Protecting the Global 'Environment Initiatives by Japanese' Business Edited by Wilfrido Cruz, Koichiro Fukui, Jeremy Warford 1 P~~ N .-A ... -~~~~~~, - s -,, C < ,, 4j = 2 n * ; \-T\ VOOV (Ocnci r , , ' Other Titles 1rom the World Bank Institute (Ini ordcr of ptublicationi) China canid the Kn)owl/c4i/,e Eco)nomyZ iStiZI)7ig th 21st (Color)'8 Carl 1. Da't1h iman and Jcn-'-Eric Autbert RC)soliit loIi otfFiiciijciail Distress A ii hi ter atii(a11l Perspective o0il h.e D)csign o) 13 krin1p1tCY Laws Ecliteci by Stijn Claessens, Simeoni Djainkov. Ashoka Moiociv Ecoliomiic Aiialy)sis o/ 'Jivestmiet Operaltionls AnCalYlical I(.ols anCd Piractical Applicationis Pedio BAelli, Jock R. And(lerson I-Tooward N Barinumi, joln A Dixon. Jee-1enig IFan Ikhe Challenlge o?/ Urban Government Policies ancd Prlaticces Fclitecl by Iv Nia Freile ancld Richall-cl Strell Privat iza tiC alrid Rcvgidfatio ii - 0/ir;an. nport In/rast ructi!urc GOitdelines /0r PolicYmciakers a uid Regidlators Eclited b)y Antonio Estawclhe ncd Gincs cle Rays Pri7i ciples of Healbt Econ1om)7ics fio Developmi ig (C011)10 ties WVilliam Ja,ick Chile: Receitlt Polic)v LessonIs a)(id Em;ei;oi ig Chall/enges Editecl bv Guillcrino Perry anid Dainy M. Leipziger Cii rhb g Corrniptioii Tlbvaird a Model iOr Buildi)ng ANatiollIil hintegriIt) Ecditedc I)y Rick StaleluIlIrsl-St andC Sahrl 1. KI)LuIIICeI Resetting Price Controls for Priviatized Utilities A I4aIanlnal/o Regul/alors Richard-c Green and Martin Rodriguez P'atrdin.t Pr/eventinmg Ba nlk Crises Lessois frotiI Recei t Globail B3aik FTai liI/Ies Ecdited by Gerarcd Capirto, jr \Y il liam C. I-Hunitei-, George G. Kaufmaii, aid Da-nly M Leipziger Etmerprise Restriniciti ig n lICad ULiemplovmnieuit ini M/lodels o/Tra lisitioli Eclitecd bv Simlon Commanldler Coiiliniiitel o07 iniside haick cover WBI LEARNING RESOURCES SERIES Protecting the Global Environment Initiatives by Japanese Business Edited by Wilfrido Cruz Koichiro Fukui Jeremy Warford Contributors Tomohiko Inui Hiroyuki Kato Noriyuki Kobayashi Teruo Okazaki Akie Takeuchi Junichi Tsunoda The World Bank Washington, D.C. © 2002 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 All rights reserved. 1 2 3 4 05 04 03 02 The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. No part of thus work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Library of Congress Cataloging-in-Publication Data Protecting the global environment: initiatives by Japanese business / edited by Wilfrido Cruz, Koichiro Fukui, Jeremy Warford; contributors Tomohiko Inui ... [et al.l. p. cm. - (WBI learning resources series) "This book is the result of a collaboration between the Development Bank of Japan and the World Bank Institute." Includes bibliographical references. ISBN 0-8213-5122-2 1. Environmental policy-Japan. 2. Environmental protection-Japan. 1. Cruz, Wilfrido. 11. Fukui, Koichiro, 1947- III. Warford, Jeremy J. IV. Inui, Tomohiko, 1962- V. Series. HC465.E5 P76 2002 333.7'2'0952-dc2l 2002024157 Contents Foreword v Acknowledgments vii Contributors ix Part I. The Relevance of Jrapanese Global Environmental Initiatives to Developing Countries-An Overview 1. Global Benefits from Private Sector Initiatives: Lessons on the Environment from Japan 3 Koichiro Fukui 2. Expanding the Scope and Constituency for Global Environmental Initiatives in Developing Countries 15 Wilfrido Cruz and Jeremy Warford 3. Review of Environmental Policy and Energy Conservation Policy in Japan 2 Tomohiko Inui and Hiroyluki Kato Part II. Case Studies 4. Environmental Conseivation by Japan's Iron and Steel Industry: An Example of the Nippon Steel Corporation 49 Teruo Okazaki, Tomohiko Inui, and Akie Takeuchi 5. Environmental Conseivation by Japan's Electric Power Industry: An Example of the Electric Power Development Company 75 Junichi Tsunoda, Tomohiko Inui, and Akie Takeuchi 6. Reforestation of an Incdonesian Tropical Forest: The Win-Win Approach of a Private Japanese Firm 99 Noriyuki Kobayashi and Hiroyuki Kato Foreword Although countries' perspectives on climate change differ greatly, a prevailing perception in the developing world is that the developed countries are primarily responsible for climate change problems and that considErations of both equity and ability to pay require developed countries to absorb the costs of global environmental protection. Developing countries' reservations about taking remedial measures to address global environmental problems are reinforced by uncer- tainty concerning the physical and economic consequences of environmental degradation, and in particular the long time horizons involved. These uncertainties, and the difficulties inherent in economic valuation, have been illustrated by numerous studies on climate change. However, developing countries are likely to suffer at least as much as developed countries from global environmental degradation in general, and the largest ones will be significant con- tributors to new growth in greenhouse gas (GHG) emissions. Thus, while physical and economic uncertainties abound, the potential for widespread impact on all countries is sufficiently large for developing countries to take global environmental problems seriously Developing countries are, of course, likely to be affected by global environmental problems in different ways. Vulnerability to environmental damage varies tremendously by cotmtry. Coun- tries also differ in the exient to which their actions pose a global threat, and in the costs they would incur in taking remedial action. Consequently, it should not be expected that all countries (developing or developed) take a uniform response to global environmental concerns. Indeed, the quality of the global debate requires that the informed views of a wide range of affected groups be articulated with regard to policies and actions at the national level and aIlso with re- gard to the role of the international and bilateral agencies that exist to assist the process of sus- tainable development. Significant differences in conditions and perspectives require the devel- opment of public and private sector institutions, nongovernmental organizations, and legal and informal systems on a coumtry-by-country basis to address these issues effectively. This volume is the res ult of a cooperative effort between the World Bank Institute (WBI) and the Development Bank of Japan (DBJ) to encourage policy discussion of the links between global environmental concerns and national development policies and programs. The book is based on the premise that policym.akers traditionally have not viewed global environmental problems, such as climate change, as collateral outcomes of their national sustainable development agenda. Therefore, the objective of this book is to present case studies that demonstrate how policy reform and investments can together produce national economic benefits while mitigating carbon emis- sions associated with climnate change. These examples from Japan, which highlight the "soft- ware" aspects of change instead of the technology (for example, the important role of public- private sector cooperation, pricing incentives, and community participation) will be relevant for developing countries where the potential for these sources of change have not been sufficiently exploited. The WBI-DBJ progranm helps develop networks of policymakers (government officials, parlia- mentarians, advisers, planners, managers) and others who shape public opinion (civil society 2' vi Foreword organizations, media communicators, academics), thereby expanding the constituencies for co- ordinated approaches to climate change actions and national sustainable development initia- tives. WBI is pleased to collaborate with DBJ in this multiyear training and capacity-building program, which encourages national and regional policy discussions among key stakeholders and takes concrete steps to address the institutional and political constraints in dealing with global environmental concerns and national or local needs. Frannie Leautier Vice President World Bank Institute Acknowledgments The authors express their thanks to all who assisted in the preparation of this study. The work was initiated as part of the World Bank Institute (WBI) capacity-building program on "Integra- tion of Global Environment Concerns in National Sustainable Development," and it was com- pleted as a joint training material development project of WBI and the Development Bank of Japan (DBJ). Many individuals, both in Washington and in Tokyo, helped with various aspects of this ac- tivity. The authors express special appreciation to Hatsuya Azumi, Michele de Nevers, and Keiko Kikukawa for their support in initiating and completing this study. During the development and preparation of the chapters, insightful comments and suggestions were provided by Raymond Clemencon, Jose Furtado, and Nalin Kishor. Very helpful reviews were also providecd by Noreen Beg, Masaki Takahashi, and Kazuhiko Takemoto. The authors gratefully acknowledge Barbara de Boinville for her careful editing of the manu- script and Cindy Stock for expertly typesetting the book. We also thank Gudivada Rao amd Vanessa Posey at WBI for their assistance in preparing the various chapter files and charts of the manu- script. The authors express their gratitude to the staff of the International Cooperation Depart- ment of DBJ for its generous support and to Stephen Ham for his editorial contribution. Any remaining shortcomings, of course, are solely the responsibilities of the authors. vii Contributors Wilfrido Cruz Terno Okazaki Consultant Group Manager The World Bank Global Environmental Affairs Department Environmental Affairs Division Koichiro Fukui Nippon Steel Corporation General Manager Overseas Corporate Business Department Akie Takeuchi Corporate Business Division Department of Economics KDDI Corporation University of Maryland Tomohiko Inui Junichi Tsunoda Associate Professor Assistant Manager College of Economics, Nihon University Coal Gasification Group Wakamatsu Coal Utilization Research Center Hiroyuki Kato Wakamatsu Operation & General Management Energy Analyst Office Economic Analysis Division Electric Power Development Co., Ltd. International Energy Agency Jeremy Warford Noriyuki Kobayashi Senior Adviser, Economic Development Principal Researcher EX Corporation, Tokyo General Administrative Division Visiting Professor of Environmental Economics Sumitomo Forestry Co., Ltd. University College London ix Part I The Relevance of Japanese Global Environmental Initiatives to Developing Countries-An Overview 1 Global Benefits jfrom Private Sector Initiatives: Lessons on the Environmentfrom Japan Koichiro Fukui As the twenty-first century begins, environmental policies now being adopted and implemented by developed and developing countries are deciding the fate of the world environment. At the Fourth Conference of Parides (COP4) of the International Framework Convention on Climate Change, held in Kyoto in 1997, developed countries made significant progress in agreeing to take measures to reduce greenhouse gases (GHGs), the principal gases linked to climate change. For developing countries and transition economies, however, specific responses to global environ- mental issues are constrained by immediate problems: the pressing need to reduce poverty and promote economic growth, Resolving national environmental issues is already difficult; address- ing global concerns is more difficult still. Among developing countries there is also an underlying resentment that some indutstrial countries, which followed a "grow first and clean up later" ap- proach in pursuing their own economic well-being, now appear to be preventing poor countries from concentrating their efforts on attainment of rapid economic growth. This chapter analyzes Japan's experience with environmental and energy policies and sum- marizes the issues discussed in detail in the rest of the book. Examples show how environmental goals have been effectively combined with efficiency and growth-oriented concerns. The chapter begins with historical background and explains the integration of environmental policy into na- tional development policy. Specific examples for three different sectors (steel, power, and for- estry) are then presented to illustrate Japan's integrated approach and its implementation. Japan's overall experience demonstrates how technology, government policy (both central and local), and private sector initiatives can be used to improve efficiency and overcome resource constraints. Two of the case studies deal with energy-intensive industries: steel and power gen- eration. New production processes and replacement of outdated equipment with state-of-the-art equipment have improved production, resource, and energy efficiency in these sectors. The third sectoral case, on a tropicaL reforestation program, shows the potential for innovative interna- tional cooperation: the dissemination of green technologies contributed to the economic welfare of local communities. Each country is unique in its background, stage of development, and surrounding interna- tional environment. However, this does not preclude the applicability of lessons derived from Japan's experience. Japan achieved remarkable environmental improvements during the 1970s and 1980s. Efforts in the 1990s achieved further efficiency gains and reduction of carbon dioxide (CO2) emissions. Japan's experience offers valuable lessons that can be tailored to address the unique problems each cotutry faces. Integration of Environrmental Policy into National Development Policy In the early stages of Japan's modernization, some of the country's severe environmental prob- lems were already apparent near copper mines and metal refineries. Further industrialization 3 4 Protecting the Global Environment and urbanization accelerated the problems in the first half of the twentieth century. However, public awareness in Japan of environmental issues was then very low, and these problems did not become important social issues. During the period of high economic growth in the 1950s and 1960s, air pollution and water contamination greatly worsened due mainly to the rapid growth of heavy industries and petrochemical complexes. The government recognized the need to pre- vent pollution, but its response was slow. It can be said that the government at that time put a higher priority on growth than on environmental concerns. By the end of the 1960s, pollution had become visible everywhere near big cities and industrial sites in Japan. As pollution increased, its victims multiplied. Those with pollution-related health problems filed lawsuits in the late 1960s, and the courts judged in favor of the victims. Under the new rule by the Supreme Court in 1970, the defendant (polluter) had the burden to prove that there was not a cause-and-effect relationship between its pollution and any adverse health outcome. Fur- thermore, a principle obligating polluters to pay for the damages they caused was established: the Polluters Pay Principle (PPP). The rulings in favor of plaintiffs successfully pressed govern- ment and industry to introduce pollution control measures. These trials, culminating in the cases of mercury poisoning and asthma patients, revealed to the public the extent of the pollution, thus exposing government measures to public scrutiny. The government of Japan clearly set environmental protection above industrial development in the 1970s. The Diet in 1970, known as the "Pollution Diet," passed or amended fourteen pieces of regulatory legislation. In 1971 the Environment Agency was established to centralize the ad- ministration of environmental matters. In the same year a law was enacted that required factories over a certain size to be monitored by qualified pollution controllers. In 1973 a law on pollution- related health damage was enacted. In a short period Japan set up rigorous environmental pa- rameters and business obligations that were very advanced by world standards at that time. Indeed, Japan became a leading country in dealing with pollution. Businesses made maximum efforts to meet the harsh standards, greatly reducing the level of pollution. During the 1980s, lifestyle pollution (for example from household sewage and garbage) re- placed industrial pollution as the primary pollution problem in Japan. Two issues gained atten- tion: the need for new technologies to break down wastes and the need for greater consumer consciousness about recycling. Then, in the second half of the 1980s, the world began to witness a succession of abnormal weather patterns. This heightened the necessity of a worldwide consen- sus on global warming, and a number of summits were held in which some of the advanced countries pledged to stabilize or lower their emission levels of the greenhouse gases. The Japa- nese government decided to reduce these gases (such as CO2 and methane) to 6 percent below their 1990 levels between the years 2008 and 2012. Improvements in Air and Water Pollution Countermeasures by both the central and local governments and strenuous efforts by private companies have improved Japan's environment substantially. Between 1971 and 1996 the aver- age annual ambient concentrations of sulfur dioxide (SO2) and carbon monoxide (CO) were re- duced by 85 percent and 70 percent, respectively. Nippon Steel Corporation's steel factories de- creased SO2 emissions by 85 percent between 1973 and 1997. Levels of nitrous oxide (NO.) also declined. The average NO. emission intensity of thermal power plants in Tokyo Electric Power Company, for example, was reduced by 85 percent per kilowatt hour (kWh) between 1973 and 1997. Despite these strides, the ambient concentration of nitrous dioxide (NO2) did not improve because of the rapid expansion of automobile traffic. Pollution from exhausts outweighed the decreases of the factories. However, the achievements can be judged to be remarkable. The government and the private sector also tackled the problem of water pollution. Emissions of heavy metals and toxic chemicals, which caused the Minamata and itai-itai diseases, are almost Global Benefitsfrom Private Sector Initiatives: Lessonis on the Environnmentfirom Japan 5 nonexistent in Japan today. But organic pollution of water has not improved substantially. Pol- luted effluents from factoiies have declined, but this has been offset by decreased water flow in urban rivers from growing industrial use and delays in controlling domestic water discharge. Further efforts are required in this area. Climate Change: The Energy-Environment Connection Industrial pollution of the atmosphere and water is not the only problem. Concern has grown in recent years about the climatic change caused by increases in greenhouse gases. Among all GHGs, carbon dioxide is the largest contributor to global warming. At the same time, CO2 ernissions are directly related to energy consumption. Here "win-win" opportunities exist for developing coun- tries to reduce CO2 emissions while simultaneously controlling energy consumption. Bringing down energy costs thus would curtail the magnitude of global warming. Between 1971 and 1995, CO2 emissions in Japan increased by 1.8 percent per year compared with growth in the country's gross domestic product (GDP) of 3.6 percent. This means that al- though CO2 emissions were still increasing, they increased at a much slower rate than industrial production. This decline w-as achieved through industrial structure change, more efficient energy use, and change in the fuel mix, especially in the power generation sector. Now Japan and France have the lowest CO2 emissions per GDP among developed countries. Japan also achieved the largest improvement in energy intensity among major industrialized countries between 1971 and 1995, and its energy use per GDP was by far the lowest. During this period, the share of energy-intensive industries declined in conjunction with the increase in high- tech industries. At the same time, energy-intensive industries achieved rapid improvements in energy usage. By the end of the 1970s various energy-saving investments had become economi- cally viable due to the oil crises and resulting higher oil prices. In the iron and steel sector, for example, energy-saving investment in total investments increased from 15 percent in 1979 to 27 percent in 1980. The energy efficiency in this sector improved by 30 percent between 1971 and 1985. Other energy-intensive industries, such as chemicals, ceramics, and pulp, also achieved substantial gains in energy efficiency. Improvement in energy efficiency began to stagnate in these industries following the collapse of oil prices in 1985. This trend was also observed in consumer goods. People began to demand more luxurious (and energy-consuming) home electric appliances and automobiles. This trend underscores the importance of energy price in promoting energy efficiency, although the great industrial achievements o1 Japan by the 1980s cannot be denied. The government's energy conservation policy also helped industries to promote energy-sav- ing investments. In 1979 the Law Concerning the Rational Use of Energy was enacted with detailed guidelines for energy-saving equipment and building standards. The government also provided long-term, low-interest loan programs through government financial institutions such as the Ja- pan Development Bank. In addition, the government introduced tax exemptions and accelerated depreciation for energy-saving investment. Policy-based finance and preferential tax treatment were the methods typically observed in the industrial policy of Japan. Contributing to the change in energy use during this period was the policy of fuel diversifica- tion away from oil, following the two oil crises in the 1970s. This policy had a particularly impor- tant impact on the fuel miK for power generation. Between 1980 and 1996 the shares of nuclear, liquefied natural gas (LNG), and coal power increased from 17 percent, 20 percent, and 3 percent to 38 percent, 29 percent, and 9 percent, respectively. The government also encouraged the devel- opment of "new energy," such as geothermal, wind, wave, and solar-generated electricity. In 1980 the New Energy Development Organization (NEDO) was established to support these ac- tivities. Despite these efforts, however, new energy accounted for only 1.3 percent of total energy supply in 1996 because of the cost disadvantage. 