small
to medium enterprises
Government subsidies (?)
Purpose 1: Promoting potentials of
3rd party OE

energy saving projects at small to
medium enterprises throughincentives called credits

Certification of
CO2 reduction (credit amount)

Big companies purchasing credits

Purpose 2: Use for theachievement of VAP target

Fig. 2

Image of CO2 domestic credit trading under METI new

Source: author prepared the above figure from Fujiwara (2007, b), Yoshida (2007), Review Committee of CO2
emission reduction at small to medium enterprises (2007, a), and Review Committee of CO2 emission reduction at
small to medium enterprises (2007, b).

3.2.2

Stringencies of credit certification (additional criteria, double counting andverification method and cost)
Table 2 compares stringencies in credit certification among various systems.

16

Table 2

Comparison of stringencies in credit certification among various systems
Acquisition
fromoverseas
KMCAP

Domestic emissions trading
Names

MOE JVETSMETI old

METI new

Additionality
criteria

Not sostringent (Postconfirmationof project’s
execution,
accept projects
as long as they
reduce grossemissions
withinboundary)

Not sostringent in
confirming
additionality

Not sostringent in
confirming
additionality(Ex. aproject with
two or more
years ininvestment
recovery is
consideredadditional)

Verification
cost

1.2 to 1.5
million Yen(Both for baseyear andexecutionyear)

Less than
100,000
Yen

Not
determined
yet

Domestic
integrated
marketNotdeterminedyet

Notdetermined
yet

J-VER

Stringentcriteria in
confirming
additionality(Ex. aproject withless than 3
years ininvestment
recovery is
notconsideredadditional)
Not
determined
yet

NA

Not
determinedyet

Source: above table prepared by author based on interviews with relevant personnel at ministries and agencies aswell as operational entities, Fujiwara (2007, b), Yoshida (2007), Global Environmental Measures Promotion
Headquarter (2008), and MOE (2008)<Analysis>
Additionality criteria and double counting
Needless to say that the biggest issue in project base systems is additionality.

In otherwords, if additionality criteria is set leniently, it will lead to the generation of credits for free riders,which were to implement the project whether the system was in place or not, resulting in the overall
increase in greenhouse gas emissions.

In regards to the methodology to confirm additionality,

MOE’s JVETS and METI’s old/new cannot be described as stringent systems as they do not ask forthe scale of investment profitability in greenhouse gas emission reduction projects.

As mentioned

above, MOE JVETS aims to reduce gross emissions within the boundary, so it may be argued thatleniency in additionality criteria is acceptable as long as the implementation of the project isconfirmed.

In case of METI new, the “Review Committee for CO2 emission reduction in small to

medium enterprises” held by the Ministry of Economy, Trade and Industry discussed the policy toaccept additionality of a project if investment recovery (pay-back periods) will take two years or

17

longer. (Yoshida, 2007)

This may be considered more lenient than the additionality criteria of

CDM, even for the smaller scale of the projects.
Furthermore, the proposal of domestic integrated market announced on October 21, 2008,
had no description of any additional criteria.

In case of J-VER, a fuel-switching project withpayback periods in less than 3 years is considered non-additional.

Moreover, if a big company uses

the emission reduction of a small to medium enterprise, which is a participating company of the
VAP or a subsidiary company located within the entity boundary of Voluntary Action target, as acredit, it is a double count of the same emissions reduction, so will not actually contribute to thecompliance with Japan’s Kyoto Protocol target.

In case of Voluntary Action Plan targets

participated by industries as a whole, their entity boundaries are quite oblique, raising the likelihoodof double counting.
Nevertheless, if a big company is allowed to claim the achievement of Voluntary Action
Plan target through the trading of non-additional credits or double-counting of credits, it will not
contribute to the achievement of Japan’s Kyoto target, but adversely affect the target achievement, as
it will actually increase emissions.

Verification method and cost
The cost associated with the verification of greenhouse gas emission reduction projects
performed by operational entities may correlate with the stringency of verification.
stringent the verification work, the higher the cost of verification.
system, however, it is necessary to lower the verification cost.

