IEEJ: April 2004
386th Forum on Research Works

19 April 2004
The Institute of Energy Economics, Japan (IEEJ)Strategy for Global Warming Countermeasures in Europe
and Implications for Japan
Hiroki Kudo
Group Manager, Environment/Energy Conservation Group,
Environment/Technology Unit, IEEJ
Objective
European countries have been discussing and introducing provisions aimed at attainment of its Kyoto targets
positively even though it’s not clear that the Kyoto Protocol will come into effect soon. In the early 1990s (before
establishment of Kyoto Protocol), the Scandinavian countries were the first to take action on this, when they
established specific energy related taxation to counter global warming (hereinafter referred to as "carbon tax").
The number of countries adopting carbon taxation increased after the 3rd Conference of Parties (COP3) to the UN
Framework Convention on Climate Change (UNFCCC) at Kyoto in 1997. In addition, some countries initiatedstudies, trials, and actual instatement of schemes for application of the Kyoto mechanisms and for domestic
emissions trading after COP3. This situation forms the background for the scheduled instatement of an emissions
trading scheme within the European Union (EU) in 2005. There is a growing possibility that, as the particulars of
this scheme become clear, its instatement will have some kind of impact on related measures in the various
member countries as well as application of the Kyoto mechanisms by non-EU countries.
This report consequently begins with an overview of the body and background of policy measures to counter
global warming in Europe. While presenting and analyzing the orientation for the future, it then attempts to
identify areas meriting examination by Japan, considering the strategy behind European measures to combat
global warming.
Conclusions
1. Greenhouse gas (GHG) emissions in the EU were 2.3 percentage points below the base year emission level in
2001. The trend since 1990 has moved from flatness to slight increase in recent years. Even with the
instatement of the additional measures now under consideration, the level is forecast to exceed the target by 0.8
points around 2010. In spite of the ongoing improvement of energy efficiency after the oil crises and theprospects for a further shift to natural gas, the European Commission is proposing another reinforcement of
measures to combat global warming.
2.

Course of global warming countermeasures in the EU thus far(1) The first global warming countermeasures to be taken in the EU were the carbon tax established by the
Scandinavian countries in the early 1990s. Besides countering global warming, the tax was part of the
movement for tax reform in correspondence with the economic integration of Europe. It incorporated
provisions for mitigation of the impact on the industrial sector to avoid causing a burden gap withneighboring countries. This period also saw proposal of a common carbon tax throughout Europe for thesame purpose, but inability to reconcile the interests of various countries have thus far prevented this tax
from becoming a reality.
(2) After adoption of the Kyoto Protocol, countries such as Germany and the United Kingdom introduced carbon
taxation (Climate Change Levy), one after the other. Besides mitigation of the burden on certain sectors,
the objective included application of revenue to funding for social insurance. At the same time, several
countries tested or introduced schemes for domestic emissions trading and application of the Kyoto
mechanisms. In short, various approaches began to be taken toward attainment of Kyoto targets.
(3) EU is going to launch an emissions trading scheme in the industry sector in 2005. The aim is to heighten
the efficacy of efforts to attain the EUs Kyoto target while keeping the distribution of the related burden
equitable. Particularly notable is the participation in this scheme by Central and Eastern European countries
that are being newly admitted into the EU. This will provide access to low-cost emission quotas forexisting EU member countries. Although there are apprehensions about ability to attain the target atpresent, the participation of these countries will open up options including CDM projects.

13. Features of strategy in EU countermeasures for global warming(1) The EU is examining and adopting schemes that are grounded in the equitability among the member
countries and the international competitiveness of the EU as a whole. Underlying this feature are certain
socioeconomic characteristics, i.e., economic integration and the high proportion of inter-regional trade (withother EU members).
(2) In taxation to counter global warming, steps are being taken to set tax rates and adjust energy taxes to preventthe opening of gaps within member countries. In addition, countries are making provisions for tax
reductions and exemptions in the industry sector.
(3) In recent years, carbon tax has been used as a source of funding for the policy issue of alleviating the burdenof social insurance costs.
(4) Since COP3, the focus has shifted from carbon tax to policy measures aimed at making attainment of the
Kyoto target surer and more economical, through active use of means such as the Kyoto mechanisms andemissions trading encompassing the countries of Central and Eastern Europe.
4.