6 Protecting the Global Environment Antipollution investments in the 1970s were mainly end-of-pipe technologies such as flue gas desulfurization to meet legal and other regulatory requirements. In contrast, investment in the 1980s involved energy-saving and clean production technologies that contribute to firms' profits through reduction of energy consumption while at the same time reducing carbon dioxide, ni- trous oxide, and sulfur oxide (SO.). The bulk of Japan's reduction in SO, emissions in the 1980s was attained through energy saving, an example of win-win opportunities for other countries. The Role of Local Governments One unique characteristic of Japan's pollution control strategy is the active role played by local governments. Local governments have initiated various measures such as pollution control ordi- nances, extensive monitoring networks, and environmental impact assessment. Since environ- mental degradation in many cases was site specific, it was natural that local governments became aware of pollution and took countermeasures. Their ordinances were often more stringent than the nationwide standards required by national laws. Another unique approach to pollution control at the local level is the use of voluntary agree- ments between local governments and businesses. Factory-by-factory emission levels are decided in detailed written agreements after intensive discussions by businesses, local governments, and residents; the potential for enforcement is considered. Such agreements are nothing more than "gentlemen's agreements," but they function as though they are legally binding. Businesses must seek the approval and support of environmentally conscious local governments and communi- ties for their activities. Compliance with laws, regulations, ordinances, and voluntary agreements depends largely on their enforceability. Air and water quality is constantly monitored at monitoring stations set up by local governments, and emission levels of individual factories are periodically reported to local governments. Also important is the environmental impact assessment, which became mandatory for new projects after the cabinet decision in 1984 to establish nationwide proce- dures. The pattern of having environmental studies followed by voluntary pollution control agreements has become common practice in many local governments before projects are final- ized. The ability, status, and moral standards of local bureaucrats also contribute to the success of these procedures. Private Sector Initiatives At the initial stages of environmental degradation, end-of-pipe solutions work effectively, but this type of policy eventually reaches a point of diminishing returns. In many cases the latest clean production technologies offer superior production efficiency, while contributing not only to pollution control but also to resource and energy conservation. Japan's environmental policy is distinguished by its emphasis on technological development. Japanese business strategies have evolved from the initial end-of-pipe solutions in the 1970s to clean production technologies, which provide new business potential and can enhance economic competitiveness. By 1978 the Japanese automobile industry, for example, had met strict standards through effective emission-control technologies. Secondary benefits, such as combustion control, resulted. These technologies al- lowed Japan to penetrate the U.S. market when there was high demand for fuel efficient and less polluting cars. Another motivation for Japanese businesses to prevent pollution is the heavy legal liability borne by polluters. Under the Polluters Pay Principle established in the early 1970s, polluters bear the financial burden for restoring the environment and compensating those suffering from pollution. This rule has induced industries to reduce their environment-related risk through pol- Global Benefitsfrom Private Sector Initiatives. Lessons on the Environmentfrom Japan 7 lution prevention measures, which are more economical than symptomatic measures taken after the environmental damage has already been done. Japanese businesses, thr.ough cooperation with existing business associations, have adopted voluntary action plans with numerical targets for the reduction and recycling of waste, as well as measures to counter global warming. These plans are not for manufacturers only but also affect distribution and construction. Even though these efforts are completely voluntary, there is nei- ther opposition nor delay in action, because businesses pay serious attention to environmental issues, which have become an increasingly important part of a company's image and reputation. Collaboration between the Public and Private Sectors In spite of conflicts in the bargaining process during which environmental measures are formed, the public and private sectors have long collaborated in the setting of environmental standards. As a result, compliance is high. The step-by-step collaborative mechanism allows time for the private sector to anticipatE' the next stage of regulation and to develop efficient and affordable technologies. It also enable s the public sector to reassess each new step for strengths and weak- nesses based on actual pollution control. Pollution control in Japan is also characterized by joint research initiatives by the government, businesses, and universities. One example is the New Energy Development Organization. In addition to its initial mandate to develop new energy technologies, NEDO has expanded its ac- tivities to include the development of technologies for global environmental protection. The gov- ernment finances NEDO's operations, but scientists and engineers in private businesses partici- pate in its activities. The private sector cannot be relied upon to fund all the necessary research and development, particularly at the ends of the research spectrum where the collaborative mecha- nism becomes important. Public Awareness of Pollution Control Measures In Japan, citizens' activism in the local community, supported by judicial decisions, became the driving force behind pollution control measures. Scientists and lawyers support the activism of ordinary citizens, making it difficult for government and industry to ignore their efforts. Al- though nongovernmental organizations (NGOs), a more sophisticated form of citizen activism, have been weak constituencies in Japan, public awareness about environmental issues has sub- stantially increased in the past three decades. One reason is improved education at school. Progress can also be attributed to the mass media, which freely express critical views that pressure politi- cians, bureaucrats, and industry to take action to safeguard the environment. Examples from Japanese Experience This chapter presents three examples of how Japan has combined environmental goals and growth- oriented policies. Cases from the steel, power, and forestry sectors are examined. The first ex- ample is based on the experience of the Nippon Steel Corporation (NSC). Toward Cleaner and More Efficient Steel Production: The Case of Nippon Steel Corporation Japan's steel production peaked at 120 million tons in 1973. Production leveled off in the 1980s at around 100 million tons per year due to the shift in industrial structure toward a service-oriented economy However, the iron and steel industry in Japan still accounted for 13 percent of world steel production in 1996, and it has kept a competitive edge in the world market. The Nippon 8 Protecting the Global Environment Steel Corporation, Japan's largest steel producer, had about a 25 percent share of Japan's steel production in the 1990s. Using NSC as an example, this case study examines Japan's environ- mental efforts in the steel sector and seeks lessons for developing countries. The iron and steel industry is energy intensive. It accounts for 11.4 percent of total energy consumption in Japan; 78 percent of the iron and steel industry's energy use comes from coal. When coal is used to make steel, pollutants such as SO, and NO, are released. Japan's iron and steel industry has succeeded in drastically reducing these hazardous pollutants while maintain- ing high production levels. It has also succeeded in reducing CO2 emissions through efficient energy use and the introduction of new technologies. Efforts to recycle by-product wastes have been remarkable as well. Although the current technologies are already state-of-the-art by world standards, the industry aims to reduce its energy use further through various means, including the utilization of waste plastics as a fuel source. EFFORTS TO REDUCE HAZARDOUS POLLUTANTS. In the steel-making process, hazardous pollut- ants and by-product wastes are inevitably produced. Japan's iron and steel industry had to meet strict standards and regulations introduced in the early 1970s. In addition, most steel mills con- cluded more stringent agreements on pollution control to reflect the geographical and social con- ditions of each area. Examples of specific mills show that local agreements on air quality are substantially stricter than the level required by law. Moreover, the actual level of pollutant emis- sions that is attained is even lower, in some cases, than the level specified in the agreement with the local government, reflecting the efforts of the industry. In order to reduce SOx and NOx, end-of-pipe and energy-saving technologies have been ex- tensively used. Water pollutants (such as suspended solids, leaked oil, chemical oxygen demand, and acid and alkali) have been lowered to minimal levels by establishing a water recycling sys- tem. NSC's capital investment for pollution control totaled 400 billion yen between 1970 and 1997. The historical trend shows a concentration of investments in the first half of the 1970s, reflecting the massive investment for desulfurization and denitrification of flue gas. Pollution control investment accounted for 34 percent of total investment in the iron and steel industry in the peak year of 1976. A law enacted in 1971 requires Japanese factories above a certain size to appoint a qualified pollution controller. In the 1990s NSC had about 1,030 authorized managers at various facilities who had passed a national examination. By carrying out measures and improving communica- tions between factories, the local government, and the local community, the managers played an important role in establishing an organizational system for pollution control. EFFORTS TO REDUCE ENERGY USE AND CO, EMISSIONS. The evolution of energy-saving mea- sures has reflected changing energy prices. Between 1974 and 1978, the iron and steel industry became 10.4 percent more energy efficient than in 1973. After the second oil crisis, investment in large-scale new technologies-such as continuous casting (CC), coke dry quenching (CDQ), blast furnace top pressure recovery turbines (TRT), and sinter waste heat recovery equipment- became economically viable. A further gain of 8.6 percent was achieved between 1979 and 1983. After 1984 oil and coal prices stabilized, and new investment opportunities diminished. In addi- tion, a product mix shift toward high-quality steel, which requires higher energy use per ton of steel, worked adversely. However, the industry achieved a 2.8 percent gain in energy efficiency by various measures between 1984 and 1988. These gains from 1974 to 1988 total about 20 per- cent. Because of these massive efforts, Japan's iron and steel industry has achieved the world's highest energy efficiency. In terms of energy consumption per unit, the United States, United Kingdom, Germany, and France are higher than Japan by 18 percent, 12 percent, 3 percent, and 11 percent, respectively. China has a very high unit consumption of energy: 50 percent higher than that of Japan. Global Benefitsfrom Private Sector Initiatives: Lessons on the Environment from Japan 9 In the 1990s the iron arid steel industry further reduced energy use. The industry adopted a voluntary action program for global warming control measures and is making efforts to attain numerical targets to reduce energy consumption by 2010 to 10 percent below its 1990 level, thus reducing CO2 emissions by 10.5 percent. The industry's efforts include the introduction of next generation technologies (such as a new coke oven under development through a national pro- gram since 1994), utilization of waste plastics as a fuel source, and recovery of mediurn- and low- temperature waste heat for the use of local communities. INTERNATIONAL COOPERATION AND LESSONS FOR DEVELOPING COUNTRIES. The Nippon Steel Corporation has increasecl its international cooperation activities and plans to transfer energy- saving technologies to developing countries. A plant using coke dry quenching technology in China is an example of such activities. From this project, NSC has derived several valuable les- sons: (a) procure parts locally wherever possible (self-help efforts should be encouraged); (b) ensure compatibility of inierface between imported parts and locally procured parts, taking into consideration the other pzrty's technological level; (c) include software in technology transfers (maintenance technology is important); and (d) provide training in operation and maintenance, preferably at facilities where similar equipment is in operation (technologies cannot be estab- lished without developing the requisite human resources). Japan's initiatives for cleaner and more energy-efficient production of steel have rich lessons applicable to other countries. First, step-by-step, priority-based introduction of teclnologies is important. NSC first introduced simple and low-cost technologies; it did not rush to sophisti- cated, expensive technolog,ies at the outset. Second, an important role can be played by an envi- ronment management organization within an industry. NSC established such an organization, and it also devised an operational management method for environmental measures. Third, the development of high-level environment-friendly technologies can heighten competitiveness. NSC aggressively tried to develop such technologies. Toward Cleaner and More Efficient Thermal Power Plants: The Case of the Electric Power Development Company Japan's electric power industry, with its 242 million kilowatt (kW) capacity, is by far the biggest primary user of energy in Japan, converting 40 percent of Japan's primary energy supply to elec- tricity. During the period of strong economic growth, Japan constructed thermal power plants (both coal and oil) on a massive scale. By the early 1970s these plants had to meet strict regulation standards for air pollution. The industry drastically reduced SO, and NO, emissions at that time. The electric power industry is also the biggest emitter of carbon dioxide in Japan. It now pro- duces 25 percent of industrial CO2 emissions. To reduce this level, the industry has made tremen- dous efforts to use energy more efficiently and to diversify its fuel sources to nuclear power and liquefied natural gas. With heightened attention in the 1990s to the problem of global warming, the industry continued to try and reduce the level of CO2 emissions. The Electric Power Development Company (EPDC) was established in 1952 as a wholesaler of electric power to the nine integrated regional power companies in Japan. Two thirds of its capital is still owned by the government, but the company will be fully privatized by 2003. EPDC has the fifth biggest generating capacity (14 million kW) in Japan. It has played an important role in the development of hydroelectric, coal-fired, and geothermal power plants. Using EPDC as an example, this case study examines Japan's efforts to address environmental problems and offers lessons for other countries. EFFORTS TO REDUCE lH[AZARDOUS POLLUTANTS. As a government-owned power company, EPDC has generated coal-fired power since the 1960s in accordance with the energy policy of 10 Protecting the Global Environment the government. The company planned to construct a coal power plant at Isogo (near Yokohama) in the 1960s, but environmental pollution was already a local issue by that time. Responding to the opposition of residents and local communities to the expansion plans of factories and power plants, the Yokohama municipal government commissioned four local academics to examine pollution prevention measures. The agreement between the Yokohama government and EPDC reflected the academics' recommendations and provided the first example of a full-scale pollu- tion prevention agreement. The Yokohama government enforced a similar series of pollution prevention measures and paved the way for voluntary agreement on pollution control between individual plants and local governments. This method, widely observed in the 1970s in Japan, became known as the Yokohama method. Responding to the stricter standards of air pollution in the early 1970s, EPDC fit three coal power plants with five flue gas desulfurizers (FGD), a technology that it had been developing for some time. This drastically reduced the level of SO2 emissions to less than 1 gram per kWh by 1976, although it pushed up the generation cost by 17 percent. EPDC's achievement is remark- able, since the overall average of the United States, United Kingdom, France, Germany, Italy, and Canada was more than 6 grams per kWh in 1993-94. The Isogo power plant exemplifies optimal use of space for large pollution-prevention equipment in an existing coal power plant. EPDC is also the world pioneer in developing full-scale flue gas denitrification devices for coal power. This technology has gained acceptance not only throughout Japan but also in Europe and elsewhere. EPDC's level of nitrous oxide emissions was reduced to less than 1 gram per kWh in 1996, compared with 2.7 grams per kWh, the average of the countries mentioned above. EFFORTS TO REDUCE ENERGY USE AND CO2 EMISSIONS. Coal-fired power plants produce more carbon dioxide per unit of electricity generated than do other fuel sources. Switching to liquefied natural gas or nuclear power lowers CO2 emissions. In many countries, however, coal is still an important energy source, and it is essential to find ways to minimize CO2 emissions of coal-fired power plants. After the oil crises in the 1970s and the greater need to save energy, EPDC reduced CO, emis- sions although CO2 emissions had not been a specific target of reduction at that time. Since then EPDC has assiduously introduced the best available technologies and actively involved itself in R&D. The Matsuura plant of EPDC, which started operation in 1990, has a thermal efficiency of 38 percent compared with Isogo's 36 percent. Pressurized fluidized bed combustion (PFBC), a new technology with thermal efficiency reaching 42 percent, is currently in the demonstration stage at EPDC. Another method, integrated coal gasification combined cycle (IGCC), with ther- mal efficiency of 44 percent, is now being tested at a pilot plant. These thermal efficiency im- provements reduce CO2 emissions as well as fuel input. There are many ways to improve the thermal efficiency of coal-fired power plants, such as plant replacement, rehabilitation of outdated equipment, introduction of auxiliary equipment, and proper operation. Replacing subcritical plants, which continue to be built in most non-OECD countries, with supercritical or ultra-super-critical plants improves thermal efficiency substan- tially, making SC and USC commercially feasible while reducing both CO2 and air pollutant emis- sions. Commercial feasibility is site specific. For optimal modifications, financially and environ- mentally, to improve thermal efficiency, proper analysis of each power plant is needed. Another important factor for efficiency gains is proper operation. LESSONS FOR OTHER COUNTRIES. Pollution control measures at existing coal-fired power plants are mostly end-of-pipe technologies and bear additional cost for power producers. When EPDC had to introduce flue gas denitrification devices in the 1970s, the generation cost of the correspond- ing plant increased 17 percent. EPDC managed to limit its electricity price hike to 11 percent Global Beniefitsfrom Private Sector linitatives: Lessons oni the Enviromllentfromii Japan 11 because of its own cost reduction efforts and government aid. Consensus building among stake- holders regarding the necEssary investments, timing, and level of electricity price increases, and incentives, are essential. Consensus is achieved through discussions and information sharing within special committees (shingikai), which are established either by the national government or local governments. Stakeholders, including the concerned companies, industrial associations, the local community, and academia, are represented on these committees. Enforcement of environmental standards is another indispensable factor in order to internal- ize the cost of pollution control. In the case of EPDC, a qualified environment controller in each power plant measures ancl reports the emission levels of various pollutants to the local environ- mental authority Local governments then have abundant information for effective monitoring and enforcement of the agreement with EPDC. Reduction of CO2 emissions can be attained through more efficient use of energy, which