The more

In order to expand and develop a

In other words, it is necessary tobalance the costs and quality of verification.
In case of MOE JVETS, a Monitoring Reporting Guideline (MRG) has been developed
based on the study of precedents among other countries.

Since July 2007, they started the use ofemission control system (called “Kaiketsu-Shiottsu”), which incorporates this MRG.

The adoptionof this system has improved efficiencies in application, calculation, monitoring and verification fromthe fiscal 2007 (3rd period) compared with the year before.

However, due to the almost mandatory

regulations to have operational entity personnel visit the site of target facilities, upon the verificationof base year and implementation year emissions, the verification under MOE JVETS can cost from
1.2 to 1.5 million yen (the cost to be paid to operational entities, for base year and implementation
year, and verification fee to be borne by MOE.)
In case of METI old, the verification cost was less than 100,000 Yen, as it adopted

18simplified method in verification, such as no monitoring after the implementation of the project.

Inthis case, however, the lowering of verification cost might invite excess-issuance of credits
exceeding the actual amount of emission reduction, since METI old issued credits, in principle,
based on the verification of CO2 emission reduction calculation sheet submitted upon the application,
and would not require monitoring after the implementation of the project, for simplification purpose.
In case of MOE JVETS, on the other hand, the scheme is designed in a way so that the
project development document (PDD) for equipment subsidies, which is related to voluntary
reduction target, and to be submitted upon application, will be used only for assessing thecost-efficiency of a project, while actual emission allowances will be issued based on the certified
calculation report for emissions in the base year and the year of implementing reduction measures (=actual value).

So, it will prevent the excess issuance of credits.

The MRG and emission control system of MOE JVETS were created by MOE under thecooperation of CA Committee through intensive discussion of one and a half year among think tanks
and Operational entities.

They refer to various systems adopted in EU member countries, while

taking due attention to Japanese laws and acts (for example, Measurement Act, Fire Prevention Law,
High Pressure Gas Safety Act, etc.).

Especially the emission control system is an IT system linking

project participants, Ministry of Environment, Operational Entities, and CA Committee throughInternet, not only contributing to the efficiency improvement in registration and verification, but also
preparing for the future prospects of increase in project participants.3
Domestic crediting system adopts relatively simplified rules on calculation, verificationand control, as it is, in principle, a negotiated transaction a big company and a small to medium
enterprise, and does not assume the distribution of credits in the market.

3.2.3 Participating companies and their projects
Table 3 indicates the number of participating companies and the description (type) ofprojects for various schemes (except domestic integrated market and J-VER)

3

URL for Japan’s emission control system “Kaiketsu-Shiotti” is: https://www.ems.registry.go.jp/imart/ems.portal

19

Table 3

Comparison of various systems in terms of participating companies
Acquisition fromabroadDomestic emissions trading
Names

MOE JVETSMETI old

METI new

KMCAP

Number ofparticipatingcompanies (note)

Fiscal 2005: 31

Fiscal 2005: 40

NA

Fiscal 2006: 5

Fiscal 2006: 58

Fiscal 2006: 17

Fiscal 2007: 61

Fiscal 2007: NA

Types ofparticipatingcompanies

Big companies andsmall to medium
companies

Small to medium
companies

Big companies andsmall to medium
companies

2 Japanese, 2Chinese, and 1
BritishProject
description

Boiler renewal/fuelswitching,co-generation, AC
efficiency
improvement, efficient
lighting, better
insulation, operational
improvement, efficientequipment, etc.

Boiler renewal/fuelswitching,co-generation, AC
efficiency
improvement,
efficient lighting,better insulation,
operational
improvement,
efficient equipment,
etc.

NA

Power generation
using wastes, hydro,
N2O thermal
decomposition,
power generation
using blast furnace
gas, biomass power
generation

Source: author prepared above table in reference to Fujiwara (2007, a), Yoshida (2007), Ministry of Environment(2005), Ministry of Environment (2006, a), Ministry of Environment (2006, b), Ministry of Environment (2007, a),
Ministry of Environment (2007, b), and NEDO (2007)
Note: KMCAP participating companies are providers of credits (sellers).
Note: Number of actually participating companies may differ from planned (number of companies accepted into thesystem), due to their withdrawal from the system.