Differences between Japan and the EU, and implications
In this area, Japan differs considerably from the EU, as follows: 1) most of its trading partners do not have tomeet the Kyoto Protocol targets; 2) it has already achieved a high level of energy efficiency; 3) it has less margin
than the EU for fuel switching; and 4) the economic impact of domestic measures is larger as a result. In theview of these differences, the following can be cited as key points of the Japanese strategy.
(1) Instead of reinforcing the existing policy measures that lack rationality and introducing carbon tax, it should
place policy emphasis on a wide-ranging and flexible application of the Kyoto mechanisms to mitigate theeconomic impact while heightening the efficacy of efforts to attain its targets.
(2) It should conclude memoranda of understanding (MoU) and otherwise strengthen ties with countries hosting
CDM/JI projects in order to increase prospects for smooth execution of such projects and acquisition ofemission reduction credits at low cost.
(3) It should promptly make studies of incentives for application of the Kyoto mechanisms by enterprises andclearly define their orientation in specific terms.
This end carries implications for the current review of existing policy and the Guideline of Measures toPrevent Global Warming. Specifically, it is important to assess existing measures from the standpoint ofcountermeasure costs and the practicality of target attainment efforts, to place extensive application of the Kyoto
mechanisms at the heart of the framework, and to set about the task of constructing the actual schemes.

Commentary
1.

Trend of and future outlook for GHG emissions in the EU (Figure 1 and Figure 2)
In 2001, combined emissions of greenhouse gases (GHG; totals for six types of gas) in the 15 member
countries of the European Union (EU) were 2.3 percentage points below the base year level (1990 for carbon
dioxide, nitrous oxide, and methane, and 1995 in many countries for the three chlorofluorocarbons). They haveconsequently declined to a level requiring a further decrease of 5.7 points for attainment of the Kyoto target. In
addition to the steady improvement of energy efficiency since the oil crises, the factors behind this trend include afurther increase in this efficiency in recent years due to the reunification of Germany and a development in theenergy supply and demand climate, i.e., the rapid shift to natural gas in the United Kingdom and other countries.
However, GHG emissions in EU increased in both 2000 and 2001, and the GHG emissions projection wasrevised upward in 2003. In response, the European Commission has pointed out the need for additional policy
measures in the effort to attain the Kyoto target.

2.

Development of global warming countermeasures (Figure 3)

1) Initial phase (early 1990s)
The first substantial measures to counter global warming in the EU member countries were the carbon
taxation in the Scandinavian countries in the early 1990s. In this phase, a proposal was also made for the
institution of a common EU carbon taxation (in 1992), but this has not yet been realized because of an inability toreconcile the interests of the member countries. In advance of COP3, the industrial sector also took voluntaryaction to reduce emission.

22) After COP3
Following the adoption of the Kyoto Protocol at COP3, Germany, the United Kingdom, and Italy establishedcarbon taxation. At the same time, countries embarked on studies and trials of application of the Kyoto
mechanisms contained in the Kyoto Protocol.
3) Approaches for the pledged deadline
Subsequent developments included the institution of a carbon tax and start of a partnership for voluntary
efforts in Denmark, establishment of an emissions trading scheme in the United Kingdom, and instatement ofprovisions for application of Kyoto mechanisms such as ERUPT (Emission Reduction Unit Procurement Tender)and CERUPT (Certified Emission Reduction Unit Procurement Tender) in the Netherlands. In 2005, a scheme
for inter-regional emission trading scheduled to be launched in the industry sector.
In 1997, when it was decided to shelve the proposal for a EU-wide carbon tax, a proposal was made for arevision of the minimum energy tax rate, and this was adopted in 2003. Also notable are the common EU
frameworks for the promotion of renewable energy, combined heat and power (CHP), and energy conservationthat have been proposed and are moving into the phase of execution.