si- multaneously maximizes profits. The incentive for energy-saving investment increases when the price of energy increases. As a matter of fact, EPDC's efficiency enhancement efforts saw major progress after the oil crises. If the energy price is kept unreasonably low either by controls or subsidy, incentives to save energy will be weakened and the allocation of resources distorted. The government's involvement in research and development is essential. Clean coal technol- ogy development plays an indispensable role in enabling the Electric Power Development Com- pany to control pollution and reduce carbon dioxide without harming production. EPDC has been an active participant in projects sponsored by the government and the New Energy Devel- opment Organization. Cooperation between the government and power companies in R&D ac- tivities has mitigated the risk and financial constraints of pollution control. Reforestation of the Indontesian Tropical Forest: The Case of tlhe Sumitomo Forestry Corporation [n 1991 the Sumitomo Forestry Corporation, one of Japan's largest forestry and housing compa- nies, initiated the Sebulu experimental forest. This project was undertaken for the reforestation of the Indonesian tropical forest. Its main objective is to restore areas destroyed by forest fires and slash-and-burn farming by replicating the conditions of the original forest as closely as possible and establishing sustainable forest utilization for the local people. If this project successfully re- stores the tropical forest, it will create a carbon sink and, at the same time, convince local people that the adjacent social foirest brings them more products than slash-and-burn farming, thus pro- viding a persuasive "win- win" example for similar areas in the world. HISTORICAL BACKGRO1JND. In the early 1970s Sumitomo acquired a concession right on the tropical forest in East Kalinantan Province and established a local joint venture, P.T. Kutai Tim- ber Indonesia (KTI). Forest development began in the area around the current experimental for- est. The main role of the forestry operation was to supply lumber for Sumitomo's plywood manu- facturing in Java. KTI gained an excellent reputation for its sustainable forest management based on selective cutting. During 1982-83, however, forest fires swept through Kalimantan causing unprecedented damage. TFhe fires destroyed 3.1 million hectares of forest and forced KTI to ter- minate its forestry operations and relinquish its concession right to the Indonesian government. After that, frequent forest fires and slash-and-burn farming practices turned the area into mostly wasteland by 1990. Aware of worldwide deforestation and the increasing concern over global warrning toward the end of the 1980s, Sunitomo focused its corporate social mission on the protection of the global environment through forestry-related activities. Sumitomo then began to commit itself to environmental issues on a large scale. It chose Sebulu as an experimental reforestation site after 12 Protecting the Global Environment careful study of the area by three Sumitomo survey missions between 1989 and 1991. One impor- tant factor behind the choice of Sebulu was Sumitomo's business activities there beginning in the early 1970s and the considerable respect the company had among local people. THE SEBULU EXPERIMENTAL FOREST PROJECT. A total area of 3,000 hectares was established as the Sebulu experimental forest in 1991 after an agreement between Sumitomo and the Indone- sian government. The first stage of the project began in November 1991, managed by KTI, Sumitomo, and the Forest Research and Development Agency of the Indonesian Ministry of For- estry. The project targets reforestation and social forestry. A proper combination of the two con- cerns is expected to improve local people's income-earning opportunities while replicating the original forest as closely as possible. This reforestation is done through artificial plantation of mainly dipterocarps, an indigenous Southeast Asian tree for which Sumitomo developed a tissue culture technique for mass propa- gation, and plantation of other fast-growing trees. The first stage of this experiment was 1991 to 1996; the second stage, 1997 to 2001. As of December 1998, the plantation covered an area of 405 hectares with more than 600,000 seedlings. This was achieved in spite of the damage caused by big fires in 1997. As noted earlier, social forestry is another unique aspect of this project, which aims to improve the standard of living of former slash-and-burn farmers through their resettling and participa- tion in artificial plantation. At present, the program is being implemented with the cooperation of thirteen families in four social forestry trial zones totaling forty-three hectares. Dipterocarp trees (50,000), fruit trees (such as durian and mango), fast-growing trees (such as sungkai, gmelina, and teak), and crops (peanuts, maize, dry-field rice) have been planted. KTI's role is to provide continuous technical guidance as well as the seedlings, fertilizer, and materials, which the farm- ers repay after the harvest. Social forestry is slowly but steadily drawing the attention of more slash-and-bum farmers, although this experiment is still new. Once its economic viability is clearly established, social forestry will accelerate the resettling and participation of slash-and-bum farmers. SOCIAL FORESTRY AND SLASH-AND-BuRN FARMING: AN ECONOMIC COMPARISON. The Sumitomo Forestry Corporation and the Development Bank of Japan intensively interviewed social forestry participants in 1998 and 1999. The results of these interviews and the outcome of a 1995 Sumitomo study of slash-and-burm farming are presented for economic comparisons. According to the analysis carried out, the average cash flow per hectare of rice with slash-and-burn farming is estimated to be US$89 (1998 price, US$1 = Rp8000), while the per hectare cash flow of a social forestry mix of maize, soybeans, green beans, peanuts, and onions is US$105. (The social forestry figure is some- what conservative, since it excludes output of chili and sweet potatoes.) Cash flow takes into account the opportunity cost of family labor input. Substantial differences in families' incomes from social forestry reflect differences in product mix, timing of planting, and damages by wild boar and insects. It should be pointed out that weather conditions that affect agricultural output were better in 1995 than in 1998. Keeping these factors in mind, we can conclude that crop culti- vation in Sebulu is economically more viable than the slash-and-burn farming on contiguous tracts of land. Analysis is also being performed on the activities of one farmer who began planting fruit trees (durian, mango, rambutan, and magnets) a few years ago. Since little data are available, assump- tions (growth of trees, productivity, and prices) were based on existing studies in Java and the actual situation of fruit near Sebulu. Multiyear simulation becomes necessary for such cash flow analysis, since it takes years for these trees to begin to bear fruit (three years for mango and four years for durian, for example), and the fruit yields increase over the years. According to the simulation on mango and durian, the cash flow reaches US$89 per hectare in the fourth year, Gfobal Beniefitsffrom Private Sector Initiatives: Lessons on the Envtronmentfronm Japan 13 when mango trees first bear fruit, on a par with slash-and-bum farming. Once durian begins to bear fruit, fruit tree planting generates much higher cash flow than does slash-and-burn farming. However, high cash flow in the future may not induce slash-and-burn farmers to begin fruit tree planting if their livelihood concerns are more immediate. Other crops must be promoted in com- bination with the fruit tree planting to compensate for the initial negative cash flow, and farmers' awareness has to be raised. IMPLICATIONS AND LESSONS OF THE SEBULU EXPERIMENTAL FOREST. The final outcome of the Sebulu experimental forest is yet to be seen, since it takes many years for the trees to grow and since social forestry was initiated not so long ago. Based on initial findings, however, the experi- mental forest appears to be on the right path to replicating the conditions of the original tropical forest as closely as possible and to increasing the standard of living of local farmers through social forestry. These two objectives are closely related: the original forest cannot be replicated if social concerns are not addressed because population growth is broadening the destruction from slash-and-bum farning. The Sebulu experimental forest is a carbon sink. It is estimated that the area under reforesta- tion by the year 2010 will absorb more than 146,000 tons of CO2 between 1991 and 2010. Although many developing countries have not yet formally accepted the innovative international coopera- tion mechanisms proposecl under the Kyoto Protocol and the Buenos Aires Action Plan, the ex- perimental forest experience can serve as a detailed model for the future. The experimental forest also represents a first small step for biodiversity. As the tropical forest has been rehabilitated with indigenous trees, orangutans have come back to the Sebulu area as have wild boar, deer, and other animals. Sebulu has also produced fruitful outcomes in research activities. The characteristics of the dipterocarps have been carefully studied, although many things are still to be learned. Effective planting methods have been easily understood and utilized by the local people, and all equip- ment and materials for the planting are procured locally. For one of the dipterocarps species, Sumitomo has established a first-in-the-world tissue culture technique that may be applied to other tropical rain forest trees. Although Sumitomo initiated this project as a purely social activ- ity, the tissue culture technique, protected by patent, might involve Sumitomo in a "win-win" situation. It is important to note that the project was begun by a company with rich forest management experience in many countries and that on-site research activities made it possible to restore not only the forest of the dipterocarps but also the original ecosystem in the region. The experience of this project, though still in process, suggests that other "win-win" reforestation cases may be possible if business entities with technique, technology, and experience take the initiative and commit to the long term. One important part of project implementation is cooperation with the local community. Al- though slash-and-burn farming in the experimental forest is illegal, the company has never tried to expel slash-and-bum farmers out of the boundary. The legal basis may hold no meaning for those farmers, and enforced banishment would undermine the existence of the project. Sumitomo tries to communicate with the farmers and counts on dissemination of information by participat- ing farmers to slash-and-bum farmers. The priority placed on the local community is also ob- served in human resource management in KTI, the actual implementing entity, whose staff con- sists of local people. Strong ties between Sumitomo, KTI, and the local communities in the Sebulu area have contributed to the success of the project. Human resources and physical infrastructure such as roads, schools, and other public facilities provided by KTI have been maintained, and this has facilitated the cooperation of the local community. Such strong ties imply that the experience is 14 Protecting the Global Environment applicable elsewhere. Other examples of North-South cooperation have been demonstrated by European firms having strong ties with African countries, and U.S. firms with Latin American countries. Finally, the importance of support from the public sector and academia must be pointed out. Financial support by the Japanese government, through the Research Association for Reforesta- tion of Tropical Forests, has enhanced the research activities and the cooperation between Sumitomo and Indonesia. The University of Tokyo's involvement has been mutually beneficial; the Sebulu experimental forest serves as a site of field research and experiment for faculty mem- bers and students, while Sumitomo can mobilize the university's resources for its research activi- ties for propagating dipterocarps. This framework can be used as a model in other cases, too. The Sebulu experimental forest is young, and there are still tasks for the future. But the rich experience thus far bodes well for "win-win" opportunities in other tropical areas of the world. 2 Expanding the Scope and Constituency for Global Environmental Initiatives in Developing Countries Wilfrido Cruz and Jererny Warford Global environmental prc,blems threaten the future of the entire planet. Climate change, pollu- tion of international waters, declining biodiversity, ozone depletion, desertification, acid rain, and many other environmental issues have transboundary consequences. Although industrial countries bear much of the responsibility for these problems, both historically and at present, prospects for the global environment will be seriously affected by actions in the developing coun- tries and transition economies. This is especially true for the largest ones (such as China, India, Brazil, the Russian Federation, Indonesia, and Nigeria), whose combined populations account for most of the world's population. Cooperation is urgently needed among all countries to arrest global environmental degradation. Background of WBI-DBJ Cooperation In response to this challenge, the World Bank Institute (WBI) and the Development Bank of Japan (DBJ) have held a series of consultation meetings and training workshops to identify strategic issues and options for learning activities and capacity building. This partnership is designed to encourage dialogue on environmental policies and to put global environmental concerns in the mainstream of national development decisionmaking. The World Bank already is deeply involved in global environmental work and plays a sig- nificant role in implementing a portion of the Global Environment Facility (GEF) project port- folio. The Global Environment Facility provides incremental cost financing to developing coun- tries to promote projects on biological diversity, climate change, international waters, and the ozone layer. The Montreal Protocol has the more focused goal of supporting projects to phase out the manufacture and use of ozone depleting substances (ODS). These projects are substan- tial, but global environmental issues are still a limited part of the Bank's mission. The expecta- tion is that the involvement of the Bank will continue to grow. It has recognized the close link between the global environment and development issues. As a World Bank presentation in Kyoto made clear, "the global environment and climate change are development issues" (Koch- Weser, 1997). This view continues to be reflected in the Bank's periodic reports to the GEF Council (World Bank 1998,1999). This perspective motivates Bank efforts to expand the scope of global environmental initia- tives to include the role of policy incentives and to expand the global environmental constituency beyond traditional environmental agencies and the foreign ministries that coordinate interna- tional conventions. For example, the World Bank's Global Overlays Program (GOP), launched in 1995, has as its goal to incorporate global environmental externalities in the discussion and re- form of national and sectoral policies. In this regard some progress has been achieved in linking 15 16 Protecting the Global Envtronment the area of climate change to energy sector planning (World Bank, 1997). However, much more needs to be done to promote better understanding of the linkages between broad policy reforms and global environmental impacts and to develop a wider constituency for this integration. The Relevance of Japanese Case Studies The WBI-DBJ partnership's main theme is to identify the policy and institutional constraints to expanded involvement of government agencies and the private sector in global environmental initiatives. In principle, the global concerns include the entire range of GEF/Montreal Protocol concerns (climate, biodiversity, intemational waters, and ozone), as well as other transboundary issues, such as acid rain. However, as a practical approach it was decided to focus on climate change issues and their linkages to national or local activities, to ensure a manageable scope for the partnership. This topic is of great political significance because of the Framework Convention on Climate Change (FCCC) negotiations and because of the central position of the energy sector in national economies. Tremendous win-win opportunities exist in the energy sector, with poten- tial economic efficiency gains accompanied by environmental benefits at both the national and global levels. However, the costs and benefits of socially desirable policy reforms must be consid- ered carefully. Although global environmental issues are being recognized as increasingly important, many developing countries are reluctant to address these problems. Their reluctance stems largely from the perception that, while interventions impose a cost, developing countries do not stand to ben- efit directly from such interventions. In addition, industrial countries are viewed as the source of much of the problem. Thus, a widely stipulated condition for developing countries' active par- ticipation is that the developed countries be the first to take major steps toward tackling global environmental problems. Based on this view, current global environmental programs have em- phasized funding from developed countries to support projects in developing countries. In the past several years there has been significant progress in these environmental projects through specialized funds, such as the Global Environment Facility and the Montreal Protocol fund for phasing out ozone depleting substances. The scope of the challenge is great. Specific project-oriented interventions are not enough to arrest, much less reverse, the environmental decline that is taking place worldwide. Despite progress in biodiversity conservation projects, unsustainable land use and deforestation con- tinue to threaten biodiversity in many countries. Similarly, rapid urbanization and industrial growth in many developing countries continue to contribute to excessive greenhouse gas (GHG) emissions. In virtually all countries there remains considerable scope for investments that pass social cost-benefit tests at the national level as well as contribute positively to environmental quality. In the climate area in particular, opportunities for such investment in energy efficiency and clean production technologies abound. More powerful than individual investments are policies that are typically required to induce such investments. Indeed, there is considerable scope for "win-win" policies of public agencies that at first sight may have limited involvement with the environment. For example, environ- mental benefits from energy price reform are a fortunate byproduct rather than the intended result of policies by the energy or finance ministries involved. In addition, there is a need to go beyond "win-win" approaches toward a more proactive sustainable development stance. Exter- nal social benefits must be integrated into decisionmaking throughout the public administrative structure. This is particularly true of policies that are implemented at a high enough level in the economic system to have a countrywide impact. Thus, the emphasis of the WBI program is to support policy reforms that promote both na- tional benefits and global environmental benefits. In contrast to technology-oriented training Expanding the S:cope and Constituencyfor Global Environmental Initiatives in Developing Countries 17 activities, the program is designed for opinion leaders and senior decisionmakers at the policy level. Many training programs implemented under the auspices of bilateral development agen- cies, the United Nations Environment Program (UNEP), and GEF have addressed various as- pects of the global environment (GEF, 1997). Most of these training programs have focused on improving technical awareness of environmental problems in areas such as biodiversity, climate change, international waters, and ozone layer protection; the programs also have discussed inter- national conventions and project development. WBI-DBJ cooperation has a wider focus, how- ever. In addition to information dissemination on the conventions and technical discussion, the partnership has emphasized the need to situate training and capacity building in the context of national development concerns in general and to link them to policy reforms in particular. Practical examples and case studies are critical to progress in this area. The approach to policy reform must deal with all the complexities of legislative and institutional changes. At the same time, the process of building broad support for programs requires the involvement of a wide range of stakeholders from the private sector. Actual case studies have the advantage of identify- ing key lessons derived from a wide range of experiences. The Japanese examples presented here describe the complex involvement of the private sector and local communities and their differing sectoral interests and environmental concerns. However, cooperation between Japanese policymakers and the private sector has been extremely effective in harmonizing environmental initiatives and efficiency rE quirements. Many of these examples provide key lessons of value for multistakeholder initiatives in developing countries. Constraints on Promoting Global Environmental Initiatives Certainly, no substantive support for global environmental programs will be forthcoming unless it is linked to national priorities and multisectoral constituencies. A major concern related to economic constraints is fa4rness in allocation of responsibility for the source of global environ- mental problems and the needed financial resources to remedy the situation. Broad support for global environmental initiatives will depend, in the first instance, on the feasibility of integrating global environmental components into national priorities and, secondly, on developing coun- tries' perception of developed countries' commitment to set their own house in order and to provide financial resources for these initiatives. As the case studies show, Japan succeeded in promoting domestic programs that also improved the global environment (for example, increas- ing energy efficiency reduced GHG emissions). The country's role as a leading donor to global environmental programs is particularly relevant in this regard. The lack of a national policy on global environmental issues and weak constituencies for global environmental initiatives constitute major constraints. The lack of national policy must be distinguished from international policies or positions on global environmental conventions or processes. Developing countries, individually and as groups, have well-articulated posi- tions in international meetings. However, such positions often are developed only within the confines of ministries of foreign affairs, and consultations usually include only national envi- ronmental officials. Awareness of the relationship between global environmental issues and national economic and development policy is very limited. Since the national and sectoral economic and financial officials are not involved, global environmental policies and agreements can be implemented only through specific projects. They are not integrated into the economic and sectoral programs that can have the most impact on the global environment (for example, power generation and distribution, agricultural and forestry land use management). In addition, because other stake- holders in society are excluded, there is no broad constituency and therefore limited potential for generating multisectoral programs. 