Discussion Paper No. 558

THE KYOTO PROTOCOL AND
GLOBAL ENVIRONMENTAL STRATEGIES OF
THE EU, THE U.S. AND JAPAN:
A PERSPECTIVE FROM JAPANTatsuyoshi Saijo

October 2001

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

The Kyoto Protocol and Global Environmental Strategies of
the EU, the U.S. and Japan: A Perspective from Japan

by

Tatsuyoshi Saijoa,b,c

August 2001

* I would like to thank Takao Aiba, Peter Bohm, Mitsutoshi Hayamawa, Carsten Helm,
Yoshie Ishida, Naoki Kojima, Mikako Kokitsu, Hiroki Kudo, Takako Nakajima, Hidetaka
Nakanishi, Hidenori Niizawa, Naoko Nishimura, Ichiro Sadamori, Kanako Tanaka, Akinobu
Yasumoto and Takehiko Yamato for their helpful comments and discussions. An earlier
version of this paper was in Japanese. Research was partially supported by the Nissan
Foundation and the Sumitomo Foundation.
a Institute of Social and Economic Research, Osaka University, Ibaraki, Osaka 567-0047, Japanb Research Institute of Economy, Trade and Industry, 1-3-1 Kasumigaseki, Chiyoda, Tokyo

100-8901, Japanc Climate Design, ISER, Osaka University, Ibaraki, Osaka 567-0047, Japan
E-mail: saijo@iser.osaka-u.ac.jp
Telephone number: 81-6-879-8571
Fax number: 81-6-878-2766

Abstract
Despite the objection of the Bush administration to the U.S.’s ratification of the Kyoto
Protocol, its entry into force has come to be realistic due to the Bonn Agreement in July.
The purpose of this paper is first to survey the framework of the Protocol, and then to
analyze the strategic positions of the EU, the U.S., and Japan in negotiations fordesigning the details of the Protocol. Finally, this paper intends to consider the due
strategy of Japan, as well as to identify the problems of the Protocol, which will be a help
for designing a new framework that will enable the participation of developing countries.

Correspondent:
Tatsuyoshi Saijo
Institute of Social and Economic Research
Osaka University
Ibaraki, Osaka 567-0047
Japan
Phone 81-6 (country & area codes)
6879-8571 (office)/6878-2766 (fax)E-mail: saijo@iser.osaka-u.ac.jp

1. Introduction
Global warming caused by the emissions of green house gases (GHGs) including CO2 isaccompanied by a double “exploitation.” One is the “exploitation” of future generations bygenerations that have emitted a significant portion of GHGs. GHGs that are being emitted
now do not contribute to the current global warming immediately. Instead, future
generations will be affected by a temperature rise caused by accumulated GHGs. The other“exploitation” appears within the same generation. Those who live in countries that are
enjoying rich lifestyles by emitting a substantial amount of GHGs are “exploiting” those
who live in countries that are not emitting GHGs, by not paying for their GHG emissions.
Thus, the global warming problem can be considered as a complicated problem regarding
intra-generational and inter-generational “commons.”
2. The Kyoto Protocol1
The UN Framework Convention on Climate Change was adopted in 1992 to address global
warming, and was brought into force in 1994. The third session of the Conference of theParties to UNFCCC (COP3) was held in Kyoto in 1997, where the Kyoto Protocol was
adopted. The Protocol stipulates that 38 countries, including developed countries andeconomies in transition, will reduce their GHGs including CO2 respectively to total
emissions 5.2% below the 1990 level during a period from 2008 to 2012. For example,
reduction below 1990 levels of 8% is required for the EU, 7% for the U.S., 6% for Japan, and
0% for Russia.
In order to achieve this target, the Protocol has employed three mechanisms, known as the
Kyoto mechanisms, while urging respective countries to make domestic reductions.
Emissions trading is one of the Kyoto mechanisms. Suppose the reduction costs per unit of
GHGs in Japan is 10, while that in Russia is only 1. If both countries are to reduce 1 unit
respectively by themselves, it will cost 11. However, if only Russia is to reduce 2 units byitself, the reduction cost will be 2. In other words, emissions trading allows Japan to let
Russia reduce Japan’s emissions by 1 unit by paying a cost ranging from 1 to 10. Emissions
trading is to set positive prices on GHGs emissions that have been free before.
Another of the Kyoto mechanisms is Clean Development Mechanism (CDM). Suppose a
As for the Kyoto Protocol, see the home page of the United Nations Framework Convention on
ClimateChange (http://www.unfccc.de/index.html).

