[ Nippon Keidanren ] [ Policy ]

Keidanren's Proposal for a Post-2012 International Framework on
Preventing Climate Change

(Draft Translation)

October 16, 2007
Nippon Keidanren

I. Introduction

Japanese industry has for some time worked to maintain and improve the highest energy efficiency levels in the world through constant technical development and energy-saving investment. Guided by our determination to contribute to preventing global climate change, Nippon Keidanren has taken active steps even before the Kyoto Protocol's adoption in 1997, such as establishing the Keidanren Voluntary Action Plan on the Environment. During the commitment period under the post-2012 framework as well as that of the Kyoto Protocol, we intend to work further toward preventing global climate change in line with this determination.

Nippon Keidanren has made several policy proposals from the perspective of promoting effective measures against global climate change under a new post-2012 framework. Most recently, we published "Toward the Post-2012 International Framework on Climate Change" in April 2007, where we proposed the establishment of an international framework that would facilitate the participation of all major greenhouse gas emitters, allowing economic growth and development to coexist with environmental preservation. This proposal has the same basic objectives as the three principles for a post-2012 international framework in the "Basic Policies for Economic and Fiscal Reform 2007" adopted by the Japanese government in June 2007, which calls for (1) the participation of all emitters, (2) a flexible and diverse framework allowing for the national circumstances of each country, and (3) compatibility between environmental preservation and economic growth.

Regarding the post-2012 international framework on climate change, the Chair's summary of the G8 Summit Heiligendamm of June 2007 noted that it would be vital for major emitters to agree to such a framework by the end of 2008, with negotiations to conclude by the end of 2009. Also, the first Major Economies Meeting on Energy Security and Climate Change, a meeting aiming to reach agreement between major economies by the end of 2008, was hosted by the United States in September 2007. A post-2012 framework will also be debated at such international gatherings as COP13 taking place in Bali, Indonesia, in December 2007 and at the Hokkaido Toyako G8 Summit to be hosted by Japan in July 2008.

With these developments in mind, Nippon Keidanren has further embodied its position on the post-2012 international framework on preventing climate change in the following proposals with the view to achieving the three principles of the Japanese government.

II. Desired Post-2012 International Framework on Preventing Climate Change

A. General Principles

Climate change is one of the most important issues bearing on the foundation of human existence, and the whole world must work together to implement effective and long-term measures. However, countries with virtual emissions reduction commitments under the Kyoto Protocol account for only about 30 percent of global CO2 emissions, a figure forecast to decrease to 24 percent in 2025. #1

1. Participation by all major emitters

If we are to effectively address climate change, every nation must shoulder a responsibility commensurate with its ability. It will be important for all major emitters to participate and to actively implement measures against climate change, including the United States, which has not ratified the Kyoto Protocol, and China and India, which have no obligation to reduce CO2 emissions.

2. Ensuring flexibility and diversity as well as compatibility between environmental preservation and economic growth

Many countries and regions have announced measures to address climate change, but they are also concerned that uniform, inflexible measures will have a negative impact on economic growth, regional development, and job creation. This is an issue that must be taken fully into account.

3. Development of innovative technology and the creation of a low-carbon society

The greatest key to achieving the target of cutting global greenhouse gas emissions in half by 2050 is technology. In the short to medium term, we need to improve energy-saving technology in developing countries through a sectoral approach #2 and financial and technical support. In the long term, it will be indispensable to strengthen partnerships between industry, government, and academia on developing innovative technology and to create a low-carbon society accompanied by new patterns of living.

From such a perspective, Nippon Keidanren believes that the post-2012 international framework should be one in which all major emitters can participate. Predicated on their international commitments, each country should promote measures against climate change while ensuring flexibility and diversity as well as compatibility between environmental preservation and economic growth. We propose as policies to be included in these commitments (1) a sectoral approach, (2) financial and technical support for willing developing countries, and (3) development of innovative technologies.

B. Promoting Measures Based on Country Commitments

1. Overview

As a measure against climate change in which all major emitters can participate, it will be effective to build on the Plan-Do-Check-Action (PDCA) methodology by having each country determine its own measures to address climate change, to make an international commitment, and to have each country's fulfillment checked at regular intervals #3 by a body like the UN. #4

Unlike country emission caps determined politically in a top-down manner without fully weighing such particulars as population, industrial structure, existence of energy resources, or geographical conditions, a country commitment approach will enable responsibility to be allocated in accordance with national characteristics and circumstances and make concrete efforts possible since it will build on country commitments developed in a bottom-up manner. Also, by working through the PDCA cycle, such as monitoring progress in fulfilling commitments or the trend for total emissions, it will be possible to steadily advance measures against climate change even with a non-enforceable nature of the framework under UNFCCC.