18 Protecting the Global Environment Opportunities for Expanding Global Environmental Initiatives Despite these constraints on promoting global environmental initiatives in developing countries, opportunities abound for them to expand their initiatives in new directions. Several approaches are presented in this section. Going Beyond Project-Oriented Responses The preceding discussion highlights the need to go beyond project-oriented approaches to im- proving the global environment. As a first step, global environmental issues need to be linked to specific components of a nation's sustainable development program. In the Japanese cases dis- cussed, national environmental priorities were identified, and the policy and programs that fol- lowed eventually contributed to global environmental goals. In developing countries there may be a strong national emphasis on urban and industrial pollution management. Global environ- mental initiatives to mitigate GHG emissions could be linked explicitly to this national program. Another approach would be to identify key investment sectors (such as land management in agriculture) and then integrate environmental issues with sectoral investment strategies. Because of the added global benefit that can arise from national sustainable development programs, addi- tional resources might be made available to expand their scope. "Win-Win"Actions at the National Level As a next step, any significant effort to address global environmental issues, whether in devel- oped or developing counties, has to include the search for "win-win" policies and investments. There appear to be many cases where domestic economic and environmental objectives coincide closely with global objectives. What prevents the implementation of these types of initiatives? In fact, major obstacles are to be observed in all countries. These include costs, lack of information, and jurisdiction constraints. INCIDENCE OF BENEFITS AND COSTS. A project or policy that yields net social benefits may not be advantageous for those parties that control political decisionmaking. Relevant for all develop- ment objectives, this issue is particularly important when externalities and conflicts of interest cause those who are harmed by environmental degradation to have less say in the decisionmaking process than those who cause the damage. Thus poor communities living downstream or downwind of industrial waste dischargers, indigenous people threatened by timber or mining interests, and, indeed, the well-being of future generations all tend to be under-represented in the decisionmaking process. Environmental deg- radation can be profitable, at least in the short run, and politically powerful vested interests cre- ate a formidable obstacle to change. Hlowever, wealthy interests are not always the obstacles: opposition to increasing energy or water prices, or to protection of natural habitats, may come from poor people as well. In practice, the incidence issue is a major reason why financial re- sources may not be made available for economically or environmentally justified actions. LACK OF INFORMATION. Reinforcing the position of vested interests may be the public's lack of understanding of the environmental damage that is being created and the direct and underlying sources of that damage. Pseudo-scientific research or propaganda on the part of industrial lob- bies and other forms of corruption may compound the problem. Awareness of the costs, sources, and incidence of environmental damage, requiring transparency and openness in public and private sector decisionmaking, is thus essential. Expanding the scope and Constituencyfor Global Environmental Initiatives in Developing Countries 19 As the Japanese experience shows, an educated population and serious efforts by the local community to gather and disseminate environmental information can be important determinants of improved environmental policies. On the other hand, inadequate access to state-of-the-art tech- nologies for energy efficiency or clean production often constrain progress. Formal educational establishments as well as nongovernmental organizations (NGOs) and religious and community leaders have vital roles to play in raising public awareness of environmental problems. This must be backed up not only by continued efforts to better understand the physical consequences and methods to combat global environmental degradation, but also by operationally oriented eco- nomic and social research. JURISDICTION CONSTRANTS. The issues of incidence and knowledge also arise with regard to public sector decisionmaking. First of all, different government agencies may have conflicting mandates, and internalizing external (environmental) effects may run into a knowledge barrier. Energy ministries may nol have staff adequately trained in environmental impact assessment, and they may not be aware of the environmental consequences of their investment programs or individual projects. Administrative constraints also can hamper the mobilization of financial re- sources. For example, financing agencies have different time horizons and thus different institu- tional objectives than resource management agencies. Even more complex are the linkages between sector, regional, and countrywide policies on the one hand and the environment on the other. Here considerable research is required, but the wide-ranging environmental impact of policies at the national level may justify the effort. Up- grading the environmental qualifications and understanding of staff would seem to be advisable. But while knowledge is necessary, it is not sufficient; systems of incentives need to be devised to induce government officials in a wide range of capacities to ensure that environmental factors are systematically taken into account in their day-to-day activities. As noted earlier, developing countries, individually and as groups, may have well-articulated positions in international rneetings, but these positions often are developed within the confines of ministries of foreign affairs, and consultations usually include only national environmental officials. Thus, awareness of the relationship between global environmental issues and national economic and developmer,t policy tends to be limited. Beyond "Win-Win"Approaches Taking advantage of "win-win" opportunities, while crucially important, is not a panacea. In many cases environmental :mprovement cannot be demonstrably justified in traditional economic terms. Indeed, valuation of the environment in economic terms is notoriously uncertain. This is especially a problem when costs are incurred now, but the benefits are realized a long way off, or when environmental improvement is clearly justifiable in commonsense or social terns but eco- nomic valuation is all but irrelevant for decisionmaking. Beyond the win-win approaches discussed earlier, developing countries will find it difficult to promote approaches tha-t are not amenable to "win-win" solutions at the national level. Devel- oping countries' primary focus in such situations will be, by necessity, to obtain assistance from international or bilateral sources. For longer-term sustainability, however, it will be necessary to build constituencies for actions that do not fall within the "win-win" category in the major devel- oping countries, as well as to continue efforts to strengthen such support in the industrial world. Whether because of the inadequacy of economic measurement or because impacts are felt out- side their borders, developing countries, for the reasons mentioned earlier, rarely wish to absorb the net economic costs of global environmental protection measures. For this reason, interna- tional mechanisms, such as the Global Environment Facility, have evolved that address this issue. 20 Protecting the Global Environment The sustainability of dependence upon extemal funding is questionable. Therefore, develop- ing countries should pursue two objectives: first, strengthening a constituency for environmental measures that are not easily justified in standard economic terms but would bring the country social and amenity benefits (these measures may not be "win-win" as conventionally defined); second, as a long-run goal, creating support for environmental protection measures, the benefits of which accrue to the world community as a whole and not just to the country concerned. In practice, this latter objective would require a new way of thinking. Companies in many parts of the world are beginning to realize that although environmental measures are often un- profitable in the short term, it is in their own interest to adhere to intemationally agreed environ- mental standards (for the reasons of image, marketing, recruitment, as well as avoidance of longer term resource degradation and depletion costs). This trend is discussed extensively in the Japa- nese case studies. The Role of International and Bilateral Cooperation The scope of international cooperation will need to support the expanded agenda for global envi- ronmental initiatives in developing countries described above. At the same time developing- country policymakers will have to be more involved in the development of new international mechanisms. They must better understand the cost-effectiveness of global environmental initia- tives and the role of intemational initiatives, such as joint implementation UI) or the Clean Devel- opment Mechanism (CDM)-innovations proposed during the 1997 Kyoto meeting on climate change to promote more international cooperation on carbon-reducing activities. Supporting Cost-Effective Initiatives Whatever the global environmental objective, it should be achieved at least cost. For any particu- lar intervention, whether policy reform or investment program, actions should be ranked in or- der of their cost-effectiveness in achieving desired outcomes. This is an important practical policy issue: there remain many opportunities for "win-win" policy reforms that are politically difficult to introduce but would merit high priority if an overall social benefit-cost perspective was adopted. At the same time investments in actual projects with lower-order priority but beneficial to pow- erful vested interests could be implemented. As shown in Figure 2-1, priority interventions would involve projects or policy changes along the axis between 0 and A. These items are economically and environmentally beneficial ("win-win") at the national level, and they should be financed by the country concerned, per- haps using World Bank or African Development Bank loans. Between A and B, actions are justified in the sense that they yield global benefits in excess of global costs but are not per- ceived as "win-win" at the national level; this is where GEF or another international subsidy mechanism comes in. However, GEF funding can make it easier for governments to avoid tak- ing the hard decisions to carry out policy reforms in the region O-A. It can be argued that the presence of such mechanisms is at odds with the objective of achieving globally cost-effective solutions to environmental problems. Creation of a constituency for global environmental protection in developing countries de- pends heavily upon the continued and increasing commitment of industrial countries in this regard. They should put their own houses in order as well as increase their financial and technical support for such initiatives in developing countries. It is essential that contributions to global environmental support be seen as additional to other aid comrmitments, not simply as a substi- tute for them. Expanding the Scope and Constituencyfor Global Environmental Initiatives in Developing Countries 21 Box 2-1. Financing Projects on the Basis of the Marginal Costs and Benefits of Reducing CO2 Emissions Figure 2-1 illustrates the situation facing a country considering greenhouse gas reduction projects. The MAC curve refers to the net marginal abatement cost to the country of each new method of reducing (or sequestering) greenhouse gases. MAC is the sum of the costs of introducing policy reform or emissions-reducing investments, minus any benefits that result from such expenditures. Therefore, it represents the net costs of alternative measures. (Up to point A, MAC could be mirrored by the curve MBC, the nel marginal benefit to the country concerned.) Countries intending tc reduce GHG emissions should select the most efficient (that is, cost-effec- tive) options first. Thus, MAC increases the greater the percentage reduction in carbon dioxide emis- sions. The portion of MAC' Iying in the negative range (0-A) represents opportunities for "win-win" actions by the country. These might include energy conservation measures, improved energy pricing policies, or clean production technologies that are justified in their own right at the national level and also benefit the global env ironment. Point A represents the level at which it is no longer in the interest of the country to reduce green- house gases any further; at that point the costs exceed the benefits accruing to the country. However, there is a benefit to the world at large from such a reduction. The global optimum emissions level requires a greater emissions reduction than for the country alone. A global marginal benefit curve, MBG, intersects MAC to the right of level A at B. This represents the global optimum: the point where global marginal benefits equal global marginal costs. Assuming that all "win-win" opportunities are taken by the countries concerned, using conven- tional financing sources, grant aid financing from the Global Environment Facility may be sought. In principle, such assistance should be restricted to the range A-B. Beyond that, further reduction in carbon dioxide emissions would not be justified, even when global considerations are included. In view of the massive costs involved in arriving at a global optimum, significant progress in this direc- tion will depend heavily upon the implementation of sectoral policy reforms-justified in their own right-at the country leve!. Figure 2-1. Marginal Costs and Benefits of Reducing CO2 Emissions $/ton of CO2 MAC 0 ("Win-win") A (E)B (Unjustified) Percent reduction in CO2 22 Protecting the Global Environment New Mechanisms for Cooperation In addition to one-way flows of resources and support from international donors to developing countries, new international mechanisms are being developed that can expand the scope and participation for global environmental initiatives and capacity building in developing countries. For example, joint implementation activities can have a positive influence by helping to build up local technical expertise in carbon emission reduction activities. Presumably, for an industrial country or company to obtain political or economic credit for investing in JI, there should be a strict requirement that its investment to achieve the environmental target is sustainable. In turn, this requires development of institutional capacity. Thus, if JI or other such measures are to work properly, they should build up environmental expertise and contribute to constituency building. Qualification for credit should be subject to strict monitoring and institution-building require- ments to ensure that it is effective. Similarly, developing-country policymakers need to consider how an emissions trading re- gime could be designed to most effectively promote global environmental awareness and capa- bility within developing countries in a way that is consistent with cost-effective achievement of global targets. As in the case of joint implementation activities, emissions trading can be expected to generate more awareness of the issues, but whether or not the net impact is efficient in a global or indeed national sense may be open to debate. Supportfor Capacity Building in Developing Countries Improving developing countries' awareness of these issues and ability to take action on them is a pressing global concern. Many training programs have addressed global environmental issues under the auspices of the World Bank and other international and bilateral development agen- cies. Most of these training programs have focused on technical awareness in specific areas such as biodiversity, climate change, ozone layer protection, and international waters, and on discus- sion of international conventions and project development. These are important topics that re- quire continuing support. However, the WBI-DBJ partnership has identified a critical need for training and capacity building that goes beyond this agenda. The challenge is to support initia- tives that will enable the full integration of environmental policy into national policymaking. References GEF (Global Environment Facility). 1997. Quarterly Operational Report. Washington, D.C. March. Koch-Weser, Caio. 1997. "The Global Climate for Sustainable Development." Presentation prepared for the Third Meeting of the Parties to the Framework Convention on Climate Change, Kyoto, Japan, Decem- ber 8, 1997. World Bank. 1997. Report of the Global Overlays Program (GOP) Advisory Group Meeting, October 8. Washing- ton, D.C. .1998. Mainstreaming the Global Environment in World Bank Group Operations, Report to the GEF Coun- cil. Global Environment Facility, Washington, D.C. October. .1999. World Bank Group Progress Report on the Preparation of an Environment Strategy. Global Environ- ment Facility, Washington, D.C. November. 