3.

Carbon tax and the EU emission trading scheme (EUETS)

1) Trend and characteristics of carbon tax
GHG taxes have thus far been introduced in eight EU countries (Sweden, Norway, Finland, Denmark, theNetherlands, Germany, the United Kingdom, and Italy). Although the rates, subjects, and other items differ
depending on the country, the revenues are utilized as a source of general account budget in all.
In the initial phase of imposition, the carbon taxes were introduced as part of larger programs of tax reform inmany countries with the economic integration in the EU in mind. In such cases, the institution was premised on
maintenance (or increase) in the level of tax revenues, and measures were taken to prevent an increase in the total
tax burden by implementing income tax cuts or energy tax reductions. Similarly, provisions for sizeable
reductions or exemptions were made for the industrial sector out of concern about the competitiveness of industry
sector. In countries introducing carbon tax more recently, they have been positioned as a financial resource forlightening the burden of social insurance costs as the reason for instatement (this is generally referred to as a"double dividend").
2) EUETSIn January 2005, EU is going to start a common emissions trading scheme (i.e., EUETS). The subjects ofallocation under the EUETS are installations producing GHG emissions above a prescribed scale, including power
generation. The requirements for allocation under this scheme are the preparation by each country of a national
allocation plan (NAP) that is in conformance with the Protocol targets, and observance of the rules setting forth
the conditions of inter-regional competition (especially as regards “state aid”). Application of CDM/JI credits isunder the moderate restriction of conformance with the principle of supplementarity (precedence of domestic
measures) expressed in the Kyoto Protocol, but there are to be legal provisions giving enterprises clear incentives
for the implementation of such projects.
Meanwhile, the ten Central and Eastern European countries admitted into the EU in 2004 will also participate
in the EUETS. This will furnish the current member countries with ready access to the low-cost emission quotasof these new members through the scheme (although the matter will be influenced by the NAPs).
Further in the future, the launch of the EUETS is likely to have an impact on the international emissions
trading market as well. Formerly regarded as independent players, the Central and Eastern European countries
will be closely linked to the EU, and this will limit access to them from non-EU countries. This, in turn, raises thepossibility of a decline in prospects for execution of JI projects by EU enterprises in Russia and other hostcountries, and a limitation of sales of initial allocations for the EUETS. Japan, too, will probably have its
transactions and JI project with Central and Eastern European countries limited. It will have full access only inthe case of CDM projects and countries such as Russia, and there is a growing possibility that it will be affectedby the monopolization of the market by Russia.
4.

Strategy for GHG countermeasures in the EU and future outlook
The following can be cited as the key features of countermeasures for global warming in the EU as describedabove.
(1) The EU is studying and adopting schemes that are grounded in the principle of equitability among member
countries and enhancement of the international competitiveness of the EU as a whole. Behind thisorientation lie certain socioeconomic factors, i.e., the movement toward economic integration and the highproportion of trading between member countries (see Table 1).
3(2) In taxation to counter global warming, steps are being taken to set tax rates and adjust energy taxes to preventthe opening of gaps with other members in keeping with the aims noted in 1) above. Additional policy
measures are the provisions for tax reductions and exemptions in the industry sector, the proposal of acommon carbon tax, and directives for a minimum tax rate in energy taxes. As this indicates,
harmonization of the tax burden has been a constant concern. In recent years, carbon tax has been selected
as a means of obtaining funds for the burden of social insurance cost.
(3) Lately, the focus of the climate policy has shifted from carbon tax to market-based policy measures aimed atmaking attainment of the Kyoto targets surer and more economical, through active use of means such as the
Kyoto mechanisms and emissions trading encompassing the countries of Central and Eastern Europe.
Moreover, the future holds the prospect of coordination between the EUETS and the energy/carbon tax
schemes, and reinforcement of strategy for attainment of national policy goals (as regards global warming
countermeasures and other issues) and maintenance of the competitiveness of EU member countries relative
to non-EU countries (see Figure 5).
5.