Also, the multiple numbers of companies may jointly participate

in a project as a group, so the number of participating companies actually means the number of participating groups.

<Analysis>
MOE JVETS and METI old had 222 facilities (sum of 4 terms, i.e. fiscal 2005, fiscal 2006,
fiscal 2007 and fiscal 2008) and 57 facilities (sum of fiscal 2005 and fiscal 2006) participated,
respectively.

MOE JVETS has several member companies of Voluntary Action Plan participating,but in case of METI old, participating companies are mostly small to medium enterprises.

Whenclassified by their sectors, total 189 companies participating MOE JVETS for fiscal 2005 and 2006
were foods (31%), businesses (20%), textile and fiber (13%), pulp and paper (10%), chemicals(10%), metal (8%), and ceramics (8%). (Ninomiya, 2007) In terms of the types of projects, 40
companies participating METI old in fiscal 2005 can be divided into boiler renewal/fuel switching(28%), co-generation (12%), air conditioner efficiency improvement (20%), efficient lighting (10%),
insulation improvement (8%), operational improvement (10%), and efficient equipment, etc. (12%)

20(Global Industrial Social Progress Research Institute, 2007)

The composition of project types may

reflect the strong influence of oil price increase in recent years.

3.3 Cost-efficiency
Table-4 indicates the values related to cost efficiency of various systems (excluding
domestic integrated market and J-VER).

<Analysis>
Government budget
Government budget for all these systems was from the Special Energy-related Account.
Total budget amount for MOE JVETS and KMCAP shows tendency to either maintain or somewhat
increase, while that of METI new is almost ten times as much as that of METI old.

Reduction quantities
Both MOE JVETS and METI old indicate that their emission reduction quantities are
relatively smaller than the average CDM projects, as a whole or in average.

The fact that theseschemes are mainly for CO2 reduction projects and for small to medium enterprises could be thereason.

In case of JVETS, however, the reduction ratio of base year in some projects were higher

than the average ratio of EU ETS projects, indicating that these participating companies accepted
relatively higher reduction targets.

In case of KMCAP for the purchase of CDM credits, theacquired reduction quantity was less than the target amount.

The reason could be the rise inpurchasing prices over the prices assumed when MOE made budget request to the Ministry of
Finance.

Cost-efficiency
Table 5 shows the cost-efficiency of MOE JVETS and METI old in details.

Here, thecost efficiency is considered as “subsidy amount divided by the sum of estimated emission reduction
quantities for legal service life of the project”.

Table-6 shows the result of credit trading performedby the participating companies of MOE JVETS in its first and second periods, in details.

Duringthe first period, most credit transactions were done immediately before the credit depreciation time
limit of the first period, i.e. August 31, 2007, according to the transaction log.

21

Table 4

Budget, reduction quantity, cost-efficiency, transaction prices, co-benefits,

etc. of various schemes
Acquired fromabroadDomestic emissions trading
METI old

METI newKMCAP

Government budget

Name

Fiscal 2005: about 2.6

MOE JVETSFY 2005: 0.6 BY

FY 2008: 0.45 BY

FY 2006: 4.9 BY

amount (Note-1)

billion Yen

FY 2006: 0.3 BY(budget request)(excluding

FY 2006: 3.5 BY

FY 2007: 0.4 BY

administrative expense)

FY 2007: 3.1 BY

Limit on national

FY 2008: 3.0 BY

budget allowance:
12.24 BY (FY2006 –FY2013)
FY 2007: 12.2 BY (w/oAdm. Expense)
National budget
allowance: 40.7 BY(FY2007 – FY2013)
FY 2008: 31.5 BY(Budget request)

Reduction Qty

FY 2005: 276,380

FY 2005: 15,832

Acquisition target for(each year, t-CO2/yr.)(21% reduction fromFY 2006: 4,185

fiscal 2006: 17.8

(Note-2)

base year)

million

FY 2006: 229,405

Actual acquisition in(20% reduction)

FY 2006: 6.38 million

FY 2007: 280,192

Acquisition target for(25% reduction)