11

country with an emissions cap, for example, Japan, builds power plants in a country
without an emissions cap, for example, China. In this system, the difference between GHG
emissions that would otherwise be caused by power generation using conventional
Chinese technology in Chinese plants and those which would otherwise be caused bypower generation using Japanese technology in will be considered as joint reductions by
Japan and China. The last of the Kyoto mechanisms is called Joint Implementation (JI),
which enables the transfer of emission reductions through technological transfer, etc.,
among countries with an emissions cap.
Joint Fulfillment could perhaps be called the fourth Kyoto mechanism. For example, 15
respective countries in the EU have made the unified commitment of 8% reduction below
1990 levels across the board, but the reallocation among themselves is approved.
The economic explanation of the Kyoto mechanisms is just to protect the earth through thepricing of GHGs. There is criticism towards emissions trading, such as “it entrusts the fateof the earth to the speculation elite”2 or “it allows those who cannot make actual
reductions to buy virtual emission reductions.”3 However, these criticisms are mere
misunderstandings. The concept of emissions trading is to minimize the global total
reduction costs, and the realization of lower reduction costs will facilitate further
investment in reduction.
3. Strategies of the EU, the U.S., and JapanLet us look at the strategies of the EU, the U.S., and Japan regarding the Kyoto Protocol. In
Figure 1, the horizontal axis represents the amount of CO2 emitted to produce the GDP of
US$ 1 million evaluated in purchasing power parity (CO2 ton), and the vertical axis
represents CO2 emissions per capita (CO2 kg) in major countries in 1996. In this figure, themore you go to the upper-right direction, the less efficient the country will be. The slope ofa line between the origin and each point shows GDP per capita (US$10,000). Therefore, thesteeper the slope becomes, the larger the GDP per capita will be. When there are no points
representing other countries in the upper-right direction from a given country’s point, thatcountry can be considered as an inefficient country.

The U.S., Australia, Russia, Ukraine

are considered as such. They can be called so-called “rogue countries” in CO2 emissions.

See Shohei Yonemoto, “CO2 International Emissions Trading: Risky American Proposal,” Ronza,
June 1997, pp.112-5, in Japanese.
3 NHK TV program, “Greedy Society: How far Markets prevail?” December 2000.
2