3 Review of Environmental Policy and Energy Conservation Policy in Japan Tomohiko Inui Hiroyuki Kato To protect the environment, Japan has adopted very strict environmental standards and used the best available technologies. Nationwide standards are often supplemented by stricter ordinances and guidelines from local governments as well as by voluntary agreements that help to adapt national efforts to local conditions. The emphasis on technology led the national government to offer considerable public s lupport for environment-related R&D expenditure and investment in pollution control and prevention equipment. Conventional wisdom is that strict environmental protection and energy conservation mea- sures, and the concomitant spending, inevitably harm a country's economic growth. On the con- trary, the Japanese experience demonstrates that technology, improvement of management effi- ciency in the private sector, and government policy can be used to overcome resource and regulatory constraints. As noted in Chapter 1, Japan made a national commitment in the mid- 1970s to reduce pollution and increase efficiency of production (especially energy efficiency) through combined efforts in the public and private sectors. Developing countries and transition economies face situations that are quite different from Japan's in two respects. Fiirst, economic development issues and environmental issues simulta- neously confront them. Japan grew first and cleaned up later. In this sense the Japanese model may not be suitable for duplication by other countries. Second, developing countries and transi- tion economies face an assemblage of environmental issues (pollution control, energy conserva- tion, natural resource preservation, and global environmental issues) all at the same time, whereas Japan was able to face them one by one. Some of what has happened in Japan reflects that country's unique economy and society. However, these differences, as well as circumstances and back- grounds specific to Japan, do not preclude the applicability of its experience to other countries. Many aspects of Japan's experience are relevant and useful. For example, Japan institutionalized environmental policy at the national and local government levels. It persuaded industry of the self-interest aspects of environmental protection, and it created public awareness of environmen- tal issues. All of these experiences provide helpful lessons as deVeloping countries ancl transition economies irnplement their own policies to protect the environment and promote development. The Appearance of Pollution Problems In the early stages of Japan's modernization, some of the country's severe environmental prob- lems were already apparent near copper mines and metal refineries. Further industrialization and urbanization accelerated the problems in pre-war Japan. The Japanese people, however, were not very aware of their environmental rights at that time, and these problems did not become important social issues right away. Environmental problems became socioeconomic problems during the rapid developrment of heavy and chemical industries after World War II. In the 1950s, 23 24 Protecting the Global Environment paper mills discharged polluted water in many parts of Japan; in 1956 thousands of residents in the Kyushu area were poisoned by organic mercury that had leaked from a factory that used it in its manufacturing process. When Japan's growth took off in the 1960s, petrochemical complexes that had been built all over the country began emitting waste gases such as sulfur oxide (SO.), nitrous oxide (NO.), and carbon monoxide (CO), greatly aggravating air pollution. Previously, most of the air pollution had been localized or purified naturally, but by the 1960s it exceeded the absorption capacity of natural processes, and many Japanese citizens suffered under its cloud. The Japanese government and some of its agencies, which should have protected public health by setting pollution standards and holding companies accountable to them, were slow to respond. Japanese law recognized the obligation of companies to prevent pollution (for example, the Law Relating to Factory Effluents enacted in the 1950s), but these standards were weak, and they were not designed to reduce water pollution substantially. The Japanese govern- ment at that time was more concerned with how pollution policies would affect production out- put than with how it could protect the health of Japanese citizens. It can be said that the govern- ment valued the right of companies to conduct business more than the right of the people to a safe environment. Pressure by citizens forced local governments to take action against pollution and set pollution standards. These measures, however, were not effective, and in the 1960s pollu- tion began to spread widely. Antipollution Actions As pollution increased, its victims multiplied. Victims and other citizens who saw the damage jumped into action, forming grassroots movements around the country. Movements to oppose construction of petrochemical complexes sprang up, and suits claiming damage caused by pollu- tion were prosecuted one after another. To the government's surprise, the courts judged in favor of the victims, ordering the defendants to pay damages to them and take steps to control their pollution. Companies from that time on were obliged to control pollution and were fined for damages when their operations breached this responsibility. Those who suffered from pollution-related health problems filed lawsuits in the late 1960s, and a decision by the Supreme Court in 1970 helped citizens in the judicial process. Under the new rule, the defendant (polluter) had the burden to prove that there was no cause-and-effect relationship between its pollution and any adverse effect on health. Associations were organized around the pollution issues; some helped obtain compensation for those who suffered from ill- nesses such as the Minamata and Yokkaichi diseases, and others did the same for those whose livelihoods were affected by lost fisheries and other adversely affected industries. In every Minamata and Yokkaichi case in the 1970s, the ruling was in favor of the plaintiffs. The rulings successfully pressed government and industry to introduce effective pollution control measures. It is important to note that these trials revealed to the public the extent of the pollution, and, as a result, business management and government measures became exposed to public scrutiny. Accordingly, in the 1970s the administration of antipollution measures changed greatly. The people's right to enjoy their environment gained far more safeguards. Furthermore, Japan along with other countries began applying the Polluter Pays Principle (PPP), obligating polluters to pay for the damages they caused. Polluters were financially liable for the treatment of the harm- ful waste materials they produced; in addition, they had to pay damages for their past activity. This clearly indicates that the government at that time set environmental protection above indus- trial development. In fact, many laws were enacted reflecting the turnabout in policy. Laws set strict standards for seven environmental problems (air pollution, water pollution, soil contamination, noise pol- lution, vibrations, land subsidence, and noxious odors) to which businesses were held strictly accountable. The Air Pollution Control Law of 1968 tightly regulated the emission of sulfur oxide. Review of Environmental Policy and Energy Conservation Policy in Japani 25 This influenced the structure of the energy demand in Japan. Industries changed their sources of energy from fuels with high sulfur content to those with low sulfur content. In addition, because of two oil crises in the 1970s, energy saving became a major policy issue. Industries rationalized their energy usage, which also contributed to lower air pollution. The administration of environmental matters, a function previously handled by various min- istries, was centralized in 1971 when the Environment Agency was established. Because it was taking too long for damage claims to work their way through the courts, an administrative frame- work for awarding judgments was also set up. In this milieu, a 1973 law on pollution-related health damage was enacted. It established a scheme whereby companies found guilty of pollut- ing were charged according to the amount of harmful waste they produced; money was distrib- uted to everyone suffering health problems, wherever they lived. These rigorous environmental parameters and the obligation of businesses to pay for damages from past pollution were very advanced by world standards at the time and helped place Japan as a leading country in fighting pollution. In addition, there is increasing recognition in government and industry that measures to control pollution before it leads to damages end up costing less than having to pay for dam- ages afterward. In the 1980s lifestyle pollution replaced industrial pollution as the primary pollution problem in Japan. Lifestyle pollution has multiple sources, but most of it comes from households. (House- hold sewage and garbage are two critical examples.) Households are seldom able or willing to pay for the environmental damage they cause. This has made it difficult to enact a law that holds the polluters accountable. The solution to this kind of pollution calls for lifestyle changes such as use of reusable resources that cause as little disturbance to the earth's ecosystem as possible. The environment is overburdened by the massive quantity of material that does not break down naturally in the environment. Examples are consumer goods produced by the petrochemical in- dustry. New technology to break down those materials is needed, but so is a change in consum- ers' consciousness about recycling. Educating citizens to become enlightened problem solvers and nurturers of the earth becomes increasingly important. The second half of the 1980s witnessed a succession of abnormal weather patterns, and the global warming phenomenon became a worldwide concern. The urgency of concluding an inter- national convention on global warming was heightened, and a number of summits were held. Some of the advanced countries pledged to stabilize or cut down the emission levels of the gases that cause the greenhouse effect. The Japanese government decided to require that emissions of greenhouse gases such as carbon dioxide and methane be reduced to 6 percent below their 1990 levels by some time between the years 2008 and 2012. In order to achieve this, the government further promoted energy c onservation, in both industry and households. Trend in Air Quality As a result of the countermeasures employed by the central and local governments, and pri- vate companies' strenuous efforts to reduce pollutants, Japan's environment has improved sub- stantially.' The average annual ambient concentrations of sulfur dioxide and carbon monoxide (observations from a sample of general stations) decreased from 0.06 parts per million (ppm) and 2.4 ppm respectively in 1971 to 0.009 ppm and 0.7 ppm in 1996. The SO2 emissions from the steel factories of Nippon Steel Corporation decreased by around 85 percent between 1973 and 1996, while the amount of crude steel produced there decreased by 34 percent during this pe- riod (Figures 3-1 and 3-2). Other pollutants, such as dust, are important as well. Although there 1. The rational usage of energy curbed the increase in carbon dioxide emnissions in Japan. Details will be discussed in the following section. 26 Protecting the Global Environment Figure 3-1. Average Annual Ambient Concentration of S02 in Japan, 1965-96 Parts per million 0.06 0.05 - 0.04 - 0.03 - 0.02 0.01 _ 0 1 I 1 1965 1969 1973 1977 1981 1985 1989 1993 1996 Note: Data are from continuous monitoring of general environmental monitoring stations. Source: Environment Agency (1998). Figure 3-2. Average Annual Ambient Concentration of CO in Japan, 1971-96 Parts per million 2.5 2.0 1.5- 1.0 0.5 - 0 1 1 1 1971 1975 1979 1983 1987 1991 1995 Note: Data are from continuous monitoring of general environmental monitoring stations. Source: Environment Agency (1998). Review of Environmental Policy and Energy Conservation Policy in Japan 27 Figure 3-3. Average Annual Ambient Concentration of NO2 in Japan, 1971-96 Parts per million 0.05 0.45 - 0.40 - 0.30 l l 1971 1975 1979 1983 1987 1991 1995 Note: Data are from contnuous monitoring of general envirormental monitoring stations. Source: Environment Agency (1998). are important health implications from these pollutants, Japanese policy has concentrated on SO, and NO.. The ambient concentration of NO2 did not improve between 1971 and 1996, and suspended particulate matter (SPM) remained relatively stable between 1981 and 1996 (Figures 3-3 and 3-4). Despite decreased emissions on a per-factory basis2 and on a per-vehicle basis, the incremental amount of emissions caused by the growth in traffic volume outweighed these decreases. Air pollution control measurEs at stationary sources in the 1970s improved the ambient concentra- tion of SPM, but it increased in the 1980s because of the greater number of diesel automobiles. As for nitrous oxide, emission from stationary sources was reduced. However, automobiles are the major sources of emission. Increases in driving distance, the average age of automobiles, road congestion, as well as the increasing share of diesel automobiles contributed to the relatively poor performance of NO, emission control. Trend in Water Quality Japan's environrnental conservation efforts led to an improvement in water quality as well as air quality; emissions of water pollutants such as heavy metals and toxic chemicals have been abated almost completely. Twenty-three toxic substances are regularly surveyed in Japan. By 1996, fif- teen substances, such as total mercury, alkyl-mercury, and PCBs, met the standards and targets at 2. For example, the average NO, emission intensity (NO, emissions per unit of electricity generated) of thermal power plants owned by Tokyo Electric Power Company decreased from around 1.6 grams per kWh in 1973 to 0.25 grams per kWh in 1997. 28 Protecting the Global Environment Figure 3-4. Average Annual Ambient Concentration of Suspended Particulate Matter in Japan, 1974-96 Milligrams per cubic meter 0.060 0.055 0.050 - 0.045 - 0.040 - 0.035 - 0.030 l l l l l 1974 1978 1982 1986 1990 1994 Note: Data are from continuous monitoring of general environmental monitoring stations. Source: Environment Agency (1998). all measurement stations, and the remaining surveyed substances failed to meet them at only a very few stations. Overall, in only 42 of 5,471 observations were standards not met in 1996. In contrast with the relatively good situation concerning heavy metals and toxic chemicals, organic pollution of water has not improved substantially. Compliance ratios for Biological Oxy- gen Demand (BOD) in rivers and for Chemical Oxygen Demand (COD) in coastal waters, lakes, and reservoirs have not improved much (Figure 3-5). Compliance on COD in lakes and reservoirs is especially substandard (42 percent in 1996) despite a decrease in polluted effluents from facto- ries. The decreased water flow in urban rivers as a result of growing industrial use and delays in controlling domestic water discharge seems to have offset this decrease in polluted effluents from factories. Climate Change: The Energy-Environment Connection Industrial pollution, such as atmospheric pollution or water contamination, remains an impor- tant problem to be solved in many countries, especially in the developing world. These countries are still on the brink of industrialization, so full-scale industrial pollution is yet to come. Climate change, however, is already causing growing concern worldwide. Current Situation and Trends in GHG Emissions Scientists and policymakers around the globe are studying the amount of gas emissions that affect the absorption and emission of radiation in the atmosphere. These gases include carbon Review of Environmental Policy and Energy Conservation Policy in Japan 29 Figure 3-5. Chemical and Biological Oxygen Demand: Ratio of Compliance with Envrionmental Quality Standards in Japan, 1974-96 Percent 90 Coastal waters (COD) 80 70 rz\ 70 ~~~~Rivers (BOD) 60 - 50- Lakes and reservoirs (COD) . - * - - 30 l l l 1974 1978 1982 1986 1990 1994 Source: Environment Agency (1998). dioxide (CO2), methane (CH4), nitrous oxide (N2O), tropospheric ozone (03), and chlorofluoro- carbons (CFCs), and they are collectively referred to as greenhouse gases (GHGs).3 This section focuses on CO2 emissions, since carbon dioxide is the most important greenhouse gas for indus- trial countries such as Japan and the relationship between the emissions and energy consumption is clearer for CO2 than for the other gases.4 In fact, according to research conducted by the Envi- ronment Agency in Japan, among all the greenhouse gases emitted in 1993, CO2 was responsible for more than 90 percent of the global warming in the year. Between 1971 and 1995, CO2 emissions worldwide increased from a little less than 4 billion tons of carbon to about 5.9 billion tons (Energy Data and Modeling Center, 1998). Huge increases occurred not only in industrial countries but also in the developing world, particularly in China and East Asia (Figure 3-6). Among the total incremental CO2 emissions during the period, about 30 percent came from China and another 7 percent from Hong Kong, Taiwan, the Republic of Korea, and Singapore. Huge increases in the emissions of developing countries are from the boosts in energy consumption that accompany periods of high economic growth. Economic growth and 3. In many developing countries, emissions of both CH4 and N2O are relatively important, because those emissions are related to enteric fermentation (cattle and rice paddies) and fertilizer application respectively. 4. According to the research conducted by Wuebbles and Edmonds (1988), the majority of man-made CO2 emissions are related to energy use, while the emission of CH4 and CFCs from human activities are less related to energy use. 30 Protecting the Global Environment Figure 3-6. C02 Emissions by Region, Selected Years, 1971-95 Million tonnes of carbon 2,500 f 1971 1980 2,000 - eg 1990 1995 1,500 1,000 North Latin Europe Former China Japan Other Asian America America Soviet Union countries Source: Energy Data and Modeling Center (1 998). increasing energy consumption in these countries are expected in the future.5 Hence, it is pre- dicted that the bulk of incremental CO, emissions will again come from developing countries. CO2 emissions in Japan accounted for about 0.3 billion tons of carbon in 1995,14 percent of the world total. Among the five major industrial countries, Japan had CO2 emissions in 1995 that were second to those of the United States, which emitted more than four times the Japanese amount. CO2 emissions per GDP (at 1987 prices and exchange rates) were lower in Japan than in the United States, Germany, and the United Kingdom, and they were almost comparable to those in France (Figure 3-7). Figure 3-8 shows the trend in CO2 emissions in Japan between 1971 and 1996. They increased from 0.2 billion tons of carbon to 0.3 billion tons, a 1.8 percent per year increase on average. This rate of increase was similar to that of the world (1.7 percent per year). During this period, real GDP in Japan grew on average by 3.6 percent per year; therefore, CO2 emissions per GDP de- clined 1.8 percent per year. The relationship between GDP growth and CO2 emissions growth is a function of industrial structure, the rationality of energy usage in the energy-consuming sector, and the fuel mixes in the sector. Japan's reduction in CO2 emissions per unit of GDP is attribut- able to three factors: * A decline in outputs from energy-intensive industries as a share of total GDP * Improved usage of energy by Japanese industries 5. Some of the Asian economies are suffering negative growth due to the recent financial turmoil in the area, but these economies are expected to grow faster again, once the financial problems are settled. Review of Etivironmenital Policy and Energy Conservationi Policy in Japan 31 Figure 3-7. CO2 Emissions per GDP by Region, 1971 and 1995 Tonnes of carbon per US$ million 2,500 7:4 1971 m 1995 2,000 1,500 1,000 500 United United Germany France Japan Former China States Kingcdom Soviet Union Source: Energy Data and Modeling Center (1998). * A change in the fuel mix, especially in the power generation sector. (Between 1970 and 1996, the share of electricity generated by nuclear power plants increased from 1.3 percent to 29.9 percent.) Energy Consumption and Energy Intensity Total energy consumption in Japan increased from 270 million tons of oil equivalent (MTOE) to 510 MTOE between 1971 and 1996. During this period, Japan's real GDP (evaluated at the market exchange rate in 1990) increased by $1,358 billion to $3,316 billion. Figure 3-9 shows trends in energy intensity of the five major industrial countries. Energy intensity in Japan (rneasured in TOE per one thousand 1990 U.S. dollars of GDP) declined from 0.20 TOE in 1971 to 0.15 TOE in 1996, a 1.1 percent annual improvement on average and the lowest of the five. The industrial sector is the largest end user of energy in Japan. In 1971 industrial energy de- mand accounted for about 60 percent of total energy demand, but by 1996 the share had fallen to 39 percent, which was still high compared with the OECD standard of 30 percent in 1996. The rapid improvement in energy intensity is largely the result of a shift in industrial production away from energy-intensive industries toward high-technology industries that are not energy intensive. The share of gross donmestic product held by energy-intensive industries declined during the 1980s and 1990s. For example, the share of the iron and steel industry declined from 2.6 percent to 1.6 percent, and the share of the nonmetallic mineral industry dropped from 1.6 percent to 1.0 percent. Meanwhile, the share held by high-tech industries increased. For example, the share of GDP of the electrical machinery industry increased from 0.5 percent to 2.0 percent cluring these two decades. 32 Protecting the Global Environment Figure 3-8. GDP and CO2 Emissions in Japan, 1971-96 Index 250 230 Gross domscru 210 - 190 _ 170- 150- 130 - 90 1971 1975 1979 1983 1987 1991 1995 Note 1971 = 100. Source: Energy Data and Modeling Center (1998). Figure 3-9. Energy Intensity of Major Industrial Countries, 1971-96 Tons of oil equivalent per US$1,000 (1990) 0.48 0.43 ted States 0.38 0.33 =,United Kingdom 0.28 __._ ._ > z . , _ _Gerrnany 0.23 0.18 ~~~~~~~~~~France ._, 0.18 1971 1975 1979 1983 1987 1991 1995 Source: International Energy Agency (1997). Review of Environmental Policy and Energy Conservation Policy in lapant 33 Figure 3-10. Trends in Energy-Saving Investment by Energy-Intensive Industries, 1979-95 Million yen Percent of total investment 600,000 6 F Other sectors Percent of total mivestment _ Electric A O Automobile 500,000 5 M Steel and petro- chemical Paper/pulp 400,000 4 M Cement 300,000 3 200,000 -2 100,000 1 0 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 Source: Ministry of Internatienal Trade and Industry (1998). During that period, energy-intensive industries also achieved rapid improvements in the us- age of energy. Because of oil price shocks in the 1970s, the price for imported oil increased from US$2.57 per barrel to $4.85 per barrel between 1973 and 1974, and from $23.37 per barrel to $34.63 per barrel between 1979 and 1980. After both crises, major industries invested heavily in energy saving. According to the Ministry of International Trade and Industry's survey on capital spend- ing (Figure 3-10), the share of energy-saving investment in total investment increased from 2.8 percent to 4.2 percent betveen 1979 and 1980. In the iron and steel sector, the share increased from 15 percent to 27 percent between those years. As a result of those inve stments, Japanese manufacturers achieved substantial improvements in energy efficiency (Figure 3-11).6 For example, the energy efficiency in the iron and steel sector improved by 31 percent between 1971 and 1996. The steel industry introduced energy-saving methods and equipment, such as coke dry quenching, continuous casting production, and blast furnace top-pressure recovery turbines. At the same time there were shifts in production tech- niques from basic oxygen furnaces to scrap-oriented electric arc furnaces (EAFs). EAFs avoid most energy-intensive processes, such as converting iron ore to iron. Furthermore, unlike the blast furnace, the EAF does not require an energy-intensive coke preparation stage. 