FY 2007: 44.49 million
Actual acquisition for
FY 2007: 16.66 million

Reduction Qty

6.6 million (Total

20,017 (total of FY(Scheme as a whole,

reduction in the2005 and FY 2006)

t-CO2)

projects of FY 2005

NA

NA

NA

NA

NA

1,911 Yen/t-CO2

participants and FY
2006 participants)
Reduction Qty

5,883/yr (average per

328/yr (average per(average per project,

project of FY 2005 andproject of FY 2005 andt-CO2)FY 2006)

FY 2006)

Cost-efficiency

About 1,000 Yen/t-CO2

About 4,500 Yen/t-CO2(Considering the cost(Considering the costborn by participants,born by participants,

about 3,000 to 6,000

about 6,000 to 12,000

Yen/t-CO2) (Note-3)

Yen/t-CO2) (Note-5)

Transaction cost

1,212 Yen/t-CO2 (FY

NA

NA

NA

(Note-4)

2005)

Yes

Yes

No

(Note-6)

1,250 Yen/t-CO2 (FY2006)
Co-benefits (domestic)

Yes

Source: author prepared the above table in reference to: Fujiwara (2007, a), Fujiwara (2007, b), Yoshida (2007), Ninomiya (2007, b),
MOE (2005), MOE (2006,a), MOE (2006, b), MOE (2007, a), MOE (2007, b), MOE (2008, b), NEDO (2007), NEDO (2008),
Denki Shimbun August 24, 2007.
Note-1: Due to participant’s withdrawal and for other reasons, the budget amount and actual expense (actual expenditure fromgovernment budget) may differ in many cases.

In this paper, however, we did not find any vast difference in amounts between the22budget and actual expenditure.
Note 2: For FY 2005 participants, actual emission reduction year will be FY 2006.
Note 3: The values of cost efficiency for MOE JVETS when considering the cost born by participants (3,000 Yen to 6,000 Yen) are
the values when the MOE’s subsidy ratio (1/3) was taken into account (according to the values published by MOE).

They differ

depending on the year (refer to Table-5 below).
Note 4: Value for fiscal 2005 is the average price of transactions through emission trading system of Mitsubishi Research Instituteonly. (Refer to the Table 6 below).
Note:5: Cost efficiency of METI old was calculated by the author on the assumption that the legal service life of equipment
introduced is 12 years for MOE JVETS participants. They are not the government published values (Refer to Table-5 below).
Note 6: The value of 1,911 Yen as cost efficiency of KMCAP is the National budget allowance for fiscal 2006 to 2013 (12.24
billion yen ) divided by actual credit acquisition amount (6.38 million ton ).

It is author’s calculation and not a government

published value.)

Table 5

Cost-efficiency of MOE JVETS and METI old

MOE JVETSFiscal Year
Total subsidies (1000

METI old

2005

2006

2007

2005

2006

2,596,340

3,511,477

3,063,405

600,000

300,000

3,75,0,311

2,848,358

1,728,611

1,894,984

50,220

692

1,233

1,772

3,158

5,973

Yen)
Total emission
reductions in legal
service life (t-CO2)
Cost-efficiency(Yen/t-CO2)
Source: above table was prepared by the author in reference to: MOE (2005), MOE (2006, a), MOE (2006, b), MOE (2007, a),
MOE (2007, b), Fujiwara (2007m b), and Yoshida (2007)
Note: Emission reduction amount for legal service life is calculated by multiplying emission reduction estimates per year with thenumber of years in the legal service life of installed equipment.
announcement of participants accepted.

In case of MOE JVETS, the numbers are published upon the(It may differ from actual reduction due to participants’ withdrawal from the program.)

In case of METI old, the value was calculated by the author with the assumption that legal service life of equipment installed under
the project would be 12 years, in reference to the values indicated in MOE JVETS.
initial costs and do not include operating and management expenses.

Note that the costs shown in this table are

Also note that the values shown for MOE JVETS are theestimates given when MOE announced the names of participants accepted in the program.