2

These countries form a group called the “Umbrella” in negotiations over the Protocol.4 The
efficiency of the major EU countries, such as U.K. and Germany, is relatively high. As forJapan, CO2 emissions in terms of both GDP and per capita are a little lower compared withGermany and U.K. However, it can be considered comparable to typical EU countries
when at least evaluated in terms of both of the two indicators. Located near the origin
along the horizontal axis are developing countries such as China, India, Indonesia, andBangladesh. It should be noted that India and Bangladesh are more efficient than the U.S.
in terms of emissions per GDP.
-------------------------------------Figure 1 is around here-------------------------------------Figure 2 shows the respective total emissions of CO2 in major countries.5 The base year for
reduction stipulated in the Protocol is 1990. The emissions of the former USSR, namely
current Russia and Ukraine, etc., were reduced approximately 40% below 1990 levels in1998 due to an economic recession. As the reduction target of Russia and Ukraine is 0%
below 1990 levels, they can sell these excess reductions of 40% as emission permits.
However, this portion called “hot air,” is criticized by NGOs under the argument that thesecountries can sell such portions as emission permits without any reduction effort. The
problem, however, may not be “hot air” itself, but the fact that “hot air” is in the hands ofinefficient “rogue countries.” The characteristic of the U.S. and Australia, which are also
members of the “rogue countries,” is that their emissions have increased compared with
1990 levels. On the other hand, in Germany and U.K., emissions are declining. Regarding
Japan, emissions in 1999 had increased 6.8% over the 1990 level, which requires a reductionof 12.8% as of 1999 to achieve the Protocol target. This is one of the reasons that Japan isincluded in the Umbrella group, along with the U.S. and other countries.
-------------------------------------Figure 2 is around here--------------------------------------The Umbrella is a negotiating group of countries consisting of Australia, Canada, Iceland, Japan,
New Zealand, Norway, Russia, Ukraine, the U.S.A., but it is not a group of Joint Fulfillment such as
the EU.
5 Data are based upon Handbook of Energy and Economy, Ed., Econometric Analysis Division of the43Let us look at the position of the EU.6 The total CO2 emissions of the EU in 1990 was about
900 million tC, with the main emitting countries of Germany and U.K. holding share of 280
million tC and 160 million tC respectively.7 As the reduction required for all EU is 8%, they
have to reduce 70 million tC in total. However, they have agreed on the reallocation of
reduction commitments within the EU: the reduction ratio for Germany is 21% (60 milliontC) and that for U.K. is 12.5% (20 million tC). Therefore, the reduction of approximately 80
million tC is planned to be done only by these two countries, which would over-achieve
the total reduction target of the EU.
Why is such reduction possible only by Germany and U.K.?8 Not only reduction efforts
made by each EU country, but also, in the first place, the base year set in 1990 is favorable
to the EU. It was in 1990 that the unification of East and West Germany — the emergence ofthe largest CO2 emitting country of the EU— was realized. In other words, East Germany,
which was a “rogue country” with hot air, joined this group. Looking at the regional
breakdown of CO2 emissions in Germany, the emissions in the former East Germany
region showed a 41% decrease compared with the 1990 level, while those in the former
West Germany region showed a 3% increase, in 1994. Secondly, both Germany and U.K.
had used a lot of coal, which causes greater CO2 emissions. In both countries, a switchoverfrom coal to natural gas took place mainly after 1990. Germany and U.K. are being
supplied natural gas respectively from Russia and from oil fields in the North Sea. They
made a shift to natural gas because the price was cheaper.

It can be said that the EU

position in negotiations over the Protocol is determined by the unification of Germany aswell as oil fields in the North Sea and the pipelines of natural gas. Furthermore, 10 Eastern
European countries with hot air are to join the EU in the future, which will facilitate theachievement of the reduction target despite the absence of actual reductions. However, it
will still be a big challenge for the EU to achieve the Protocol target, as shown in Figure 2.
With how much cost, then, will the EU be able to reduce GHGs? According to a survey by
the EU, the marginal cost for reducing emissions by 8% below the 1990 level is about 70

Institute of Energy Economics, Japan.
6 See also J. Gummer and R. Moreland, “The European Union and Global Climate Change: A Review
of Five National Programmes,” Pew Center on Global Climate Change, June 2000
(http://www.pewclimate.org/projects/pol_review.cfm).
7 Ton CO2 ton x (3/11) = Ton Carbon.
8 See http://www.meti.go.jp/topic/data/e97924cj.html.

4euro per ton of carbon.9 On the other hand, the marginal reduction cost of Japan forachieving the Protocol target is said to be over 100 thousand yen per ton of carbon.10 If the
Kyoto mechanisms fully function, and the U.S. participates in the Protocol, an international
price per ton of carbon is said to be around US$70. This means that the EU will be able toachieve the Protocol target efficiently within their boundary without depending on the
Kyoto mechanisms at all.
If so, the diplomatic strategy of the EU, which acts in the EU’s interest, is to acquire a
relatively favorable position compared with outside of the EU, by making the Kyoto
mechanisms inconvenient for the Umbrella group countries. In other words, theirnegotiation cards would include: the limitation on emissions trading, etc., as much as
possible; no forest sinks; and the strict operation of CDM. Furthermore,environment-oriented political powers within and outside of the EU responded to that andhave been supporting limitation on the use of the Kyoto mechanisms. On the other hand,the EU is trying not to limit emissions trading within the EU as much as possible tominimize the total costs all over their region, while trying to set a limit on internationalemissions trading.11 In other words, the EU is intentionally trying to apply different
policies inside and outside of their region.
However, in response to President Bush’s statement, “I oppose the Kyoto Protocol because
it exempts 80 percent of the world, including major population centers such as China andIndia, from compliance and would cause serious harm to the U.S. economy,” thediplomatic strategy of the EU has entirely changed, which made them greatly compromise
to the Umbrella group in the resumed session of COP6 in Bonn this July. This is because
the EU considered that there would be no other choices for the entry into force of theProtocol, as stated below, as well as because the international price of emission permits
would be significantly lowered by using Kyoto mechanisms without the U.S., which would
force the EU themselves to somewhat depend on the mechanisms.
CO2 emissions per capita in Japan continued to rise until the early 70s, when the increase
almost stopped due to the oil shock in 1973 - 1974.