2. Country measures against climate change

The reduction and absorption of greenhouse gas emissions can be mentioned as possible measures against climate change for country commitment. With respect to the reduction of emissions, measures that can be considered are energy efficiency targets and regulatory and tax provisions for their achievement, promotion of the early replacement of inefficient facilities, promotion of energy conversion, and the curtailing of grants contrary to the efficient use of energy or to emissions reduction. With respect to the absorption of greenhouse gases, one possible measure would be forest recovery. Other possibilities are (1) a sectoral approach, (2) financial and technical support for willing developing countries, and (3) development of innovative technologies as are discussed below.

To achieve energy conservation and to reduce greenhouse gas emissions, it will be important to make full use of market mechanisms in the transaction of goods and services. Companies promote the development, supply, and procurement of methods, products, and services that are effective in preventing climate change and users and society evaluate these companies and their products and services. Thus, policy measures which promote a low environmental load throughout the product life cycle in the good and services markets #5, could also be made a part of country commitments.

3. Country targets

Country targets should principally be based on energy efficiency. Energy efficiency is an excellent indicator for assessing efforts since it directly reflects the results of technical innovation or technical support for developing countries. It is also effective in terms of steadily working through the PDCA cycle for measures against climate change in keeping with technical rationality. Energy efficiency is nothing other than an indicator of the effective use of limited resources, and it is directly related to energy security and cost reductions. Given the way it facilitates compatibility between environmental preservation and economic growth, it will contribute to encouraging full-scale efforts by major emitters.

The improvement of energy efficiency will be essential in reducing the total emission of greenhouse gases. For example, under the Keidanren Voluntary Action Plan on the Environment, an increase of 10.1 percent in production by the industrial and energy conversion sectors was accompanied by a decrease of 0.6 percent in total emissions (in fiscal 2005 compared with fiscal 1990), and emissions reduction targets have been achieved for six consecutive years since fiscal 2000 through the improvement of energy efficiency. #6 It is estimated that if all other countries achieve Japan's efficiency in thermoelectric power generation, annual global emissions would be reduced by 1,700 million t-CO2. Also, if all other countries achieve Japan's usage rate for technologies like exhaust heat recovery and continuous casting in iron and steel production, the potential reduction of annual global emissions is estimated at 300 million t-CO2. As explained by the Japanese government, halving global emissions by 2050 cannot be achieved merely through the extension of existing technologies and social systems. It will require the development of innovative technologies from a long-term perspective and a transition to low-carbon social systems. What is needed is a comprehensive program where energy-efficiency targets are established with respect to the reduction of total emissions and where high-efficiency and low-cost energy-related technology is developed after total emissions outlooks are clarified in terms of the economic growth and changes in the social and industrial structure of each nation. It also goes without saying that the further reduction of emissions in home and office sectors ensuing from new patterns of living will be indispensable.

In promoting measures based on country commitments, countries are not prohibited from setting their own total GHG reduction targets.

4. Process for promoting commitment-based measures

a) Progress through regular checking

Each country's fulfillment of its commitment will be checked every few years by a body like the UN, and in cases where progress is inadequate, the country will be required to analyze and explain the situation and decide what further steps to take. To more certainly ensure the fulfillment of commitments, the fulfillment of major emitters could be checked with greater frequency. Since accurate data will be needed to verify the achievement of targets, it will be desirable to establish a system for objectively assessing the data of each country and region, such as through the International Energy Agency.

b) Progress through negotiation between major emitters

The commitments of emitters at the time of the start of the new framework could be subject to negotiations between major emitters, whose outcome would be reflected in commitments as needed. These negotiations could be based on the exchange of requests and offers, #7 as in WTO services trade negotiations.

C. Sectoral Approach

As discussed above, a sectoral approach should be introduced in the post-2012 international framework. Experience on the sectoral approach is being accumulated in APP, #8 where (1) the sharing of know-how and BAT, #9 (2) the establishment of common benchmarks, #10 and (3) the nature of technical cooperation toward the achievement of benchmarks are being examined for eight sectors including power generation and transmission, steel, and cement. The eight sectors currently being targeted by APP account for 57 percent of total global CO2 emissions. #11 Coverage could be extended further by including other global industrial sectors. In adding new sectors, it would be particularly useful to focus on industries where comparable data is available and where objective evaluations are possible. To responsibly implement matters that have been agreed to for each sector, participating countries can make commitments on policy measures. Developed countries could commit to (1) measures to develop innovative technologies, (2) technical assistance from developing countries, and (3) improvement of the energy efficiency of products, while developing countries could commit to (1) implementation of projects making use of the technical assistance of developed countries referred to above and (2) measures to improve energy efficiency domestically. (See Attachment 1 on examples of the sectoral approach.)