23

Table 6

Credit transaction amount and transaction prices of MOE JVETS

Gross

Gross

Average

Maximum

Minimumtransaction

transaction

transaction

transaction

transaction

amount (Yen)volume (t-CO2)

price

price

price

(GHG-trade)(GHG-trade)(GHG-trade)(Yen/t-CO2)(Yen/t-CO2)(GHG-Trade)

FY 2005: 24

21,796,050

82,624

1,212

2,500

900

NA

54,643

1,250

NA

NA

transactions
FY 2006: 51
transactions
Source: MOE (2007, c), MOE (2008, b), Mitsubishi Research Institute GHG-trade website (www.ghg-trade.com,
September 5, 2007)
Note: Number of transactions and gross transaction quantities are MOE’s data (for fiscal 2006, average transaction
price is also MOE’s data).

In case of fiscal 2005, on the other hand, gross amount, average transaction price,

maximum price and minimum price are those only for transactions through GHG-trade, which was created by the
Mitsubishi Research Institute for MOE JVETS (number of transaction: 13, and total transaction quantity: 17,987
t-CO2).

Other transactions were those mediated by transaction participants, and over-the-counter transaction among

project participants.

In case of MOE JVETS, cost efficiency including the cost born by participating companies
was in the range of 3,000 - 6,000 Yen/t-CO2.

In case of METI old, the cost efficiency can be 6,000– 12,000 Yen/t-CO2, if calculated as in the case of MOE JCETS.
Due to smaller number of samples, and early stage of introduction, the comparison of
MOE JVETS and METI old is difficult, considering the significant differences in the scale ofparticipating companies, types of projects, and budget amount.

Still, one reason why MOE JVETS

tends to show better cost-efficiency can be because MOE JVETS specifically request higher cost
efficiency as a condition of project acceptance, so participating entities may add emission reductions
from greenhouse gas emission reduction projects that are not the subject of subsidies.4
In case of small to medium enterprises, lack of information and fund procurement forcapital investment may act as obstacles against energy saving investment. (Review Committee on
CO2 emissions reduction at the small to medium enterprises, c) Therefore, if a scheme provides
greater scale of subsidies and credits, and government and businesses communicate more
information on energy saving equipment and devices, more cost-effective projects may be developed

4 Other reductions are those from the projects without subsidies.

MOE publishes the emission reduction costs(1,298 Yen/t-CO2) of projects subjected to subsidy provision for fiscal 2005 participants only. (MOE, 2005)24

among small to medium enterprises.
Nevertheless, there were some studies analyzing the selection of global warming measuresamong small to medium enterprises (such as Okamura, 2006), but advance studies that focus on
small to medium enterprises and analyze actual global warming measures taken by such enterprises
from economic viewpoint are fewer, except the survey METI conducted in their processes ofdeveloping METI old/new schemes (Global Industrial and Social Progress Research Institute, 2007).
Therefore, further development of case studies in this field is anticipated.
The transaction prices shown in Table-6 are from the data of only those transactions thatwent through MOE prepared trading system.

In consideration of limited number of transactions,the prices shown here could be described cheaper than those of less risk CERs in the market, as ofAugust, 2007.5
In case of KMCAP, it is difficult to determine whether the purchasing price of 1,911
Yen/t-CO2 is higher or lower than general market price of CER, considering the uncertainty in thescale risks involved in each credit, and the fact that Japanese Government has provided significant
amount of funds for CDM related capacity building in other Asian countries.

Nonetheless, thepurchase price is likely being higher than original estimates.

Co-benefits
The disadvantage of importing Kyoto Credits from abroad is that they provide lessco-benefit to an importing nation.

For example, energy saving project implemented in Japan can

generate positive cash revenue after the recovery of investment, resulting in the creation of
employment and the sustenance of technology among Japanese companies.
may provide the co-benefits of air pollution measures.

Fuel switching project

It is difficult to quantify such co-benefits,

but in case of Netherlands, the air pollution prevention effects of domestic global warming measures
were monetized.

According to such study, (avoided) costs of regional air pollution measures andacidification measures were about 100 million Euro in total for 5 years from 1990 to 2004,
equivalent to about 12.5 % of global warming measure cost (De Bruyn et al., 2005)

5 Transaction prices a greatly influenced by CER prices and the request for the return of subsidies in case ofnon-compliance (= amount of cost efficiency). Since there are over-the-counter transactions without going throughtrading system, the overall picture of transaction is not known.

25

3.4 Summary of comparison study
Although generalization is difficult due to limited number of cases, the comparison study
conducted here can be summarized as follows:First of all, there are relatively less cost reduction potentials in Japan.