It continued to shift around 8 CO2t

thereafter, but it turned again into an increase since 1987. From 1990 to 1999, the increase in

http://europa.eu.int/comm/environment/enveco/climate_change/sectoral_objectives.htm
See http://www.env.go.jp/council/06earth/y062-08/mat02.pdf.
11 See EU’s green paper published in March 2000,
http://europa.eu.int/comm/environment/docum/0087_en.htm.
9

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the industrial sector is 0.8%, while that in the transportation sector is 23 % and for thecommercial and residential buildings sector it is 15%. In order to achieve the Protocol target
based on 1990 levels, a reduction of 12.8% is required. However, it cannot be easily
achieved even if an economic recession drags due to the structural reform of the Koizumi
administration. Just after the adoption of the Protocol, the Japanese government decided on
the General Principles on the Promotion of the Measures to Cope with Global Warming ina Cabinet meeting in June 1998.12 According to these General Principles, energy-derived
CO2 emissions control is to be 0%, the emissions control of methane, etc., is to be –0.5%,
reduction through technical innovation, etc., is to be –2.0%, reduction by forest sinks is tobe –3.7%, the emissions control of CFC substitutes, etc., to be +2%, and the use of the Kyoto
mechanisms is to be –1.8%, which will be a total of –6%.

The policies in the General

Principles are mainly based on command-and-control, and the share of those using the
Kyoto mechanisms is 1.8%. However, since the price of emission permits is inherently
fluctuating, it is impossible to fix the share from using market mechanisms previously.
The Japanese negotiation position changed dramatically in response to the U.S. objection
toward ratification. The requirements for the entry into force of the Protocol are (i) that it
must be ratified by more than 55 countries, and (ii) that it must be ratified by countries
with an emissions cap whose aggregate 1990’s emissions is at least 55% of the total CO2
emissions in 1990 of capped parties. The share of the U.S. in 1990 was 36.1% and that ofJapan was 8.5%. Therefore, the total share excluding these two countries is to be 55.4%. As
the shares of Canada and Australia are 3.3% and 2.1% respectively, the Protocol will not beable to come into effect if either of them do not ratify it following Japan. Canada iswavering between a choice of ratifying the Protocol without the U.S. or waiting for
ratification by the U.S., while Australia is indicating that it might wait for the U.S. Thismeans that Japan has become the pivotal player to decide the future of the Kyoto Protocol.
In COP6 held in The Hague in November last year, an agreement was not reached because
the proposal of President Pronk was refused by Germany and others. One of the biggest
interests of the Japanese government at that conference was the treatment of forest sinks.
Although it estimated a 3.7% reduction through forest sinks below the 1990 level in the
General Principles, only 0.5% was to be approved in the Pronk proposal. Although
President Pronk offered a compromising proposal of 3% to Japan in June, Japan refused toaccept it, demanding to add more. Japan also did not clarify its attitude toward the12

