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Explainer: Japan“s carbon pricing scheme being launched in April

2023-03-30T13:10:13Z

Smoke rises from a factory during the sunset at Keihin industrial zone in Kawasaki, Japan, January 16, 2017. REUTERS/Toru Hanai/File Photo

Japan, the world’s fifth-biggest carbon dioxide (CO2) emitter, will begin a carbon pricing scheme in stages from April to encourage companies to curb emissions and achieve its goal of carbon neutrality by 2050.

The plan is aimed at speeding up decarbonisation to tackle climate change but Japan lags behind other major economies that have already implemented similar policies.

Still, Japan believes the scheme, which combines emissions trading and a carbon levy, will help to turn the world’s third-largest economy greener while maintaining the global competitiveness of its industries, including heavy emitters like steelmakers.

As the private sector cannot make a stand-alone green investment commitment due to the high costs and risk, Europe and the United States have developed state support tools, said Shigeki Ohnuki, director of the environmental policy division at the ministry of economy, trade and industry (METI).

Japan also needs to make a commitment quickly to support green investment to incentivise companies to change their behaviour, he said.

The scheme, based on METI proposals and approved by the cabinet this year, consists of emissions trading and a carbon levy.

As a first step, Japan’s version of an emissions trading system (ETS), set up by a forum for “green transformation” called the “GX League” will begin in the 2023/24 fiscal year on a voluntary basis, followed by full-scale operation from around 2026/27.

Participants – about 680 companies as of the end of January accounting for more than 40% of Japan’s emissions – would be required to pledge and disclose emission-cut targets.

If the target is not met, they will trade emissions through the market. Trading will likely be done at the Tokyo Stock Exchange, which conducted a trial from last September to January.

By 2026/27, Japan would set guidelines for the ETS and introduce a mechanism for third-party certification of companies’ targets. Official supervision may also be introduced for those abusing the system.

From around 2033/34, auctions for emission allowances for the power generation sector will begin.

Details including the price of carbon, the scope of coverage and whether it is mandatory are being discussed.

The carbon levy will be introduced from around 2028/29 on fossil fuel importers such as refiners, trading houses and electricity utilities. The initial levy will be set low but will gradually rise.

The government estimates the public and private sectors will need to invest more than 150 trillion yen ($1.1 trillion) in decarbonisation over the next 10 years. It will provide 20 trillion yen of the total via state bonds, with the revenue from the carbon levy and emission allowances to be used to finance the redemption.

The plan has met with mixed reactions, with some praising it while others have expressed concern about how slow it is.

The introduction of emissions trading and carbon surcharges mark “a significant shift in Japan’s climate change policy”, said Tohru Shimizu, senior researcher at the Japan’s Institute of Energy Economics.

But careful consideration must be given to the extent to which emission-intensive industries should be required to participate in the ETS in 2026, he said.

The GX-ETS has the potential to be as effective as other mandatory markets in G7 countries towards 2030 and beyond, said Yoko Nobuoka, senior analyst of Japan power research at Refinitiv.

But the carbon levy and the allocation of emission allowances to power companies will start too late to help the country meet the 2030 goal of cutting emission by 46% on 2013 levels, she said.

The measures will help secure funding for the government’s green investments, but they may not be ambitious enough to alter private sector behaviour, she added.

Japan’s Renewable Energy Institute pointed to an estimated carbon price level of about one-tenth of the level of $130 per ton that the International Energy Agency (IEA) says is required of developed countries, calling Japan’s plan “too passive”.

“It’s necessary to aim for an earlier and more comprehensive and effective carbon price,” said Teruyuki Ohno, executive director of the institute.

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