Differences between Japan and the EU, and implications (Figure 6)
In this area, Japan differs considerably from the EU, as follows: 1) most of its trading partners do not have tomeet Kyoto target (see Table 1); 2) it has already achieved a high level of energy efficiency (see Figure 2); 3) it
has less margin than the EU for fuel switching; and 4) the economic impact of domestic measures is larger as aresult. In the view of these differences, the following can be cited as key points of the Japanese strategy.
(1) Instead of reinforcing the existing policy measures that lack rationality and introducing carbon tax, it should
place policy emphasis on a wide-ranging and flexible application of the Kyoto mechanisms to mitigate theeconomic impact while heightening the efficacy of efforts to attain its targets.
(2) It should conclude memoranda of understanding (MoU) and otherwise strengthen ties with countries hosting
CDM/JI projects in order to increase prospects for smooth execution of such projects and acquisition ofemission reduction credits at low cost.
(3) It should promptly make studies of incentives for application of the Kyoto mechanisms by enterprises andclearly define their orientation in specific terms.
These ends carry implications for the current review of existing policy and the Guideline of Measures toPrevent Global Warming. Specifically, it is important to assess existing measures from the standpoint ofcountermeasure costs and the practicality of target attainment efforts, to place extensive application of the Kyoto
mechanisms at the heart of the framework, and to set about the task of constructing the actual schemes4Figure 1
105

GHG Emission Trends and Projections in the EU

1990=100

99.5

100

97.7
(95.3)

95

92.8
90* Figures in parentheses indicate forecast※ ( )内は2002年評価時の見通
valuesfrom the 2002 assessment. し(87.6)

85
1990

1995

2000

Current
既存政策
measures2005

Additional
追加政策
measures2010
Actual実績
trend

Targets
目標

Source: EEA (European Environment Agency), Greenhouse gas emission trends and projections in Europe:
Final Draft, 2003.12

Figure 2

Comparison between Japan and the EU in respect of energy efficiency
and energy source mix[Primary energy supply per unit of GDP]
Tons of oil-equivalent (toe)/US dollar
0.25 (1995 prices)[Breakdown of primary energy supply by fuel]
100%

EU
Japan

0.20

75%
Other

0.15

NuclearNatural gas

50%

Oil
Coal

0.10
25%
0.05

0%
1990

0.00
1971

Source:

1981

1991

2001

2001
EU

Prepared with data from IEA, "Energy Balances of OECD Countries"

5

1990

2001

Japan

Figure 3

Development of global warming countermeasures in the EU

UNFCCC

COP3

Carbon taxes

Germany, Italy, andthe UK

Scandinavian
countries

Coordination;
Denmark

Coordination;
the UK

Voluntary action/agreements
Conclusion ofagreement;
Germany

Germany,etc.

Domestic emissions trading
Denmark

EUETS：2005

Kyoto mechanisms
Netherlands

Proposal of acommon carbon tax

Directive for a minimum energy tax
rate
Renewable energy directive, CHP directive,
energy conservation directive, etc.

Figure 4

Comparison of Energy related taxes in key European countries

250,000

¥/t-C

Price
excluding tax

Existing
energy tax

Carbon tax

200,000

150,000

100,000

50,000

GHG tax
Existing energy tax
Price excluding tax

UK

Germany

151,204
57,78630,950101,077
59,508

FranceSwedenNetherlands

DenmarkJapan

118,854
51,54838,91164,632
69,4092,594
127,201
75,847

109,632
75,564

88,18774,068Source: prepared with data from various documentation
Note: data for unleaded gasoline

6Figure 5 Coordination of EU global warming policies
Key points:
Intraregional equitability
Maintenance of EUinternational
competitivenessresidential/commercial& transportation sectors

Industry andconversion sectors
Tax reform (including
assurance of tax revenues)
Maintenance of the balance
between member countries

EU common
carbon tax(impasse)

Carbon tax

Application for assurance ofrevenues for social insurance
cost burdens and otherobjectives