http://www.env.go.jp/earth/cop3/kanren/suisin2.html

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ratification of the Protocol, saying the first thing to do is to urge the U.S. to come back to
the Protocol regime. Although it was reasonable for Japan to maintain that attitude in orderto proceed with the negotiation favorably to itself, the press and NGOs were offended. In
the resumed session of COP6 in Bonn in July, the EU made substantial concessions to theUmbrella group, and Japan could secure a 3.8% reduction through forest sinks. It is said
that Japan had almost all of its demands granted despite some remaining uncertainties.
The Japanese government argued for a lax compliance system as well as no limits on the
Kyoto mechanisms. If it intends to use the Kyoto mechanisms including emissions trading,
it is essential to design a robust compliance system as well as not to set limits on the use of
the mechanisms. In this regard, the argument of the government lacks consistency. In theBonn Agreement, the following statement is included: to maintain a commitment period
reserve which should not drop below 90% of the Party's assigned amount under theProtocol, or 100 per cent of five times its most recently reviewed inventory, whichever islowest. There are a number of problems in the reserve system.13 First of all, reserves mean
supply limits, which makes the price of emission permits higher than that in a casewithout reserves. Secondly, it does not encourage domestic reduction in the suppliercountries of emission permits. Suppose the most recent emissions of Russia is 60% of the1990 emissions. As it would have a right to emit 100% of the 1990 level, Russia’s reserve
would be 60%. Although it would be able to sell its hot air of 40% as emission permits,
there would be no incentive for domestic reduction over this level. In other words, even if
it reduces emissions, Russia will not be allowed to sell them. Third, a reserve system does
not contribute to the compliance of each country. If Russia is able to make a domestic
reduction over the level of hot air, countries on the demand side can buy those reductions.
Therefore, a reserve system will cut off the route of compliance through this option. The
Japanese government tolerated the reserve system, and deferred the issue of a legallybinding penalty system.14
Then, how is the U.S. strategy? The U.S. Senate decided the followings by consensus in1997. First, developing countries also need to have emissions reduction commitments.
Second, the Protocol should not have an impact on the U.S. economy. Third, the ratificationof the Protocol cannot be approved unless both of two requirements above are fulfilled.
http://www.unfccc.int/resource/docs/cop6secpart/l07.pdf
It has been a central issue to restrict the usage of the Kyoto Mechanism, which is called
supplementarity. See also K. Kaino, T. Saijo, and T. Yamato, “Economic Consequences of EU's
Proposal of Quantity Restraints on the Kyoto Mechanism,” Energy and Resources,Vol. 21(2), March

13
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Although in Kyoto, the then Vice President Gore accepted a 7% reduction below the 1990
level, the U.S. emissions increased by 12.5% over the 1990 level in 1998 reflecting its
economic boom in the 1990s. It means that they had to make 19.5% reduction as of 1998.
Compared before (1972) and after (1982) the two oil shocks, CO2 emissions in the U.S. havebeen somewhat reduced. However, they increased by 23.6% in 1998 over the 1982 level. It
can be said that the U.S.’s Protocol target will be difficult achieve unless somethingequivalent to continuous oil shocks, inter elia, a large amount of domestic carbon tax or acommand-and-control type regulation, is introduced. The U.S., which does not favor tax
and regulations, broadly approved forest sinks in the country and aimed to design asystem that would not limit the use of mechanisms that would utilize overseas reductions.
However, it can be said that these ways were cut off by the EU strategy.15 The
abandonment of the Protocol by the Bush administration means that the U.S. has returnedto the position of the 1997’s Senate’s decisions. However, the Bonn Agreement should
facilitate the U.S.’s return to the framework of the Protocol, due to a substantial concession
by the EU.
The situations of the EU, the U.S. and Japan are often compared to a wet towel. The EU is a
wet towel with a substantial amount of water, which can be wrung. The problem iswhether the towel can be wrung after year 2013 when decarbonization, etc., is to becompleted. Japan is a towel almost dried, with little water to be wrung. It is even uncertain
whether it can achieve the Protocol target unless technology or people’s lifestyles change.
The U.S. is a wet towel with abundant water, but it is less willing to wring it, holding theAmerican lifestyle and national interests as an excuse. It is also one of the problems in the
Protocol that the EU, the U.S. and Japan have almost similar reduction commitments
though their national conditions are quite different.
4. After Kyoto
Let us probe into problems in the Protocol. The first problem is that it took too much time
to reach the agreement. The practical start point of the Protocol was COP1 in 1995 in Berlin,