6. Hereafter, improvement of energy efficiency implies a reduction in the amount of energy required to produce one unit of a certain product. 34 Protecting the Global Environment Figure 3-11. Industrial Energy Efficiency in Japan, 1970-96 Index 120 110 100 90 80 70 - 60 -Pl 50- 40 l l I I I l 1970 1974 1978 1982 1986 1990 1994 Note: 1974 = 100. Source: Energy Data and Modeling Center (1998). Energy Prices and Energy Conservation Energy prices play an important role in achieving efficient energy usage. During the surge in oil prices between 1970 and 1980, the prices for nearly all forms of energy in Japan rose: imported oil rose from US$1.83 per barrel to $34.63 per barrel, imported liquid natural gas rose from US$27.34 per ton to $286.65 per ton, and imported coal rose from US$21.21 per ton to $67.11 per ton. Be- cause of these rapid increases in energy prices, energy-saving investments were essential in manu- facturing industries, especially energy-intensive industries, if they were going to keep their com- petitiveness in domestic and foreign markets. Following the collapse in oil prices in 1985, the pace of improvement in efficiency stagnated. There was almost no improvement in energy efficiency between 1985 and 1996, after an average annual improvement of 3.9 percent between 1971 and 1985. This stagnation was partly attribut- able to low energy prices, which made additional energy-saving investments uneconomical. Some industries began to produce higher-value-added products, which require more processing and thus more energy inputs. A similar phenomenon can be found in the home electric appliance sector. The energy efficiency of refrigerators, color television sets, and air conditioners in Japan improved significantly between the early 1970s and the early 1980s (Figure 3-12). People then began to pay less attention to energy conservation. Since the early 1980s, large and high-speed cars, which are less efficient from a fuel economy point of view, have become more popular. The International Energy Agency (IEA) in 1995 estimated the energy price elasticity of Japa- nese industrial energy demand and found that the long-run elasticity is -0.33. This implies that a 1 percent increase in energy price would lead to a 0.33 percent decrease in the Japanese industrial sector's energy consumption in the long run. This result also indicates the close connection be- tween the price of energy and the energy efficiency of Japan's industrial sector. Review of Environmental Policy and Energy Conservation Policy in Japan 35 Figure 3-12. Energy Efficiency Improvements in Japanese Home Appliances, 1973-94 Index 100 90 80 \ Air conditioners 70 60 C t i sets 50 40 Rfierators 30 - 20 1 l l l l 1973 1975 1978 1981 1984 1989 1994 Note: 1973 = 100. Source: Energy Data and Modeling Center (1998). Government Policy and Energy Conservation Energy policy has changed drastically since the first oil price shock in 1973. Before the oil shock, the Japanese government gave top priority to the development of heavy industries, such as coal and steel, and there were r.o important policy measures for energy conservation. In 1977, how- ever, the Japanese government set up a committee on energy saving and began to discuss policy measures. In 1979 the Law ('oncerning the Rational Use of Energy was enacted with detailed guide- lines for energy-saving equipment and building standards. This law required each factory within the industrial sector to nominate qualified persons to implement the guidelines for heat and/or electricity management. In order to support these policy ends, government provided long-term, low-interest loan programs for companies and households through governmental financial insti- tutions such as the Japan Development Bank, Japan Finance Corporation for Small Business, and Housing Loan Corporation. The government also introduced tax exemptions and accelerated depreciation for energy-saving equipment. As a result, industries were able to invest heavily in energy-saving equipment axnd could achieve substantial reductions in energy consumption. Fuel Diversification Following the two oil crises in the 1970s, diversification of energy resources became an important issue for the Japanese government. Japan's dependence on oil from the Middle East was very high in the 1960s and 1970,; 78 percent of energy supply came from oil when the first oil crisis occurred in 1973. In order lo secure a more stable supply of energy, the government decided to reduce the country's dependence on oil; it introduced measures that facilitated (1) conversions from oil to other energy sources and (2) development of alternative energy resources. 36 Protecting the Global Environmetit Figure 3-13. Shlare of Japan's Primary Energy Supply, by Type, 1971-95 Percent New energy 100 ___ I 90 Nuclear power 80 Natural gas 70 60 50 40 30 20 Oil 10 Coal 0 1971 1975 1979 1983 1987 1991 1995 Source: Energy Data and Modeling Center (1998). This energy diversification policy had a particularly important impact on the fuel mix of the power generation sector. Power companies invested actively in plants powered by nuclear fis- sion, coal, and liquefied natural gas. As a result of these investments, the ratio of oil-generated electricity to total electricity (at nine major electric power companies) declined substantially in the 1980s and 1990s. The ratio was 43 percent in 1980, 26 percent in 1990, and 15 percent in 1996. Concurrently, between 1980 and 1996, the ratios of other electricity sources increased: coal from 3 percent to 9 percent, liquefied natural gas from 20 percent to 29 percent, and nuclear power from 17 percent to 38 percent. Figure 3-13 shows the trend of energy supply between 1971 and 1995. The share of oil sub- stantially increased between 1965 and 1975, when it reached 73 percent of energy supply. The share of oil then declined by about 18 percent between 1975 and 1985. It became quite stable in 1985 at around 55 percent. Since 1975, the shares of nuclear generation and natural gas have increased at the expense of the share of oil. The Japanese government encouraged research and development activities in so-called "new energy," such as geothermal, wind, wave, and solar-generated electricity. In 1980 the New En- ergy Development Organization (NEDO) was established to support these activities. Although tremendous efforts have been made to increase the share of energy supplied by "new energy," it is still negligible (1.3 percent in 1996). This is mainly because the cost of new energy is much higher than conventional forms of energy, such as oil, gas, and coal. Japan's "Win-Win" Experience in Energy Conservation Rationalization in energy usage reduces emissions of CO2 and other pollutants such as SOx and NOx. These pollutants are emitted when fuels combust; therefore, less use of energy automati- Review of Environmental Policy and Energy Conservation Policy in lapan 37 cally means fewer emissions of pollutants. Antipollution investments usually involve end-of- pipe technologies, such as flue gas desulfurization. By themselves, these investments usually do not contribute to firms' profits. In contrast, the adoption of clean production technologies not only reduces the emission of pollutants but also contributes to profits. Energy-saving invest- ments can be regarded as clean production technology investments; they reduce CO2, NO., and SO, emissions and contribute to the profits of firms through reduction in energy consumption. In fact, the bulk of Japan's reductions in SO. emissions in the 1980s materialized through energy saving. According to a study by Imai (1998,24), "a steel company 'S Steel' in l(itakyushu City, Japan, attained more than 30 percent of its total SO, reduction from 1970 to 1990 through energy and materials saving and over 40 per cent from the use of clean fuel (that is, converting from heavy oil to liquefiedi petroleum gas to liquid natural gas); end-of-pipe technologies ac- counted for 25 percent." Furthermore, simulation results from a macro energy demand model incorporating a pollution damage function show that the bulk of reduction of SO2 emissions in Japan between 1975 and 1996 was achieved by switching from high sulfur content fuels to low sulfur content fuels, and by energy conservation (Committee on Japan's Experience, 1997). Stakeholders' Varied Roles The previous sections discussed the evolution of environmental policy and energy conserva- tion policy in Japan and its applicability to developing countries and transition economies. In this section four of the most important aspects of the Japanese experience will be analyzed and evaluated. Public Sector Divisions of Labor: National and Local Government Traditionally, Japan's national government, on the one hand, establishes the framework for pub- lic policies through legislation and regulation and, on the other, provides local governments with financial and technical support. Local governments are entrusted with the implementation of public policies, and the fiscal system makes possible this role: the national government disburses necessary funds to local governments after collecting them through taxes and other methods. Under the constitution, local governments are authorized to enact ordinances as long as they are not in conflict with national laws. Those ordinances can be more stringent than the nationwide standards. Japan's environmental policy reflects this relationship between national and local govern- ments. Environmental degradation is usually regarded as a local problem at first. Because pollu- tion is perceived in specific areas of the nation, local governments naturally are the first to be- come aware of it and take countermeasures. For example, the Minamata and Yokkaichi diseases first attracted local attention. To address current environmental problems, local governments have implemented pollution control ordinances, established extensive monitoring networks, and performed environmental impact assessment. Antipollution ordinances by local governments first appeared around 1950 in the Tokyo and Osaka metropolitan areas, where industry is heavily concentrated. Now all prefectures and ma- jor municipalities have enacted them. National laws for pollution control introduced in the late 1960s and 1970s enabled local governments to invoke ordinances with more stringent emission standards if it was determined that public health and living conditions would not be adequately protected by the nationwide general standards. Reliance only on nationwide uniform standards is not sufficient since environmental problems differ from place to place, depending on natural, economic, and social circumstances. A majority of the local governments introduced emission standards that were stricter than the national standards. 38 Protecting the Global Environmenzt Another unique characteristic of the Japanese approach to pollution control at the local gov- ernment level is the use of voluntary agreements between local govemments and businesses. Local governments negotiate with individual firms to reach detailed written agreements on pol- lution control measures. In such a "Pollution Control Agreement," quantitative emission levels are determined based on consideration of technological and technical issues and discussion among the stakeholders, including civil activists. Although such an agreement is nothing more than a "gentlemen's agreement," it, in effect, functions like a legally binding agreement. In order for businesses to operate smoothly, they must obtain the approval and cooperation of local govern- ments and communities; the agreement is equivalent to local government approval and commu- nity support for activities in the area. Almost all businesses comply with these agreed emissions standards, and some accept spot inspections to ensure that they are in compliance with all regu- lations and to avoid problems in the future. From the perspective of local governments and resi- dents, this system is quite favorable because the standards are tailored to local geographical, social, and economic conditions. Since details of an agreement are worked out through intensive discussions by businesses, local governments, and residents, this process enhances public aware- ness as well. Compliance with laws, regulations, pollution control ordinances, and voluntary agreements depends largely on their enforceability. Major prefectures and municipalities in Japan have de- veloped extensive and sophisticated monitoring systems. Air and water quality is constantly monitored at stations set up by local governments. Emission levels of factories are recorded by the firms according to national law, which requires them to have pollution control managers and controllers and to make periodic reports to the local government. Some factories over a certain scale are required to have automatic monitoring systems that are directly linked to local govern- ment agencies through telemetric systems. The Environmental Impact Assessment Law was enacted in 1997. Before then Japan had no uni- form legislation for this. The national government had only a cabinet decision, Implementation of Environmental Impact Assessment, which was introduced in 1984 to establish nationwide proce- dures. Environmental impact assessment was conducted in Japan as early as 1961 at the local government level. These were internal studies that lacked public involvement. However, envi- ronmental impact studies have become indispensable when making industrial development plan proposals to local communities. In general, the local government requires that environmental impact studies be open to the public for review before projects are finalized. Environmental im- pact studies are often followed by voluntary pollution control agreements. This has become a common practice in many local governments, making it a tool with which to provide a sound scientific basis for taking appropriate pollution control measures. Under the Japanese approach, local governments undertake the implementation and enforce- ment of the framework through ordinances and other measures such as on-site inspections. Envi- ronmental issues are resolved through cooperation between local governments, industry, and citizens. Implementation of Japanese environmental policy owes its success to the usually excel- lent training of local civil servants and their strong desire to serve the public good. The fact that local legislatures, including their heads, are subject to elections contributes to environmental sen- sitivity and awareness. Local governments differ from country to country, but they are the first to recognize environ- mental problems-problems that exhibit the specific characteristics of each region. Therefore, the environmental law and ordinance enforcement capacity of local governments in developing coun- tries and transition economies needs to be developed. The political and social climate in each country will determine the effectiveness of pollution control agreements between businesses, local governments, and citizens. Raising public awareness, especially through information shar- ing and dissemination, can help make implementation feasible. Review of Environmental Policy and Energy Conservation Policy in Japan 39 Private Sector Initiatives The Polluter Pays PrinciplE (PPP), which actually guarantees fair competition among polluters, forms the basis of Japanese environmental policy. Strict regulations on industrial activities, based on this principle, contribute to the introduction of equipment, technologies, and a management system for effective pollution control. In this way environmental protection measures are intro- duced into the market. The response to environmental problems is dependent on many factors: the legal system, technologies, and human and financial resources. Japanese businesses attach great importance to their resolution through technology development supplemented by innova- tive management and human resource development. TECHNOLOGY DEVELOPNMENT AND IMPROVED MANAGEMENT. While it is true that Japan's com- mitment to pollution control is centered on the development of sophisticated end-of-pipe tech- nologies, it is only partially true. Japanese environmental policy is distinguished by its emphasis on technological and technical development. Its preferred course for reducing the burden on the environment has not been .o take steps to reduce production but rather to rely on innovation to reduce environmental burdens and increase production at the same time. Development of this technology requires a viable market for environment-friendly equipment. In the early days when environmental degradation was primarily caused by harmful efflu- ents, all that was necessary was to regulate the discharge of those materials. Governments only had to regulate the businesses that were discharging pollutants. Businesses addressed the pollu- tion problem almost entirely with end-of-pipe solutions (for example, by installing desulfuriza- tion equipment to remove SO, from smoke, or purifiers to clean wastewater). This method was effective at the time in significantly reducing the number of polluters. However, the effects of urban waste disposal and c:limate change worsened. To cope with this problem, businesses had to address every activity of their operations, from R&D to the production process to sales; in fact, clean production technologies, namely green technologies, were developed alongside end-of- pipe technologies. The Japanese private sector has learned not only that environmental protection anci economic growth can coexist but that there is a large potential market for environmental technologies. The typical Japanese response to environmental issues has been to see them as part of a lirger strat- egy of supplying goods and services. Responses to air and water pollution, energy crises, and global warming are much more than environmental policy: they become production standards. Adopting consistent domestic standards is essential to helping industry leam what is necessary to simultaneously achieve profits and meet environmental obligations. Environmental protec- tion has evolved into a strategy for enhancing economic competitiveness. Regulatory standards in Japan, compared with other developed countries, have been high and there was concern that the high cost would weaken industry's competitive edge. However, tightened regulation standards can serve as a business incentive and create competition in the marketplace. A good example is the Japanese automobile industry. To meet air pollution stan- dards, the industry developed vehicles that emit less NO, and SO.. Emissions in the late 1970s were less than those specified in the 1978 emission control regulations of the United States. These regulations in Japan fostered the technological development of the Japanese automobile industry for effective emission control. They also brought secondary benefits such as combustion control and quality control. Improvement in fuel efficiency positioned the industry to capitalize on the sudden worldwide demand for fuel-efficient automobiles when the oil crises struck. The Japanese automobile industry grew rapidly from the 1970., to the 1980s. Sales of cars with high fuel efficiency-and lower pollu- tion levels than were mandated-soared in the U.S. market as well as the Japanese market. 