In addition to the endeavors of APP, we in the business community intend to support efforts currently under way in IEA on establishing and utilizing sectoral energy efficiency indicators in response to the Gleneagles Plan of Action. #12

D. Financial and Technical Support for Willing Developing Countries

To effectively reduce greenhouse gases, the post-2012 international framework should include a mechanism for providing funds and technology in an effective manner to willing developing countries actively working to increase energy efficiency.

CDM #13 is currently being implemented based on the Kyoto Protocol, and is fulfilling a certain role in the area of offset schemes (in the case of Japan, acquiring credits for the purpose of achieving targets of the Voluntary Action Plan on the Environment). CDM, however, is also associated with the following problems.

  1. Since funds are provided to developing countries without obligations to reduce emissions, this risks inviting outcomes that differ from the original intent of CDM if such funds are used in businesses that increase greenhouse gas emissions.
  2. There are projects that can be carried out without the technical and financial support of developed countries, and the system does not entail additional reduction of greenhouse gases.

Therefore, the mechanism for providing financial and technical support to willing developing countries needs drastic revision. What will be important in this process is the effective reduction of emissions through technical support for improving energy efficiency and fuel conversion. The best mix of private and public funds to promote this will also be indispensable.

1. Private-sector contributions

In 2005, flows of FDI in Non-Annex I Countries from the private sector amounted to 412.5 billion USD. In contrast, the investment of public funds came to no more than 82.7 billion USD (including Official Development Assistance of about 20.2 billion USD) in the same year. #14 Therefore, low-carbon projects in the developing world cannot go forward without the participation of the private sector. The investment environment, however, is less than adequate in some developing countries, a situation giving rise to the following impediments.

  1. There are no prospects from the onset of recovering capital invested in low-carbon projects for such reasons as energy prices being held low for political reasons.
  2. Country risk is more than what the private sector can bear, such as business contracts being unilaterally breached or altered due to central or regional political circumstances.
  3. Intellectual property rights are not adequately protected, and technology cannot be transferred under reasonable terms.
  4. State policies are contrary to low-carbon projects, such as subsidies to increase the use of coal to protect the domestic coal industry.

Thus, policies to eliminate these impediments and the strengthening of public risk hedging will be essential. Should such measures be taken, it will become possible for private-sector companies to invest in low-carbon projects in developing countries.

The private sector can also cooperate with developing countries' measures against climate change by purchasing such countries' low-carbon or energy-saving products and by supporting companies that are energetically reducing greenhouse gases. The private sector could also establish voluntary standards on procurement and investment that promote developing countries' measures against climate change.

Despite the view that carbon pricing #15 is necessary to support developing countries, given the large number of developing countries as well as other energy-inefficient countries and regions, most low-carbon investments will still be economically viable without carbon pricing. #16 These investments still do not go forward because of the impediments listed above, therefore making the elimination of such impediments a top priority issue. Furthermore, a carbon market is only one of many policy choices available for internalizing the externalities of CO2 emissions, and one can hardly say that designing a system that is greatly dependent on such a market is the realistic approach to take.

2. Effective use of public funds

Priority use should be made of such public funds as official development assistance and the funds of the World Bank and other multilateral institutions regarding developing countries implementing measures against climate change under the post-2012 international framework. In addition to technical support for improving energy efficiency and the development of infrastructure needed to promote low-carbon projects, public funds should be used to prime the pump for projects to strengthen the social infrastructure, such as human resources development and the establishment of laws to protect investment and intellectual property. In providing support, it will also be important to maintain linkage with the sectoral approach referred to above.

In these and other cases, it is deemed to be often difficult for the private sector in terms of economic viability to provide the funds needed by developing countries (for example, funds for adaptation and forestation, and such funds should basically be furnished by the public sector. The private sector, however, can contribute to developing countries' adaptation to climate change by means of technological assistance. #17

E. Promoting the Development of Innovative Technology

As described above, halving global greenhouse gas emissions by 2050 cannot be achieved merely through the extension of existing technologies and social systems. Technological breakthroughs will be required. Stronger efforts are needed to develop innovative technologies like hydrogen energy, next-generation nuclear power, highly efficient next-generation solar power, and clean coal. These technologies, however, require a long time and huge expenses to go from basic research to development, commercialization, and market penetration. What individual private companies or industries can accomplish by themselves is therefore limited, and strengthened partnerships between industry, academia, and government at the international level will be indispensable. As a global frontrunner in the environment and energy fields, Japan should take the lead in forming international partnerships and contribute actively to achieving major reductions in the global emission of greenhouse gases. Currently, the specifics of innovative energy technology for priority development and the nature of international partnerships is being investigated under the Cool Earth Energy Innovative Technology Plan, and the business community intends to cooperate actively in these efforts.

