To what extent will establishment of new market facilitate reductions?

Editorial

12:29 JST, October 23, 2022

A thorough examination must be carried out to determine whether emissions trading, in which emissions reductions are regarded like securities and traded on a market, is an effective means of achieving this goal.

The Tokyo Stock Exchange has opened Japan’s first market for trading CO2 emissions. This is being conducted as a demonstration experiment by the Economy, Trade and Industry Ministry.

Already established is a system in which the central government issues tradable credits when certifying efforts to reduce or absorb emissions through the introduction of renewable energy and afforestation. The credits can now be freely sold and purchased on the new market.

The government has set a goal of reducing greenhouse gas emissions, including CO2, by 46% from the fiscal 2013 level by fiscal 2030, and to “net zero” by fiscal 2050. To achieve this goal, a mechanism to encourage companies to make efforts is necessary.

More than 150 companies and organizations from a wide range of industries, including Hitachi, Ltd., Mizuho Bank and Sumitomo Corp., are participating in the new market in addition to electric power, gas and other energy companies with large emissions volumes.

The central government’s certification system gives credits mainly to small and midsize companies and local governments, with these credits having been purchased by large companies in direct transactions. The creation of the market is expected to stimulate trading of credits.

The ministry will conduct its demonstration experiment until January and, after analyzing the results, is said to be aiming for full-scale operation.

In the new market, participating companies will set their own targets and the government will certify as credits reductions that exceed those targets, after which the companies will be able to buy and sell the credits.

Firms that significantly reduce their emissions will have the advantage of earning money through market trading. This mechanism is expected to have the effect of accelerating corporate efforts to reduce emissions.

Companies that fail to meet their targets will still be able play a role in decarbonation, to some extent, by purchasing emissions credits from other businesses.

The European Union is leading the way in emissions trading. Under its system, designated companies that produce emissions above a quota are forced to buy emissions allowances from other companies whose emissions are below the quota, and the system is legally binding.

However, there are some in Japan who are cautious about making the system obligatory as in Europe. Currently, the system does not envision allocating emissions quotas to companies. Participation in the market is also expected to be voluntary.

In order to increase effectiveness under such circumstances, it will be important to increase the number of participating companies in the new market to the maximum extent possible and to require them to set appropriate targets. Discussions must be deepened as to how the system should work by referring to the demonstration experiment and cases from other countries.

(From The Yomiuri Shimbun, Oct. 23, 2022)