2005 by the 25 EU Member States). The Member States formulated a national allocation plan (NAP) for assigned amount units. Upon approval by the European Unions' Executive Commission, the EU-Allowances were assigned to these installations. It is a mandatory system for limiting emissions (a so-called cap-and-trade approach). If the actual emission amount from an installation is below the allocated EU-Allowances, the installation can sell these allowances. Conversely, if the actual emission amount of an installation is expected to exceed the allocated EU-Allowances, the facility can reduce its emissions or purchase allowances. Since this system is linked to the Kyoto Mechanism, EU-ETS facilities can also use CERs or ERUs to meet the EU-ETS requirement.

It has been pointed out that allocation in Phase I was quite generous because consideration was given to ensure that the overall emission amount would meet the allocated amounts and that the system would be launched smoothly. For this reason, the EU-Allowances for Phase II have been reduced 5.7% from the actual emissions in 2005, forcing the installations to reduce emissions further.

In January 2008, the European Commission proposed to the European Parliament and the European Council a post-2013 framework to succeed Phase II. Currently, Member States mostly use the grandfathering method to allocate EU-Allowances to targeted installations based on their emissions in the past. The new framework will drastically increase the ratio of the auctioning method, allowing installations to purchase EU-Allowances according to their estimated emission amounts using open bidding. Discussions on institutional schemes to aid sectors facing severe international competition will continue.

## C Emissions Trading Systems in Other Countries and Regions

The emissions trading system is also spreading to other countries. New Zealand has adopted an emissions trading system for the forest sector since 2008 and the system is expanding into other sectors. The governments of Australia and Canada have indicated the introduction of such system beginning in 2010. The US Congress has submitted multiple bills for regulating GHG emissions. One of the bills, which centered on the introduction of an emissions trading system, was approved by the Senate Environment and Public Works Committee in December 2007. Some states already have plans to launch such a system. The United States also has a voluntary emissions trading system. The Chicago Climate Exchange (CCX), launched in 2003, is led by the private sector. It has over 300 members, including electric power companies, manufacturing companies, and local governments.

## (2) Examining Japan’s Emissions Trading System

In FY 2005, Japan’s Ministry of the Environment launched the Voluntary Emissions Trading Scheme (J-VETS) with a view to reducing GHGs cost-efficiently and steadily and accumulating knowledge and experience on a domestic emissions trading system. The scheme supports emissions reduction of businesses that reduce GHGs voluntarily and proactively, by providing subsidies for the installation of equipment to limit carbon dioxide emissions, such as improving energy efficiency, in exchange for the businesses’ commitment to reduce a certain quantity of emissions. To facilitate achievement of the reduction commitment, this scheme uses a flexible measure that enables trading of the emission units. The first phase (started in FY 2005) ended in September 2007. Japan will review the results in order to enhance the scheme in the future by further expanding membership, diversifying methods of participation, and optimizing validation methods.

The Kyoto Protocol Target Achievement Plan pointed out that a domestic emission trading system should be reviewed in a comprehensive manner. In addition to the perspective of realizing the Government of Japan’s medium-term strategies in relation to warming, the review should take into account the 2007 appraisal and verification outcome regarding the significant emissions reduction effect that can be realized from the “expansion and strengthening of voluntary action plans,” which is the pillar of industry based countermeasures. The review should be carried out comprehensively, including the wide range of discussion points such as a comparison of the domestic emissions trading system with other methods and their effects, the impact on industrial activities and the national economy, international trends, etc., as well as the appropriateness of the introduction and the appraisal of specific proposals.

In January 2008, the Ministry of the Environment set up the Advisory Committee on the Emission Trading Scheme to review specific ways to design a domestic emissions trading system that can reflect the conditions in Japan. Taking into consideration mainly the emissions reduction after 2013, the Ministry of Economy, Trade and Industry also conducted an in-depth review of economic instruments, including the domestic emissions trading system, at the Study Group for Economic Instruments to Mitigate Global Warming. In the February 2008 meeting of the Council on the Global Warming Issue, which was made