Summary

Tokyo Metropolitan Government (TMG) has developed a cap-and-trade program that many advanced nations and regions are also moving to implement since the first introduction of such a scheme by the European Union in 2005. TMG’s program is the first one to be implemented in Japan and Asia. It requires installations under the cap to reduce CO2 emission for the 1st period from FY 2010 to FY 2014 by average 6% compared to the base year emission.

What is it?

Approximately 59.6 million tons of greenhouse gases (GHG) were emitted in Tokyo in FY 2006. GHG emissions in FY 2006 increased by about 3% compared to FY 1990. Energy-related CO2 accounted for about 95% of GHG emissions. The amount of CO2 emitted from commercial sector is the biggest among all sectors, accounting for about 37% of all CO2 emissions. In addition to that, its share is increasing year by year. In view of these trends, TMG developed and implemented Japan’s first mandatory cap-and-trade program. Compared to other cap-and-trade programs such as EU-ETS and RGGI, TMG’s scheme is unique in its scope. It focuses on large office buildings concentrated in city centre, because about 40% of CO2 emitted from commercial sector comes from these buildings.

How does it work?

Coverage 

Installations covered by this program are determined by the amount of energy consumption. Those that consume energy equal to 1,500 kiloliters or larger per year (crude oil equivalent) are required to reduce CO2 emissions under this program.

Cap setting

The cap in the TMG cap-and-trade program is an absolute cap. It is not an intensity target. The cap-and-trade program is among the most important measures to deal with climate change implemented by the TMG, and the cap was studied and set from the viewpoint of achieving the overall reduction target for Tokyo (reducing GHG emissions in Tokyo to 25% below the 2000 levels by 2020).

In this program, a compliance period of five years is set and targets are set for total emissions over the five-year period. The first compliance period (period from FY 2010 to FY 2014) is regarded as the“period of the turning point toward a significant reduction,” and the total reduction target (cap for emissions) for the first compliance period has been set to reduce the base-year emissions of the large-scale business sector by 6%(*). During the first compliance period, “the establishment of reduction organizations that also involve management”, “the planning of full-fledged energy conservation investments” and other measures are to be implemented, while even stricter reduction target which are expected to be around 17% lower than the base-year emissions are planned for the second compliance period (period from FY 2015 to FY 2019).

* The base-year emissions of the large-scale business sector refers to the total base-year emissions of the existing installations. The total reduction target is the cap for the large-scale business sector for the first five-year compliance period, and is derived by totalling the emissions for one year, which is obtained by reducing the base-year emissions of the large-scale business sector by 6% over five years. The total reduction target includes the cap for business facilities that join with these specified business facilities in which measures against global warming are being implemented during the first compliance period and after the total reduction obligations come into effect.

Allowance

Allowances are given by grandfathering. Allowances are determined by the following multiplication.

Allowances: Base year emission×Compliance factor × Compliance period (5years)
Base year emission is determined by taking an average of CO2 emissions during consecutive 3 years from FY 2002 to FY 2007.

Emissions trading mechanism

Emission reduction exceeding the yearly obligation may be traded from the 2nd year of each compliance period. Banking is allowed, but borrowing is not allowed.

Compliance Factor and Period

The first compliance period started from FY 2010 and will end in FY 2014. During this period, installations are required to reduce CO2 emissions by about 6 % from base-year emissions. The second compliance period will be starting from FY 2015 and ending in FY 2019. Installations will be required to reduce CO2 emissions by about 17% during the second compliance period. Regarding compliance factors, 6% is applied to those receiving energy from district heating and cooling plants during the 1st compliance period. To the rest of buildings, 8% is applied. Installations that have made outstanding progress with regard to measures against global warming are recognized as top-level installations whose compliance factor is reduced to 1/2 or 2/3.

Offsets

There will be three types of offset.

1. Emission reductions from small and midsize installations within the Tokyo area

  • Emission reduction by energy-saving measures
  • Buyer can buy necessary amount without limit

2. Renewable Energy Certificates

  • Solar (heat and light) energy, wind energy, geothermal energy, hydropower energy (under 1000kW), biomass energy (biomass rate 95% or above)

3. Emission reductions outside the Tokyo area

  • Coverage: large installations with less than 150 thousand ton base year emission
  • Large installations will be assumed to be covered under the Tokyo Cap-and-Trade Program, and reduction exceeding the reduction obligation would be counted as offset credit
  • Buyer can only buy up to 1/3 of base year emission

Monitoring and Verification

Participants are required to report their verified emissions to TMG annually based on “TMG Monitoring / Reporting Guideline” and “TMG Verification Guideline”. Verification by a verification agency certified by the Governor is necessary for monitoring and reporting emissions.

Penalty

Installations that don’t fulfil their obligation are required to reduce 1.3 times the shortage. Also, monetary fine will be imposed (About 500 thousand yen). In addition to that, the fact of violation will be released to the public, and the Governor will buy the allowance credit for shortage with payment cost charged to the violating installation.

CO2 reduction

To be determined.

Next Steps

In November 2009, TMG announced a proposal to encourage Japanese government to realize a nationwide cap-and-trade program in Japan. Outlines of the proposed nationwide cap-and-trade program are as follows.

  • The nationwide cap-and-trade program shall consist of two sub-programs: National Level Cap-and-Trade Program (NLCTP) and Regional Level Cap-and-Trade Program (RLCTP). Both the supply and demand sides of energy and resources shall fall under the cap. These programs will cover at least 60% of total domestic CO2 emissions.
  • Main target of National Level Cap-and-Trade Program is super large-scale energy and resource suppliers such as power plants and steel plants. About 500 such suppliers shall be subject to this program, and about 50% of domestic CO2 emission will be covered. The national government shall manage this program.
  • Regional Level Cap-and-Trade Program targets large scale installations such as factories, office buildings and public facilities that consume energy of at least 1,500kl per year (crude oil equivalent). About 14,000 installations will be subject to this program. Prefectures and major cities shall manage this program. RLCAP and NLCAP are in similar relation with the UK’s CRC and EU-ETS.
  • Emission allowances created in RLCAP can be traded in the nationwide regional level market only. The trade between NLCAP and RLCAP shall not be allowed since these two programs adopt different emission calculations.
  • National Level Cap-and-Trade market could establish links with other national carbon market in the future while Regional Level Cap-and-Trade markets will remain as a domestic market.

Application

About 1,400 installations will be within the scope of this program.