9 summarizes Japan’s experience to promote energy efficiency, using a mix of objective setting, benchmarking, norm and regulations, R&D, and direct investments.

These types of industrial policies may usefully complement price-based policies, even though there are risks associated with them. In particular, the role of government failures (see discussions in the climate domain in Anthoff and Hahn, 2010 and Helm, 2010) needs to be accounted for in the same way than market failures are included. Activist policies create a risk from capture and rent-seeking behaviors (Laffont, 1999) that need to be considered. For a comprehensive survey of industrial policies in developing countries, see Harrison and Rodriguez-Clare (2010).

# **Box 9. Japan’s energy efficiency strategy: an example of sector-scale policy**

Building on its excellent track record in energy conservation since the first oil shock (the energy use per unit of GDP has decreased 26 percent between 1980 and 2009), Japan has pledged to go further with the “Energy Conservation Law” enforced in 2006. The law seeks to improve energy efficiency (already one of the highest in the world) by 30 percent in 2030 relative to 2006. The aim is double: protecting the environment, and improve the efficiency of the economy (represented by the term in Equation (2)).

To reach such a target, the plan outlines a strategy to foster energy conservation technologies and develop and disseminate a **benchmarking approach** in order to correctly monitor energy conservation. More precisely, the strategy seeks to (i) introduce the most advanced technologies for replacing equipment in the energy sector, (ii) make net-zero-energy houses available by 2020 (and the norm nationwide by 2030), and (iii) introduce new integrated standards for energy consumption in all buildings.

Interestingly, the national strategy also contains the **Top Runner Program** , which is a very innovative policy to raise energy efficiency standards. The program sets standards for 21 products (e.g. vending machines, air conditioners, television sets, etc.) sold in Japan. On a regular basis, officials test all the products available in a category, determine the most efficient model, and make that model’s level of efficiency the new baseline. Then, manufacturers have the obligation to make efforts to achieve the new baseline within four to eight years. If a manufacturer does not meet the target or fails to make a good faith effort, this fact is publicized. Conversely, products which have reached the energy efficiency standard receive a “Top Runner” label.

Furthermore, the newest innovation in energy efficiency is the concept of **“smart community”** . A smart community is a model city which maximizes the use of renewable energy (such as PVs, wind power and micro hydraulic) and heavily relies on smart grids to deal with its intermittent nature. Four large-scale pilot projects were started in Japan in 2010. For instance, in Fukuoka, the deployment of energy conservation systems for an entire town will involve a real-time energy management for 70 companies and 200 households using smart meters. In Kansai Science City, an active deployment of electric vehicles will be undertaken, with the construction of a network of charging station. The Japan Smart Community Alliance brings together private companies from the power, automobile, and IT sectors, as well as the construction industry, the public sector, and academia. Japan is also seeking to export this concept: a project is under way in India and a “smart community plan” has been signed between Japan and China.

_Source:_ METI (Ministry of Economy, Trade and Industry) website <u>http://www.meti.go.jp/ and World</u> Resource Institute website <u>http://www.wri.org.</u> 29