III. Conclusion: Efforts of Japanese Industry

Prior to the ratification of the Kyoto Protocol, Nippon Keidanren has worked to address climate change through the Keidanren Voluntary Action Plan on the Environment for the reduction of CO2 emissions since 1997, an endeavor that has yielded steady results as described above. #18

Under the post-2012 scheme, Nippon Keidanren will continue to work actively to tackle climate change using the Voluntary Action Plan as one of the major pillars of its efforts. More specifically, with the view of contributing to Japanese society and the global community, we will promote efforts in the medium term to (1) maintain and improve energy efficiency levels that are among the world's highest, (2) reduce emissions through inter-industry partnerships and through products, (3) reduce emissions in the home and transportation sectors, and (4) contribute to emissions reduction at the global level. In the longer term, we will promote efforts to (5) develop innovative technologies and examine the nature of international partnerships to achieve these ends. Also, we will work to encourage similar voluntary action by the world's business community.

Climate change will be solved by technology, and it is the private sector that will develop, commercialize, and promote technology, spread it internationally, and bear the required investment risk. Hence, the new international framework should become one that promotes private-sector dynamism. It will be important to make the market mechanism function in its true sense so that products and services with a low environmental load are highly regarded by users and society. In other words, emissions reduction should come to be seen as having social value, which will then trigger further energy conservation. An emissions trading system offers many impediments to the dynamism of the private sectors and the function of market mechanisms in the truest sense. Given the issues that have been raised over the EU Emissions Trading Scheme (EU ETS), such a system should not be adopted in Japan where industry efforts are producing results.

National governments, including those of developing countries, will need to (1) ensure a free and fair competitive environment, (2) develop energy conservation laws and standards, (3) support technology development by the private sector, promote the use of low-CO2 products and services, and (4) redouble their efforts to educate their citizens toward the realization of a low-carbon society. Progress in effective measures against climate change will only be effective if the efforts of government, industry, and citizens are engaged on a global scale.

Nippon Keidanren will continue to propose concrete policies from the perspective of the private sector, keeping in mind the direction of international negotiations.

[Attachment 1]

Examples of the Sectoral Approach

A. Power Generation and Transmission Sector

  1. Based on the activities of the APP Power Generation and Transmission Task Force (activities including sharing of technology and experience by technical experts through peer review toward energy efficiency improvement, promotion of technical cooperation, and partnerships with other sectors), establish benchmarks and technical cooperation schemes for their achievement, and work to increase the efficiency of maintaining and operating facilities.
  2. Promote the adoption of BAT #19 in building and replacing facilities.
  3. Promote multilateral cooperation on the development and adoption of clean coal technology and third- and fourth-generation nuclear power.

B. Steel Sector

  1. Building on the accumulated experience of the APP Steel Task Force in sharing BAT through the creation of advanced technology handbooks, in investigating the penetration rate of energy conservation and green facilities, in establishing benchmarks, and in estimating the accompanying potential for country improvements, determine measures for reducing greenhouse gas emissions.
  2. Promote the adoption of efficient technologies by participating countries through voluntary policies based on energy efficiency.

C. Cement Sector

  1. Building on the experience of the APP Cement Task Force in disseminating existing clean technologies and developing new technologies, in developing human resources, in estimating the potential for country improvements in relation to establishing benchmarks, and in overcoming necessary issues toward achievement, establish measures for reducing greenhouse gas emissions.
  2. Work toward global emissions control based on energy efficiency.

[Attachment 2]

On Emissions Trading Systems

A. Cap and Trade System

A cap and trade system, where emission allowances are allocated to companies and where they must buy allowances from other companies when their emissions exceed their own allowances, is associated with the following impediments.

  1. Emission allowances that are determined administratively will invite bureaucratic control over the private sector and hinder the vitality of private sector. Also, since future economic conditions, such as the industrial structure, cannot be accurately forecast, establishing a system that assigns emission allowances in a equitable manner will be significantly difficult.
  2. Companies and industries whose products are well received by the market and whose emissions are rising as production increases will need to buy emission allowances. In contrast, companies and industries in decline will be able to profit from the sale of their surplus emission allowances. Such a situation will hamper fair competition.
  3. What is most important in emissions reduction is the development of technology from a long-term perspective. Using funds that should be invested in the development of technology to buy emission allowances is contrary to this objective.
  4. As inter-industry partnerships and life cycle assessment (LCA) approaches gain in importance, capping individual emission sources will be to merely aim for suboptimization.
  5. The EU Emissions Trading Scheme (EU ETS) adopted by the European Union is experiencing such problems as considerable volatility in emission allowance prices caused by speculative trading, and many lawsuits over the allocation of allowances.