2000, pp.38-42, in Japanese.
15 As for the U.S. Climate Change Review - Initial Report, see
http://www.whitehouse.gov/news/releases/2001/06/climatechange.pdf. It is impossible to design
an institution or a treaty where every party ratifies it when the issue is an international public goodsuch as global warming. As a theoretical framework, see T. Saijo and T. Yamato, "A Voluntary
Participation Game with a Non-Excludable Public Good," Journal of Economic Theory, Vol.84,
pp.227-242, 1999.

8

followed by COP3 where the numerical targets were set, and finally, the resumed sessionof COP6 in 2001 at which operational rules were agreed upon. Thus, it will be from 2008 to2012 that the numerical targets will be applied. The second problem is the base year for
reduction. The important objective of UNFCCC was to stabilize GHG levels at 1990 levels
by 2000. Although this objective was not achieved in most of the major countries, 1990 has
been set as the base year tacitly in negotiation over the Protocol. The numerical targets
seem to have been set with a country’s specific economic situation and equitability withother countries taken into consideration, but it still gives an impression that theestablishment process of the targets was slow. The third problem is that country specificfigures for forest sinks were virtually decided in the political negotiations at the resumed
session of COP6 in an artificial way, after the numerical reduction targets had been decided
at COP3. Forest absorption figures should be decided at least based on scientific evidence
instead of negotiations. The problem is that those baseless numerical targets had been
decided before detailed rules were set. The fourth problem is that developing countries do
not participate in the Protocol as was indicated by the U.S. The following paragraphs areintending to offer practical proposals to resolve these problems.
Given that the Protocol is to be effective, we have to start developing a new protocol for aperiod after 2013 by 2005. We also have to avoid wasting time in choosing an adequatebase year. For that purpose, a country-specific GHG emissions path for 2013-2017 must be
established. The selection of a path may depend on reduction efforts that have been madeby a country concerned, its economic performance, its weather and climate, its energy
consumption pattern, forest sinks, emissions per GDP and so on. This path must not be
decided in a plenary session of the COP, but in a team, which consists of experts from three
countries, each representing developed countries, semi-developed countries, anddeveloping countries. When an emissions path for Japan is to be decided, the team should
consist of experts from such three countries excluding Japan itself. In other words, anemissions path for one’s own country would not be decided by the country concerned but
by other countries.16 In this case, Japan would also of course, be involved in the decision
by providing information to these three decision-making countries, but thedecision-making itself would be done by the three evaluating countries. Through suchprocess, there would be a smaller possibility of making allowances for each othercompared with other cases including bilateral evaluation. As a result, this would give

This type of method in the theory of institutional design, see T. Saijo, "Strategy Space Reduction in
Maskin's Theorem: Sufficient Conditions for Nash Implementation," Econometrica 56(3), 693-700, May
1988.

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objectivity to an evaluation itself. Moreover, it would facilitate as well as save time for adecision compared with a process in a plenary, as an evaluation is to be made by only three
countries. This process must be implemented in all of the UNFCCC ratifying countries. In
case of a country without enough human resources, organizations including theInternational Energy Agency would give a support.
After country-specific emissions paths have been decided, reduction schedules would be
decided at every annual Conference of the Parties (COP). Emissions paths for developing
countries may be approved as they are, while developed countries may be required toreduce more.
Each country would use emissions trading and joint implementation (JI) as flexible
mechanisms while implementing domestic reduction. As all countries participate in thissystem, CDM would be integrated into JI, and CDM specific problems including themeasurement of emission reductions generated from CDM could be avoided.
Even in this system, however, there remains a possibility that the global total emissions
would increase due to the participation of developing countries. To avoid this, the global
total target – which would be set less than the total of national targets - would be set
separately from country specific targets, and the administrative organization of emissions
trading would keep emission permits supplied from developing countries to abandon
some of them. The equivalent cost of this abandoned emission permits’ value would beborne by developed countries in proportion to their accumulative emissions amount in thepast.
5. Domestic Policies in JapanAs Figure 2 shows, although Japan also experienced the two oil shocks, its total CO2
emissions have increased when compared before and after the oil shocks. As in the case of
the U.S., it is also difficult for Japan to achieve the Protocol target unless somethingequivalent to continuous oil shocks or policies with more effect are introduced. Remember
the two oil shocks raised the price of crude oil ten times higher.
Securing its line in the General Principles almost as it is in the Bonn Agreement, the10