Reductions/exemptions
Reinforcement of the
tax rate

Agreements andreductions/exemptions(Netherlands,
Germany)(UK, Denmark）

Admission of Central
and Eastern European
countries into the EU(approaches to systemicrequirements)

EU15＋10EU emissions trading scheme
Maintenance of agreements
and reductions/exemptions

Supplementarity

Energy tax coordination(UK)

Taxation and policy
coordination

Initial allocation level
Central/Eastern
European “Hot –Air”

EU energy tax
Minimum tax rate
directive

Further reinforcement of tax rates

Tax exclusions

CoordinatedSupplementarity

Tax revenue target forresolution of financial
issuesDouble dividend

Note: Dotted-line boxes indicate events anticipated to occur in the future.

Table 1

Direction of Trade by destination country/region

To the US

To developing
countries

To the EU

To JapanTo otherregions

EU

7.6%

20.3%

62.9%
62.9%

1.9%

7.2%

(Subtotal:
Germany)

8.3%

23.5%

58.2%
58.2%

2.4%

7.6%

(Subtotal:
UK)

13.2%

20.3%

55.3%
55.3%

2.2%

9.0%

Japan

29.5%
29.5%

48.0%
48.0%

17.3%

42.2%

22.4%

Exportingcountry/region

US

5.2%
10.0%

25.5%

Source: Takao Aeba, "Kigyo no Ondanka Taisaku Sokushin ni Mukete" ("Toward Promotion of Global WarmingCountermeasures among Companies"), "Chosa" ("Survey"), Development Bank of Japan (DBJ), No. 53, May 2003
Original source: IMF, "Direction of Trade Statistics"(Note) Figures indicate average over the period from 1990 to 2001

7

Figure 6

Current status in the EU and Japan

EU

Japan

GHG emission trend
and background• Reduction trend toward the target• Promotion of a shift to natural gas• Improvement of efficiency through thereunification of Germany• Continuation of the trend toward
rationalization into the long term

• Shift from a trend of increase to one offlatness in recent years (distance fromthe target)• Delayed construction of nuclear power
plants• Change in the trend of efficiency fromflatness to decline

Degree of difficulty inattainment of Kyoto
Protocol targets (cost)• Possibility of considerable coveragethrough inter-regional measures• Inter-regional trade rate of nearly 70%;
relatively small external economic
influence• Low cost rating as compared to Japan• High cost of efforts based on domestic
measures alone• Strong economic influence due toincrease in countermeasure costs
because transaction partners are mainly
countries without Kyoto target

Focus of policy
measures (economic
aspect)• Equitability among EU countries• Attention to international
competitiveness on the regional (EU)level

• Need for reduction of the economic
burden as far as possible in light of thehigh cost of domestic countermeasuresand the trade relations

Actual status of policy
measures• Burden sharing agreement• Industrial sector approaches forcarbon taxes• Transition from the common carbon
tax concept to the energy tax directiveand EUETS instatement• Sharing of policy targets for renewableenergy, CHP, etc. (Directive)• Establishment of sector-specific targets
in the Guideline and reinforcement ofexisting measures (including green-tax,
RPS, etc.)• Voluntary action plans• Pilot projects related to the emissions
trading scheme

Condition of access to
CDM/JI• EUETS rulemaking for clear definitionof incentives for businessestablishments and legal handling oftransactions• Imposition of "vague" limitations withattention to supplementarity• Construction of application procedures,etc.
• Preparation of the environment throughinformation support, OE education, etc.

Approaches related to
the Kyoto mechanisms
for target attainment(quantitative assurance)• Participation of Central/Eastern
European countries in the EUETS• ERUPT and CERUPT• Conclusion of MoU with host countries
and promotion of projects• Provisions for FS support andsubsidization by the national government• Establishment of the carbon fundComing events• Discussion for the NAP (EUETS;
including the period beginning in 2008)• Presence/absence of coordination withcarbon tax schemes upon EUETS
instatement• Review of existing GHG
countermeasures• Study of policy measures for thesecond step

Contact: report@tky.ieej.or.jp8