As a global emissions trading market is beginning to emerge, it has been argued that appropriate systems should be developed in Japan so that related financial aspects do not lag behind. However, the original objective of reducing greenhouse gas emissions should not be confused with the industrial policy matters of financial sector.

B. Upstream Emissions Trading System

Upstream emissions trading, where entities importing fossil fuels are required to purchase emission allowances equaling the carbon content of such fuel, is associated with the following impediments.

  1. This is a system that presupposes country total emissions caps.
  2. Japan imports most of its energy, and upstream emissions trading would mean placing restrictions on its lifeline energy procurement through administrative regulation. Such a situation would impede Japan's stable sourcing of energy.
  3. Since upstream emissions trading would not apply to imported goods (raw materials and semi-finished goods), the manufacture of products consuming huge quantities of fossil fuel would shift from Japan to countries that are less energy efficient, giving rise to the prospect of carbon leakage.
  4. Should emission allowances be purchased from abroad, funds will flow overseas, which may be invested in projects that increase greenhouse gas emissions.

  1. Estimated by Research Institute of Innovative Technology for the Earth (RITE).
  2. In a sectoral approach, countries and regions establish energy efficiency benchmarks by sector and work together to achieve them.
  3. This can also be called a "Commitment & Progress" system.
  4. Specifically, the United Nations Framework Convention on Climate Change (UNFCCC) could be considered.
  5. Measures that can be mentioned in Japan include the top-runner program and eco-labeling system based on the Law Concerning the Rational Use of Energy (Energy Conservation Law), the green procurement program under the Law Concerning the Promotion of Procurement of Eco-Friendly Goods and Services by the State and Other Entities (Green Procurement Law), and private-sector procurement standards.
  6. Nippon Keidanren, "Results of the Fiscal 2006 Follow-up to the Keidanren Voluntary Action Plan on the Environment (Summary)," 14 Dec. 2006: 3.
  7. Request-offer negotiation is a process where participating countries negotiate based on requests made to each other, and the outcome of these negotiations is then reflected in the process.
  8. The Asia-Pacific Partnership on Clean Development and Climate (APP) is a regional cooperation scheme established in July 2005. With the view of addressing climate change issues, Japan, Australia, China, India, the Republic of Korea, and the United States are promoting regional cooperation on the development, spread, and transfer of clean and efficient technology. Targeted sectors are power generation and transmission, steel, cement, aluminum, coal mining, buildings and appliances, renewable energy and distributed generation, and cleaner fossil energy.
  9. Best available technology.
  10. In this case, common sectoral benchmarks to be achieved on energy efficiency.
  11. Based on IEA materials. Of APP countries, 62 percent of total CO2 emissions originate in these eight sectors.
  12. A plan of action on climate change, clean energy, and sustainable development adopted at the G8 Gleneagles Summit in 2005.
  13. The Clean Development Mechanism (CDM) was adopted based on Article 12 of the Kyoto Protocol. When a developed country provides technical or financial support to a developing country and emissions are reduced, a certain amount of this reduction is credited to the developed country in question and counted as the reduction in its emissions.
  14. Estimated from UNFCCC Dialogue Working Paper 8 (2007), "Report on the Analysis of Existing and Potential Investment and Financial Flows Relevant to the Development of an Effective and Appropriate International Response to Climate Change."
  15. Carbon pricing is a method for pricing the cost of reducing greenhouse gases. The case is made that carbon pricing will create an incentive for investment since it will permit the cost of low-carbon projects in developing countries to be recovered through the acquisition of emission rights.
  16. It is estimated that many low-carbon investments, such as those in building insulation, fuel efficiency in vehicles, improving the energy efficiency of water heating and air conditioning, and nuclear power, would be economically viable without carbon pricing (Per-Anders Enkvist, "A Cost Curve for Greenhouse Gas Reduction," The McKinsey Quarterly 2007 No. 1: 36-40).
  17. Examples of possible assistance are the prior assessment of climate change risk (such as through wind simulation), risk management (such as monitoring the flooding situation of rivers), and risk abatement (such as through coastal civil engineering work).
  18. Refer to page 4 of this document.
  19. Best available technology.

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