40 Protecting the Global Environment Managerial capacity is needed as well as technological innovation in order to deal with envi- ronmental issues at the industry level. The effect of technological development can be very lim- ited if top or middle-level management is not willing to take action to control pollution. Manage- ment, of course, needs to be supplemented by technical experts at the operation level. Human resource factors, namely management and technical experts, have played major roles in the intro- duction and improvement of pollution control equipment and green technologies in Japan. A system of pollution control managers and controllers has contributed to businesses' tech- nology development and capacity building. The Law Concerning the Improvement of Pollution Pre- vention Systems in Specific Factories (1971) requires that factories over a certain size appoint a pollution control manager and a controller who have passed a national examination. Industry is obliged to keep records of operational management and the effluents from specified facilities, while pollution control managers are required to check fuel and raw materials and to inspect and repair facilities. These personnel have a vested interest in complying with emission standards set by regulations and ordinances. In case of noncompliance, they can be relieved of their positions, and their employers may face fines. The technical expertise of pollution managers and control- lers in this self-monitoring system supports generic changes in production processes that im- prove quality, reliability, and controllability, as well as cost factors (reducing material inputs and the need to clean up toxic wastes). In addition, strict record-keeping requirements on effluents enables local governments to understand the actual and potential sources of pollution in their areas, thereby providing the information necessary to conclude pollution control agreements and/ or introduce ordinances. Recently, new environmental criteria in the market such as International Standards Organiza- tion 14001 have helped establish and maintain environment-friendly management systems.7 The public is increasingly putting strong emphasis on the environmental performance of enterprises, and large firms that have obtained ISO 14001 now request that their suppliers, most of which are small and medium-size enterprises, meet certain environmental criteria. End-of-pipe solutions work effectively as initial fixes to environmental degradation, but this kind of environmental policy eventually reaches a point of diminishing returns-the stricter the regulations become, the more technology and technical innovations are needed. In many cases the latest green technologies and clean production innovations offer superior production effi- ciency while contributing to pollution control and resource and energy conservation. Thus tech- nologies that optimize environmental and economic objectives in the production process create win-win opportunities. Replacing outdated equipment with state-of-the-art equipment is expected to have a huge impact on developing countries and transition economies. LEGAL LIABILITY. Business activities are considered unlawful if they damage another party, and the aggrieved is entitled to compensation by the party responsible. This responsibility to compensate victims for damage arises only for unlawful acts that are done deliberately or know- ingly. However, it was difficult for pollution victims, who are outsiders, to prove a causal rela- tionship between the damage (probably arising from pollution) and the illegal activity. Japanese courts have changed their way of adjudication in order to combat the proliferation of environmental destruction. Strict liability was introduced in 1972 by the Air Pollution Control Law and the Water Pollution Control Law. These laws required businesses to compensate victims of pollution, even when there was no evidence of direct fault, if it was found that considerable damage was possibly caused by the company. The Pollution-Related Health Damage Compensation 7. The ISO is an organization that certifies compliance by firms with specific management and produc- tion standards. ISO 14001 is the set of standards that focuses on environmental improvement. Review of Environmental Policy and Energy Conservation Policy in Japan 41 Law of 1973 responded to victims' need for a comprehensive system that provides them with support for living and medical expenses. All of these changes in the rules of compensation-by reducing the costs of filing for indemnity and increasing the costs for wrongdoing by businesses- have made it easier for victims to claim damages. The new liability regime prompted enterprises to take severe measures to prevent pollu- tion. Damage to health is often irreversible: once the damage has occurred, the compensation is expensive and must be paid for many years; therefore, company management treats it as a mid- or long-term risk. Th is has been inducing industry to prevent pollution and thereby re- duce a financial burden on itself. The experiences of Japanese industry demonstrate that pollu- tion prevention measures can proceed hand in hand with the pursuit of profits, or at least with the reduction of costs. In Japan polluters bear the financial burden not only for pollution prevention measures but also for restoration of the environment and compensation to those suffering from pollution. Given the rapid speed of environmental degradation in developing countries and transition economies at the height of their economic growth, and the significant damage generated by delayed re- sponses, these countries slhould incorporate legal liability into PPP as a preventive measure that is less costly than symptomatic measures. Indeed, according to a Japan Environment Agency study, if the timing of investment for flue gas desulfurization had been delayed six to ten years in Japan, damages would have peaked at two to three times their actual amounts (Committee on Japan's Experience, 1997). VOLUNTARY COMMITMENT. In addition to setting up special units for dealing with global envi- ronmental issues, many enterprises and industries have adopted their own guidelines or action plans. The Keidanren (Federation of Economic Organizations) is Japan's top business associa- tion. It has published Global Environmental Charter (1991), Keidanren Appeal on the lEnvironment (1996), and Voluntary Action Plan on the Environment (1997). The Voluntary Action Plan establishes numerical targets for reductions and recycling of waste and addresses the problem of global warming-not only for the manufacturing and energy industries, but also in distribution and construction. Enterprises that do not comply with emission standards tend to be criticized by the public. In the Minamata disease and Yokkaichi asthma cases, a huge cost to the companies other than com- pensation for health damage was the lost public esteem, something that is very important in Japan. Japanese companies are very sensitive to the risk to their reputations, and they want to make sure that there are nc, boycotts or bad publicity regarding their products or practices. There- fore, a steady commitmerLt to pollution control and dialogue about the environment with the local community help maintain an enterprise's good public image. Interactions between the lPublic and Private Sectors Checks on business, like the regulation of emissions standards and the requirement for compen- sation, do not constitute a[l of Japan's pollution control measures. Also beneficial are business- friendly policies like long-term low-interest loans and tax exemptions. In addition to using strict guidelines, the government has extended economic incentives for businesses to install pollution control equipment. SUPPORT FOR POLLUTION COUNTERMEASURES. The government provided particular assistance to small and medium-size enterprises for taking pollution countermeasures. This policy was de- signed to reduce the damage from pollution without dampening the dynamism of these enter- prise. The Japan Environment Corporation (established in 1965 as the Environmental Pollution 42 Protecting thze Global Enivironmient Control Corporation and renamed JEC in 1992) encourages small and medium-size businesses to move out of the cities to newly created industrial areas. The Japan Finance Corporation for Small Business and special funds operated bv local governments also have low-interest loan programs for small enterprises The market for manufacturers of pollution control equipment was ensured by tax exemptions and other incentives in the 1970s. Thereafter the market expanded rapidly. Accelerated deprecia- tion for pollution control equipment or facilities is granted under the Exceptions to the Tax Lazv Act. It allows deferred payment of taxes, providing an effect similar to that of tax reduction. The share of capital investment that went to pollution control equipment approached 17.7 percent in 1975. The vast investment demands of large companies were realized partly because of loans from the Development Bank of Japan. Without DBJ's support, even large companies would have found it difficult to finance antipollution investments that did not contribute to their profits directly. DBJ loans for antipollution measures and other environmental provisions amounted to 205.5 billion yen in 1975 (26.8 percent of all loans for the period and the maximum proportional outlay for antipollution loans to date). There was a high concentration of loans in this sector from FY 1973 through FY 1976. After industries met the deadline for costly end-of pipe measures, this amount began to decline in the latter half of the 1970s (Figure 3-14). Annual totals for antipollution loans were around 30 to 40 billion yen, and despite slight fluctuations from varying interest rate levels, the capital requirement has been relatively stable. Two immediate effects of DBJ loans are more available capital and investment incentives through loans at below-market interest rates. Capital availability arises directly through the allo- cation of DBJ loans and indirectly through DBJ loans inducing private-sector loans. In the 1970s many companies were not in a position to invest in non-profit-returning activities such as pollu- Figure 3-14. Antipollution Investment, 1973-96 Investment in billion yen Percent of capital investment in pollution control equipment 1,000 1 8 10I Investment 900 / Investment ratio 16 800 14 700 _1 600- 10 500- 400- 6 300 -' 200 H-I Iw 0 0 1973 1976 1980 1984 1988 1992 1996 Source: Ministry of International Trade and Industry (1998). Review, of Environt menetal Policy and Energy Conserzation Policy in Japan 43 tion prevention. This was partly due to an immature long-term financial market and partly due to the decline in economic growth after the booming 1960s. By supplying the necessary capital, governmental financial institutions made possible the installation of antipollution facilities. Competition in the de, elopment of pollution control technology was spurred by the expan- sion of the market and graclual strengthening of regulations. The Science and Technology Agency, the Ministry of International Trade and Industry, and other agencies helped by subsidizing re- search and development. STEP-BY-STEP APPROACH. Japan's step-by-step approach to setting of standards is a major rea- son for high compliance, a lthough there was criticism that the country acted too late and too little in some areas. The incremental approach enabled both the public sector and the private sector to prioritize environmental problems and concentrate on the most serious and urgent ones. It al- lowed the private sector time to develop efficient, manageable, and affordable technologies in anticipation of the next regulatory step. In fact, technology development has been by way of incremental innovation retther than sudden breakthroughs. Furthermore, the step-by-step ap- proach has enabled the public sector to assess the actual strengths and weaknesses of existing mechanisms to control po]lution before considering new ones. This kind of approach has succeeded in Japan because of collaboration between the public and private sectors. The legal and regulatory process has tended to be dominated by scientists, lawyers, and economists. if, however, the focus is to expand to technological and technical inno- vation, the process should include more engineers and industrial managers, providing for a mix of skills. Often committees consisting of representatives from national and local governments, the pri- vate sector, academia, and civil activists are set up to coordinate the stakeholders' interests in the formation of environmental measures as wetl as the mid- and long-term national visions of eco- nomic development and environmental policy. In these committees industries often provide tech- nical information to the public sector that is used to develop rational emission standards; other- wise the public sector does not have enough detailed information about technologies and techniques. Governments, in turn, inform the local community about the outcomes of R&D, while civil activists urge both governments and enterprises to take appropriate action. Those commit- tees must reach and convey their consensus on when, to what extent, and how to make commit- ments to particular environmental issues. In such a manner Japan has been responding to new environmental realities in an organized fashion. Such an approach often results in the formation of new joint research initiatives by the gov- ernment, businesses, and universities. For example, with respect to energy conservation, most technology development policy has been overseen by the New Energy Development Organiza- tion. Its original mission was the commercial development of new energy technologies that would mitigate Japan's dependence on imported energies, but this was expanded in 1990 to include the development of technologies for global environmental protection. NEDO operates with govern- ment money and, in part, with participation by employees of private businesses. This type of collaborative mechanism is quite common in Japan and is not confined to environmental initia- tives. NEDO's major projects are the Sunshine Project (to discover new and recyclable energy sources) and the Moonlight Project (to achieve greater energy efficiency). Solar cell systems and coal liquefaction and gasification technologies are successful outputs from these initiatives, sub- sidized through partnerships between the public and private sectors. For example, a part of taxes on oil and electricity sales is earmarked to go to a Special Account that subsidizes research and deployment of new and clean energy sources. The private sector cannot raise all of the research and development funds it needs, let alone what the nation needs. Public support for research, particularly for the basic end of the research 44 Protecting the Global Environment spectrum, should become a bedrock of environmental policy in developing countries and transi- tion economies, where the overall R&D budget is badly skewed toward only a few objectives such as national defense. Serious consideration should be given to creating programs with many stakeholders in environmentally relevant industrial R&D. The guiding criterion should be to support critical technologies of general applicability in areas where private R&D cannot keep pace with national needs. Role of Communities During the Japan's rapid economic growth, air pollution and water contamination damaged the health of its citizens. The ensuing activism of victims and ordinary citizens began to make a difference. ACTIVISM OF CITIZENS AND NONGOVERNMENTAL ORGANIZATIONS. Citizens' activism in the local community, supported by judicial decisions, became the driving force behind the pollu- tion control measures taken by governments and industry in Japan. Scientists and lawyers supported the activism, making it difficult for governments and industry to ignore. Tragic inci- dents attracted public sympathy and gained coverage in the national press. However, environ- mental measures were taken only after the local people complained and only after the damages had become irreversible. Nongovernmental organizations (NGOs), a more sophisticated form of citizens' activism, have been weak in Japan. After some of them joined the movement that opposed the construction of Narita Airport in the 1970s, NGOs expanded their activities to include natural conservation and recycling, for example. Though they are now focusing on global environmental issues such as tropical forests and biodiversity, when the pollution-related health damage appeared in the 1960s they usually lacked sufficient knowledge and financial resources. Even now they do not have a large membership and do not have legal standing in courts on environmental issues. Neither are they financially supported by public authorities: for example, few NGOs satisfy requirements for tax deductions on donations. MASS MEDIA AND EDUCATION. Scientific and technical investigations of pollution and its ef- fects on public health and natural resources need to be conducted to help with monitoring and preventive strategies. It is necessary to not only collect and assess information on the causes, effects, and current status of pollution but also to disseminate such information to the govern- ments, industry, and citizens. In Japan the mass media have played a pivotal role in raising public awareness. The public's understanding of pollution has been heightened by broad media cover- age of activism on behalf of pollution victims and by the lawsuits that have followed, which have pressured the government and industry to take appropriate measures. Pollution has long been taken up as an important political issue, and a national consensus regarding the importance of knowledge about pollution-related damages has been achieved. Facing growing public concern about environmental degradation, Japan's Environment Agency, in cooperation with the Ministry of Education, has undertaken measures to improve education on environmental issues. At the forefront of civil activism opposing certain industrial complexes, schoolteachers were again among the first to recognize the importance of learning about pollu- tion. Since the late 1960s they have incorporated information about the environment into school courses on history, natural science, and physical health. The guidelines for elementary and high school education were amended in 1989 to include a provision recommending instruction on the environment. Although such curricula remains voluntary, the sad stories of the Minamata, Itai- Itai, and Yokkaichi diseases have been deeply implanted in the minds of all Japanese citizens, at least in their compulsory social science classes. Review of Environmental Policy and Energy Conservation Policy in lapan 45 Consumer education enables citizens to choose services and goods based on their effects on the environment. In other words, it develops the public's environmental consciousness. For this purpose, the Environment Agency and the Ministry of Education work closely together to pro- duce television broadcasts and films on the environment, sponsor seminars, and distribute teach- ing materials. Most public e ducation on the environment, however, is conducted by local govern- ments. Their information dissemination networks utilize Local Environmental Conservation Funds to develop a database of information on environmental education activities. With the rise in consumners' consciousness of the environmental impacts associated with the production of goods and services, the Ecomark Labeling System was introduced. For a product or service to be eligible for the label, its use and disposal should improve or conserve the environ- ment by entailing minimum or no pollution. During the past three decades, public awareness and concern about environmental issues in Japan have substantially increased. The fundamental reasons are the high levels of general edu- cation (the high literacy rate resulted in a well-informed population) and the mass media, which freely expressed critical views to put pressure on politicians, bureaucrats, and industry to take environmentally sound actions. Developing countries should establish a framework for releasing and sharing information, both by the media and in the education system, so that they can avoid bitter confrontation and, mn ore importantly, irreversible environmental consequences. Conclusion Japanese environmental policy has been criticized for being too little too late. In fact, the govern- ment and the public did not know enough to recognize the nature and severity of damage when it occurred. As a result, environmental pollution rapidly worsened as the economy grew. Inci- dents of health damage would have been much fewer had Japan more quickly and appropriately responded to the issues. Because Japan successfully integrated environmental protection into its economic system after experiencing rampant pollution, other countries may think that dealing with economic development first and coping with environmental issues later is a plausible path. However, significant advancements in knowledge, information, and technologies have be- come widely available since the 1970s when Japan tackled the environmental problems created by development. For developing countries to adopt a strategy of "first develop, then clean up" might no longer be justifiable because the costs of environmental protection have been reduced substantially. The speed of environmental degradation at the height of economic growth in developing coun- tries and transition economies is rapid, and delays in response generate significant damage. It is now common knowledge that the use of preventive measures is a far more effective and less costly way to fight pollution than after-the-fact efforts. Once pollution has occurred, it is extremely diffi- cult, and often impossible, to return to the status quo. Furthermore, because pollution affects hu- man life and the ecosystem, the value of which is especially difficult to measure, the most practical policy is to insist that pollution prevention equipment be installed when factories are built. It is sometimes said that Japan has emphasized pollution control and energy conservation and only recently addressed global environmental issues such as global warming and acid rain. Yet Japan's experience demonstrates that government policy and private sector initiatives in tech- nology development and production process innovation for pollution control and energy conser- vation can positively affect the global environment. For example, air pollution control is linked to fossil fuel combustion, which has already been targeted by measures on energy conservation and reduction of CO2 emissions. In turn, energy conservation has contributed to rises in productivity as well as air pollution control and global warming prevention. The Japanese experience shows that there are win-win opportunities for developing countries and transition economies. 46 Protecting the Global Environment References Committee on Japan's Experience in the Battle against Air Pollution. 1997. Japan's Experience in the Battle against Air Pollution: Working Towards Sustainable Development. Tokyo: The Pollution-Related Health Damage Compensation and Prevention Association. Energy Data and Modeling Center. 1998. Energy and Economics Databook. Tokyo: Energy Conservation Center. Environment Agency. 