Japanese government is likely to take command-and-control type measures.17 In this case,the first problem is that entities escaping from regulatory loopholes would benefit, while
those taking measures according to regulations would lose. The second problem is that
entities whose marginal reduction costs are low would not reduce more than the regulatorylevel while entities whose costs are high would have to pay significant costs for reduction.
Therefore, total costs could not be minimized in terms of the national total. The thirdproblem is that a system regulating all over Japan must be maintained. This would requiretransaction costs and would also create various interests. The fourth problem is that theinternational price of emission permits would be lowered by the absence of Japan – whichis expected to have a large demand for emission permits – in the emissions trading market,
which would make the reduction costs of Japan relatively higher than other countries
including the EU. The fifth problem is that if the Protocol comes into effect without the U.S.,
and Japan takes a command-and-control line, the emissions trading market will become too
small to function.
We must design a simple and transparent system while avoiding these problems. Possible
systems that could realize this objective are carbon tax and domestic emissions trading.
Given that the Protocol target is considered as an international commitment that should beachieved, carbon tax may not achieve this target. Of course, we can use the Kyoto
mechanisms to achieve reductions that could not be covered by the tax. However, in thecurrent situation where the emissions amount of a given year is established 1-2 years afterthat year, this approach would not be sufficient, either. The background of Japanese
government’s support to a lax compliance system seems to be that they consider theProtocol target unachievable.
Therefore, I would like to propose here an upstream emissions trading system as a simple
and transparent system that would ensure the achievement of the Protocol target. In such asystem, the domestic importers of fossil fuels cannot sell their products without emission
permits. This system will be able to reduce the number of participating entities and tominimize transaction costs compared with the downstream trading of fossil fuelconsumption. Moreover, this system can secure equitability because the price of emission
permits is to be set at the upstream, as well as create an incentive for reduction investment
also at the downstream due to the price increase of goods and services that are fossil fuelintensive. It will be possible of course, that the consumers of fossil fuels may buy emission
See T. Kusakawa and T. Saijo, “Economic Consequences of Japan's Isolationism on Global
Warming,” Economic Seminar, December 2000, pp.36-41, in Japanese.

1711permits abroad and get fossil fuels by presenting them to importers. The acquisition ofemission permits overseas is also possible through CDM and JI, as well as emissions
trading, by investing in GHG reduction technology including afforestation not only withina country but also in foreign countries. Therefore, in this regard, we should aim to be an“environmental trading country” instead of an “environmentally isolated country” by
pursuing the General Principles. In the future, we might become able to hear the price of
CO2 permits per ton of carbon everyday on TV news.
We often come across an argument that the pricing of GHG emissions through emissions
trading would hamper economic growth. This is not necessarily true. If GHG emissions
come to be priced, various technological improvements will take place in order to restrain
this. This technological progress will lead to the creation of new industries to change theJapanese industrial structure itself. Through this process, we will be led to sustainableeconomic development.18
6. Concluding Remarks
I had an opportunity to talk with Mr. Seluka from Tuvalu, which is an island country withcoral atolls in the South Pacific, at the resumed session of COP6 in Bonn. The populationof this country is 12,000. He said their immediate problem was the increase of seawaterflow into wells. He said sorrowfully, “We have to ask for overseas support because wehave no technology to remove salts.” This might be an unnecessary technology for such a
country if there was not the rising sea level problem. I could not help but think about their
future, in which the coral atolls will go under water together with their wonderful culture,and in which the people will be forced to migrate overseas only to experience
discrimination and oppression as well as the loss of their identity.