Secondly, thetypes of emission reduction projects implemented by participating companies seem to reflect the
recent oil price increase as fuel switching and other projects increase their share.

Thirdly, whencomparing the credits acquired from abroad and generated from the implementation of emission
reduction projects in Japan, the costs are higher in case of domestic measures. However, incomparing costs, it is necessary to take into account other factors such as co-benefits.

Fourthly, indesigning the systems for issuing credits from domestic projects, there can be many differences,
especially for the criteria on additionality and double counts.

Fifthly, the construction of robust

infrastructures for emissions trading schemes is ongoing in Japan.

4. Conclusion – Future issues and prospects
Finally, let us discuss the future issues and prospects of carbon crediting systems in Japan,
especially domestic integrated market (including JVETS), J-VER and KMCAP from the three
aspects of: credit demand/supply, reduction effects and efficiency (achieving target at minimumcost), and infrastructure development including verification system.

The author shall also discuss

briefly about the issues to be addressed in future studies.
For the supply of domestic credits and J-VER, the learning of METI old/new indicates thatlarge supply of credits cannot be expected from these systems at least for the first and second year of
the start-up, due to fewer numbers of credits per project and higher transaction costs.

However, theindustries and corporations, which are participating in Voluntary Action Plan and have achieved
their VAP target already, may be able to provide considerable amount of credits, although VAP
provide banking system.
In case of KMCAP, AAU credits from Russia and Central and East European countries,
with a mandate on environmental investment, and credits purchase under so-called GIS (Green
Investment Scheme) may largely influence the prices and supply volume of CERs. A call forprioritizing the use of cheaper GIS may increase in the future.

In this term, focus will be on future

discussion in Japan and international negotiation by Japanese government.

Considering the

reduction effects and efficiencies, the domestic integrated market is not likely to provide significant
reduction over the reduction achievable under the current Voluntary Action Plan, as the market is26

basically conform to the VAP targets.

If domestic crediting system provides more lenient criteria

to allow the generation of non-additional credits and double counting of credits, it leads to further
increase in emission quantity, making it more difficult for Japan to achieve the target.

Considering

the efficiency, participants of domestic systems may find perverse incentives to increase productionand emission quantities in order to raise the allowances allocated for the next period, in expectationof imminent review of allocation methods, as indicated in Oka (2008) and Neuhoff (2008).
Moreover, the current rules of domestic integrated market for free allowance allocation andacceptance of intensity-base targets may reduce efficiency in comparison to the combination ofallowance auctioning and absolute targets. (Neuhoff, 2007)
In terms of infrastructure including verification system, operational entities may face thedeficiency in capacity, in case of domestic integrated market, as the number of participatingcompanies will drastically increase and multiply from JVET’s 100 or less.

If participatingcompanies of domestic integrated market adopt intensity targets, it will not conform to the JVETS
which targets are based on absolute quantities, so that infrastructure built for JVETS based oninternational standards may not be utilized fully.

In case of domestic integrated market, theguideline for monitoring and reporting will be based on the one created for JVETS, but the presenceof multiple numbers of systems may make them extremely difficult to understand by project
developers and trading participants.
Future research subjects may include not only the study of individual projects, but also theanalysis of costs of governmental measures, how they are related to sectors as a whole or a part, as in
the case of researches in Netherlands discussed in the section 1 of this paper (Faber and Wit, 2005;
De Bruyn et al., 2005), which may include the detailed analysis of cost efficiency for concrete
government measures in each industrial sector, considering five cost items of: 1) investment cost, 2)
operation costs, 3) management costs, 4) subsidies, and 5) revenue (negative costs, such as energy
saving).

In pursuing such studies, if it is possible to identify the relationship with the marginal

reduction cost curve for each sector provided by National Environmental Research Institute, it may
lead to the analysis of reduction costs and reduction potentials in Japan.

Moreover, interestingstudies can be made in the detailed analysis of policy-making processes among actors of MOE,
METI and industries and possibilities of links with emissions trading systems of other countries,
through quantitative analysis of co-benefits such as air pollution mitigation associated with global
warming measures.

27

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