Emissions Trading and its Recent Trends
June 17, 2008
Purpose of This Article
1. Initiatives for measures to prevent global warming are becoming a shared challenge facing all mankind, and emissions trading is becoming one of the key measures in this regard. However, since the concept “emission” has been created artificially, it is generally difficult to get a real sense of what this means. Also, being largely dependent on systems, numerous detailed agreements exist. Moreover, multiple emissions trading systems coexist, and they are sometimes debated with no distinction between them, making it difficult to follow the debates without specialist knowledge.
This means that even if the term “emissions trading” and its broad meaning is understood, it may be that understanding in respect of its specific substance is inadequate among parties other than specialists or those directly involved.
2. Therefore, in this article we would like to briefly summarize the features and types of emissions trading, how it relates to measures to prevent global warming, points worthy of note, and recent trends, , as an aid to understanding emissions trading.
1. Emissions trading is a mechanism to promote reduced emissions of greenhouse gases in a low-cost and efficient manner. The two basic schemes are “cap and trade” and “baseline and credit.”
2. The Kyoto Protocol established an international emissions trading system in accordance with the so-called Kyoto Mechanisms. Already, close to 3,500 projects have been implemented on the basis of this (as of April 30, 2008). Japan too is incorporated into this scheme, with companies in sectors such as power, steel, trading working to obtain emmission.
3. A compulsory participation model of cap and trade such as the EU ETS (EU Emissions Trading Scheme) has not been introduced in Japan. However, since it is hard to attain the Kyoto Protocol’s reduction targets, and with cap and trade spreading in other industrialized countries, Japan too has begun to consider its introduction. In particular, with the growing momentum toward its introduction into the U.S. after Europe, and moreover, with the commencement of a move to create shared rules for cap and trade in Europe and the U.S., there is an increasingly widespread view that it is inadvisable for Japan to remain out of the loop of cap and trade indefinitely.
4. If Japan were to decide to take up the compulsory participation model of cap and trade, the greatest anticipated point of contention is the method of allocating emissions allowances to the participating companies. While there are three methods of allocation, namely auction, grandfathering, and benchmark, all have both merits and demerits, and it is extremely difficult to allocate in a way that is acceptable to all companies.
5. In recent years, the EU ETS has become the driving force behind emissions trading. Since the launch of the scheme in 2005, both trading volume and trading value under the EU ETS has seen a six-fold expansion, and as a result, trading under the EU ETS in 2007 accounted for 70% of global emissions trading volume, and close to 80% in value terms. Although emissions trading is mainly conducted through direct dealing, expansion of trading is bringing with it an increase in exchange dealing.
6. With global warming and emissions reduction attracting growing interest, a variety of new products related to emissions are appearing on the market. For example, “emissions trust” products have substantially lowered the barrier to obtaining emissions , and this is expected to be conducive to stimulating small-scale demand for which it was until now difficult to meet. . Further, carbon offset products are rapidly gaining popularity as a way to enable the general public to contribute easily to emissions reduction. Meanwhile, catering to those who wish to make a contribution to combating global warming while also securing a return in the form of investment products, emissions -linked bonds and investment trusts linked to emissions indexes are now being publicly offered for sale.
7. We cannot exclude the possibility that the drawing up of a framework after the 1st obligation period (2013 onward) may adversely impact the Kyoto Mechanisms. However, since there is a strong possibility that emissions trading will expand outside the framework of the Kyoto Mechanisms, it is expected that emissions trading itself will further expand and develop in the future.
For more information on the content of this report, please contact Kaori Iwasaki, the Japan Research Institute, Limited.