I also heard astatement by Professor Dr. A. Atiq Rahman from the Bangladesh Centre for Advanced
Studies that “we should not choose a path where we would pursue economic
development with the help of ODAs, polluting environment as well as emitting GHGs,
only to end up with being transferred GHGs reduction technology”, at a NGOs meetingon technological transfer. Developing countries themselves are also facing with a problem
of free-ride.
The Bonn Agreement also stipulates to narrow the per capita emissions gap between
See T. Ono, “Environmental Tax Policy in a Model of Growth Cycles,” University of Tsukuba,
mimeo., 2001.

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developed and developing countries. Although it is not indicated in Figure 1, if we look at
the changes over time (1971-1998), they show each country has been moving left, across theboard. In other words, although the efficiency per GDP has improved, CO2 emissions per
capita have not indicated any remarkable change. Per capita differences have not been
narrowed for the past 30 years either within developed countries or between developed
and developing countries. The Environmental Kuznets Curve shows that, in the long run,emissions per capita increase as income goes up, but it turns into a decrease when income
reaches a certain level.19 This effect may have not been seen during a period of only 30
years, but we cannot wait for 50 years or 100 years to see the effect of the Environmental
Kuznets Curve. It is necessary to design a mechanism that will lead each country to movetoward the lower-left direction in Figure 1. The Kyoto Protocol is an agreement among
countries that would serve for this objective, and does not present the domestic policies ofeach country. It is also true in Japan that the Protocol objective cannot be achieved only by
consumers with “awareness” that emphasize GHG reduction. Although it is of course
important to have PR activities to increase consumers with awareness, it is more important
to design a system including a mechanism that can control consumption through the priceincrease of goods and services that generate GHGs.
Although we tend to look at per capita emissions, what should really be given attention
may be the amount of GHGs directly/indirectly input in goods and services that are usedby a given individual. Suppose one country produces goods that would produce a large
amount of GHGs and another country produces services that would produce relatively
smaller amount. Per capita emission might be larger in the former and smaller in the latter.
However, they use other country’s goods and services through bilateral trading. This
would then narrow the difference of GHG emissions per capita that have been input
directly/indirectly into those goods and services. Therefore, it can be said that the entity totake responsibility is the consumer. In this regard, it is highly possible that the U.S., shownin Figure 1, is using more GHGs than the data from the perspective of consumers’
responsibility because it is buying goods and services from developing countries.
The 20th century was the century of the American lifestyle, symbolized by mass production,
mass consumption, and mass disposal. The Bonn Agreement without the U.S. indicatesSee, for example, J. T. Roberts and P. E. Grimes, “Carbon Intensity and Economic Development
1962-91: A Brief Exploration of the Environmental Kuznets Curve,” World Development, 25(2), 191-198,
1997 and Noriyuki Goto, “Empirical Examination of the Relationship between Carbon Emissions andEconomic Development,” The Proceedings of the Department of Advanced Social and International Studies,19

13

that the Bush administration is not an administration of the 21st century, but is rather thelast administration of the 20th century -- the America’s century.

Graduate School of Arts and Sciences, University of Tokyo, pp.111-148, March, 2001.

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Data Source http://earthtrends.wri.org/

一人あたりのＣＯ２排出量（ｋｇ）

CO2 Emissions Per Capita
1996 (kg CO2)

25000
USA

20000
Australia

15000
10000
5000

Japan
Italy

Umbrella

CanadaGermany
Netherlands
PolandUK
EU
NZ

RussiaUkraineFrance Spain
China
Indonesia
Developing Coutries
India
0
Bangladesh
0
1000
2000
3000

4000

CO2１００万ドルＧＤＰあたりのＣＯ２排出量（トン）Per Million Int$ GDP, 1996 (ton CO2)

Figure 1. CO2 Emissions Per Capita and Per GDP

1,600USA

1,400

100万炭素トン
Millionton Carbon

1,200
Former Soviet U.

1,000
EU

800
1972

1982

600
1990

China

400

Japan
Germany

200

UK

CanadaAustralia

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

0

Figure 2. CO2 Emissions from 1971 to 98