1991. Twenty-Year History of the Environment Agency (in Japanese). Tokyo. .1998. TheJapanese Government White Paper on the Environmlent (in Japanese). Tokyo: Printing Bureau, Ministry of Finance. Goodstein, Evan S. 1999. Economics and the Environment. Englewood Cliffs, N.J.: Prentice-Hall. Hamamoto, Mitsutugu. 1998. Environmetntal Regulations and Corporate Behavior: Essays on Environmental Policy Choice and Dynamic Adjustments of Firms in Japan (in Japanese). Ph.D. diss., Kyoto University. Imai, Senro 1998. "Role of Industry: Standards and Technology." In Wilfrido Cruz, Kazuhiko Takemoto, and Jeremy Warford, eds., Urban and Industrial Management in Developing Countries: Lessons from the Japanese Experience. EDI Learning Resource Series. Washington, D.C.: The World Bank. International Energy Agency. 1991. Greenhouse Gas Emissions: The Energy Dimension. Paris: Organization for Economic Cooperation and Development. . various years. World Energy Outlook. Paris: Organization for Economic Cooperation and Develop- ment (published annually). . 1997. Energy Balances of OECD Countries, 1995-96. Kazuhiro, Ueda, T. Oka, and H. Niizawa, eds. 1997. Economics of Environmental Policy: Theory and Practice (in Japanese). Tokyo: Nihon Hyoronsha. Keidanren (Federation of Economic Organizations). 1991. Global Environ metntal Charter. Tokyo. 1996. Keidanren Appeal on the Environment. Tokyo. 1997. Keidanren Voluntary Action Plan on the Environment (Final Report). Tokyo. Ministry of International Trade and Industry. 1998. Business Investment Plans of Major Japanese Industries (in Japanese). Tokyo: Government of Japan. Moore, Curtis, and Alan Miller. 1995. Green Gold: Japan, Gernmany, the United States, and the Racefor Environ- mental Technology. Boston: Beacon Press. Nippon Steel Corporation. 1998. Environment Report (in Japanese). Tokyo. OECD (Organization for Economic Cooperation and Development). 1994. OECD Environmental Perforniance Reviews: Japan. Paris. Tokyo Electronic Power Company. 1988. Environment Action Report: Action toward Energy and Environmiental Problems (in Japanese). Tokyo. Wuebbles, D. J., and J. A. Edmonds. 1988. A Primer on Greenhouse Gases. TRO40, DOE/NOB. Washington, D.C.: U.S. Department of Energy. Part II Case Studies 4 Environmental Conservation by Japan's Iron and Steel Industry: An Example of the Nippon Steel Corporation Teruo Okazaki Tomohiko Inui Akie Takeuchi Reflecting the economy's rapid growth, iron and steel production in Japan increased significantly in the 1960s, expanding from 23 million tons in 1960 to a peak of almost 120 million tons in 1973. Since then production has leveled off at around 100 million tons. The slowdown in Japan's eco- nomic growth following the oil shocks and the shift in economic structure from manufacturing industry to services are contributing factors. Although Japan exported more than 30 percent of its steel during the 1970s and early 1980s, the export ratio dropped to about 20 percent in the mid-1990s. Worldwide iron and steel produc- tion in 1996 was 750 million tons. Of that amount Japan accounted for about 13 percent, the second largest share following China. (Japan was the world's largest producer until 1995.) The United States accounted for 12.6 percent; the Russian Federation, 6.5 percent; Germany, 5.3 per- cent; the Republic of Korea, 5.2 percent; and Brazil, 3.4 percent (Figure 4-1). Nippon Steel Corpo- ration, Japan's largest steel producer, contributes about 25 percent of domestic production. Steel consumption and production are closely related to economic development. They rise in the early stages because huge amounts of iron and steel are required as roads, railways, and other infrastructure facilities are rapidly built. This is expected to be the case in many developing coun- tries as they experience economic growth. With the expansion of production activities in these countries, environmental issues will become serious concerns. Steel making is an energy-inten- sive industry and uses large amounts of coal. When coal is used, pollutants such as sulfur oxide (SO) and nitrous oxide (NOx) are released, as is carbon dioxide (CO2), which causes global warm- ing. Japan's iron and steel industry has succeeded in reducing such hazardous pollutants and CO2 emissions significantlv while sustaining high production levels. Japanese companies' efforts to address environmental problems provide valuable lessons for developing countries. Nippon Steel Corporation (NSC) is used as an example. Environmental Regulal ions and Agreements With the dramatic economic development that took off in the 1960s, Japan faced various environ- mental problems, such as air pollution and water contamination. At the same time rising living standards and population ,oncentration in the cities led to urban pollution in the form of vehicu- lar emissions and traffic noise. People began to focus more attention on environmental issues as pollution became more serious. In 1967 the Basic Lawfor Environmental Pollution Control was en- acted. It formed a basis fcr promoting environmental policies. Then in 1970 specific laws con- cerning the environment were amended or enacted (Table 4-1). 49 50 Protecting the Global Environnenti Figure 4-1. Production Share of Crude Steel by Country, 1996 China Association of .ti%er 13.3'S, Southeast Asian / - Nations 1.5% . Taiwan (China) 1.6% - ' J Mexico 1.7% 13.1% Turkey 1.8% _ World total Canada 1.9% 753 million tons France 2.3% i United Kingdom 2.4%-. .i hi States India 2.9%/:\ 12 60/ Ukraine 3.1% Italy 3.2% BraLil P Russian Federation 3.4° Republic Germany 6.5% of Korea 5.3% 5.2% Source: Japan Steel Federation. These new laws were different from the previous ones in the following respects: the target area became nationwide, penalties could immediately be imposed on organizations not comply- ing with the standards, and stricter standards set by local government ordinances gained a legal basis. In 1971 the Environmental Agency was established to reinforce Japan's legal and constitu- tional foundations concerning the environment. On a global level, the first United Nations' Con- ference on the Human Environment was held in June 1972 in Stockholm. It paved the way for countries to initiate global activities for environmental conservation beyond the regional level. Since environmental issues entail regional as well as global considerations, many local gov- ernments have fully conumitted themselves to addressing them. For example, they have issued ordinances that set stricter standards than those provided by law, and they have signed pollution control agreements with individual corporations to supplement the laws and ordinances. Busi- nesses have worked hard to satisfy the stringent standards set by laws, ordinances, and agree- ments. In addition, they have taken voluntary measures to reduce pollution and to develop and disseminate pollution control technologies. Regulation via the Air Pollution Control Law and Water Pollution Control Law has been rein- forced numerous times. Many integrated steelworks in Japan are built in areas that are subject to Air Pollution Control Law limits on the total amounts of sulfur oxide (SO) and nitrous oxide (NO) and to Water Pollution Control Law restraints on the total amount of chemical oxygen demand (COD). Therefore, every piece of steelworks equipment in Japan is subject to at least one of these four types of regulation: * Nationwide uniform emissions control * Special emissions control by laws in designated areas Envirortinental Conservation by Japan's Iron and Steel lIndustry 51 Table 4-1. Environniental Regulation Laws, 1970 Environmental Responsibility of Emissionis control quality standards individual companies * Air pollution control law * Law concerning prevention of marine pollution and marine disasters * Special measures for conserva- * Sulfur dioxide, nitrogen * Law concerning irmprovement tion of the environment of Seto dioxide, particulates, water of pollution prevention Inland Sea pollutants, and noise systems in specific factories * Agricultural land soil polluttion prevention law * Noise regulation law and offensive odor control law * Waste disposal and public cleaning law Source: Japan Basic Law for Environmental Pollution Control, revision of 1970. * Reinforcement of emissions control by local governments * Restrictions on total volume (applicable only to those areas that do not satisfy environmen- tal standards). Agreements on Pollution Control In addition to these laws and other regulations, most steelworks have concluded agreements on pollution control individually with local governments, thereby subjecting themselves to strin- gent environmental standards. An agreement on pollution control is an agreement between a company and a local government based on bilateral consensus about the measures that the com- pany must take to prevent pollution, contamination, and destruction of the environment. The Memorandum on Pcllution Control that the Gotsu factory of Sanyo-Kokusaku Pulp Co., Ltd., and the Masuda factoiy of Daiwabo Co., Ltd., concluded with Shimane prefecture in March 1952 is generally regarded as Japan's first agreement on pollution control. (The name of Sanyo- Kokusaku Pulp Company was changed to Nippon Paper Industries in 1993.) However, the agree- ment that Electric Power Development Co., Ltd., and Tokyo Electric Power Co., Ltd., signed with Yokohama city in December 1964, covering planned facilities in the Negishi coastal industrial region, is the prototype of today's agreements. Since then this "Yokohama method" has rapidly spread to local governments and municipaLities all over Japan. There have been about 40,000 such agreements. A core difference distinguishes legislation and local ordinances from agreements: legislation and local ordinances apply to all operators, whereas agreements are restricted to relatively large- scale operators with high environmental loads. Furthermore, legislation and local ordinances legally bind operators to penalties in case of violation, but agreements are contract based, and they are not associated with binding powers of penalty. The advantage in adopting agreements is that laws and local ordinances must be applied consistently to all operators in the interest of public fairness. Consequently, small- and medium- scale operators with limited investment capacity face unnecessarily strict regulation. Agreements, on the other hand, are, in essence, individualized contracts with operators. They make it possible to target high-emission operators, providing flexible response on a case-by-case basis, and they 52 Protechng the Global Environment contribute to substantial reductions in environmental load. Authorities can set achievable but challenging targets for individual operators on the basis of specific considerations such as the individual company's technical capability and financial standing. A disadvantage of agreements is that they often contain confidential terms, which cannot be disclosed to the public. This creates concerns about transparency. However, local authori- ties are required to publicly release data on emissions of different polluting substances and to monitor ongoing trends in emissions, so that it is possible to externally verify the effective- ness of agreements. Pollution prevention agreements came into being in the 1970s in the context of worsening pollution and today are prevalent throughout Japan. Initially not all operators were eager to sign these agreements. In order to maintain friendly relations with local residents in the vicinity of factories, however, operators altered their course to favor environmental protection and agreed to enter into pollution prevention agreements. In response to scathing public criticism of pollu- tion problems, these agreements stipulated stricter controls than did existing legislation and local ordinances. As local residents' concerns about the environment have grown, pollution preven- tion agreements have helped improve the public image of corporations and their relationships with local communities. To illustrate how such agreements are constructed, we consider the agreements made by Nippon Steel Corporation (NSC) with two local governments, one a prefecture and the other a city gov- ernment. (Table 4-2 presents the simplified components of the NSC agreements.) The Agreement on Pollution Control was concluded between the governor of the prefecture, the mayor of the city, and the head of two NSC steelworks in June 1970. In the agreement each piece of equipment in the steelworks was assigned an emissions standard for every pollutant. Note that in such agree- ments, the standards are stricter than those set by laws and ordinances, but the target figures can vary depending on the conditions of each area and particular pieces of equipment. Ever since the conclusion of the agreement, the steelworks have complied with all its requirements, and emis- sions levels have been maintained below the standards set by laws and ordinances. Air Pollution Control Law The Air Pollution Control Law stipulates separate regulations for "smoke- and soot-emitting facili- ties" and "dust-generating facilities." The smoke and soot emissions standard is set according to the kind and scale of each facility. For example, the method to determine the SO, limit was changed from density control to k-value control (or touchdown density control, depending on the height of the chimney) in 1968 when the Air Pollution Control Law was enacted. This k-value control was made stricter on eight occasions. However, because it had a limited effect on SO, reduction, a regulation on total emissions was introduced in 1974 (Table 4-3). Table 4-2. Pollution Control Agreements between Local Governments and Two NSC Steelworks NO, concentration standard (parts per million) Soot and dust (mg/Nm3) Type of By By Actual By By Actual NSC steelworks equipment law agreement Performance law agreement performance Steelworks A Type a 260 165 162 200 150 20 Type b 200 140 100 200 100 4 Steelworks B Type a 260 260 250 200 80 40 Type b 200 200 130 200 50 4 Source: Nippon Steel Corporation. Environmental Conservation by Japan's Iron and Steel Industry 53 Table 4-3. Air Pollution Conztrol Legislation Year Law Regulation Target area 1962 Law for Smoke and Soot Density control: SO, smoke and soot Designated areas Emission Restriction 1968 Air Pollution Control Act Density control: NO,, smoke and soot Designaled areas k-value control: SO, (k-value: touch-down density control Depends on areas depends on the height of the chimney) 1970 Amendment of Air Diffusion of emission control Pollution Control Act Smoke and soot: Standard value depends Nationwide on kind of facilities NO2: Standard value depends on kind of facilities SOx: k-value control (The control was Depends on areas made stricter every year until 1976.) 1972 Amendment of Air No-fault liability to compensate for Pollution Control Act damages in cases of injury to human health or body 1974 Controls on total amount of SO, Areas unsatisfied Amendment of Air with environmental 1981 Pollution Control Act Controls on total amount of NOX standards 1982 Stricter standards on smoke and soot emissions 1993 Enactment of Special Law Reduced the total amount of NOx of Air Pollution Contiol Act emitted from cars in designated areas 1998 Revision of the Cabinet order Environmental standards on benzene on Air Pollution Control Act air pollution; control standards on dioxin emitted from electric fumaces for steel and waste incinerators Source: Japan Environment Agency. In a similar manner the Air Pollution Control Law controls emissions of nitrogen oxide. (Den- sity control was made stricter on five occasions between 1973 and 1983.) Since 1981 the law has regulated total emissions for every factory operating in highly contaminated areas. Dust-de- fined as "substances that are generated or scattered in the process of mechanical treatment such as crushing and separation, or during sedimentation"-is not suitable for control by uniform emission standards. Consequently, standards for structure, usage, and management are estab- lished separately by the type of the dust-generating facility. Water Pollution Control Law Though our focus is on air pollution, we mention water pollution regulations governing the iron and steel industry to complete our description of relevant environmental legislation. The Water Pollution Control Law applies to factories that discharge more than 50 cubic meters of effluent every day on average. It regulates the density of effluent discharged into public waters (Table 4- 4). Effluent standards for toxic substances that are harmful to human health are set at levels ten times higher than environmental quality standards; the dilution effect after inflow into public 54 Protecting the Global Environment Table 4-4. Water Pollution Control Legislation Year Law Regulation Target area 1958 Law relating to factory Density control of effluent (violators Limited to desig- effluent regulations ordered to make improvements) nated water areas 1970 Water Pollution Control Law Penal provisions for noncompliance All public waters with standards; allows for severer standards by ordinance 1972 Amendment of Water No-fault liability to compensate for Pollution Control Law damages is introduced for cases of injury to human health or body 1978 Amendment of Water Introduction of total effluent control Tokyo Bay, Ise Bay, Pollution Control Law system; restrictions on total volume and Seto Inland Sea of COD were made stricter for every target year (reinforcement of regulatory standard) 1978 Amendment of Water Prohibits infiltration into ground of Pollution Control Law effluent or waste liquid containing harmful substances 1993 Revision of the Cabinet Reinforcement of harmful substance order on Water Pollution regulations; enlargement of scope of Control Law regulated items; standard reinforce- ment concerning lead and arsenic 1993 Revision of effluent standard Effluent standards on nitrogen and Limited to inner phosphorus in sea as part of eutro- bays phication control measures - No specific target area mentioned in legislation. Source: Japan Environment Agency. waters is taken into account. To control organic pollution, this law adopts biological oxygen de- mand (BOD) for effluent discharged into rivers and chemical oxygen demand (COD) for effluent discharged into lakes and sea areas. BOD is the amount of oxygen consumed by microorganisms in water; an index shows the amount of organic substances that can be decomposed by microor- ganisms in water. COD is the amount of oxygen consumed by certain oxidants; an index shows the amount of organic substances in water. COD control by the Water Pollution Control Law on effluents discharged from the steel industry has been made stricter on three occasions (1979, 1987, and 1991). Japanese Steel Industry's Efforts to Protect the Environment Before examining environmental protection initiatives by the Nippon Steel Corporation, we ex- plain the harmful substances generated in the steel production process. Although it is important to keep such byproducts to a minimum, there is no way to eliminate them. They should be re- cycled as much as possible-for example, by utilizing collected dust as a material in the steel- making process or by building a water recycling system. Byproducts include air pollutants, water pollutants, and wastes. Environmental Conservation by lapan's Iron and Steel Industry 55 Air Pollutants * SO.: Generated by the combustion of the sulfur content in materials and fuels; the sintering process is a major source * NO,: Generated by combustion; the sintering process is a major source * Smoke and soot: Generated by combustion * Dust: Generated by transportation of fuels and materials, and scattered by wincl from stor- age facilities such as yards. Water Pollutants * Suspended Solid (SS): Generated in the waste gas dust collection process and the hot ma- terials direct cooling process X Oil: Leakage of various oils used in machines, generated as rolling oil in the cold rolling process * COD: Generated as ammonia water in coal coking, and as plating wastewater from cold rolling * Acid and Alkali: Generated in the cold rolling process (acid cleaning) and the finished product acid cleaning process. Wastes * Slag: Generated in the refining processes for blast furnaces, basic oxygen furnaces, and electric furnaces * Sludge: Byproduct processed by water treatment facilities * Dust: Collected by dust collectors. Development of Energy Conservation Technologies Energy saving is the most efficient and effective way to prevent air pollution. It not only reduces pollutants but also entails the use of exhaust gas treatment equipment that is more compact, thereby reducing investment and running costs. Technology that tries to solve environmental problems by streamlining production and cutting production costs is called clean production technology. By contrast, tecmnology that merely reduces emissions without streamlining produc- tion is called end-of-pipe technology. Both end-of-pipe technology and energy-saving technolo- gies have been extensively used to reduce emissions of sulfur oxide and nitrogen oxide. The major sources of SO. are sintering machines, reheat furnaces, and boilers. Using low- sulfur fuels and materials can reduce SOQ. For example, low-sulfur iron ore may be used for sintering, or desulfurization methods may be applied to coke oven gas (COG) or flue gas. Al- though nitrogen oxide is generated by all combustion equipment, the sintering machines and coke ovens are two major sources. Combustion improvement from a low-NOx burner and flue gas denitrification technology may be used to control nitrogen oxide. For desulfurization of sintering flue gas, the Nippon Steel Corporation initially tried to adopt the lime-gypsum technology. Later, however, the company developed the magnesium hydroxide method after discovering its superior post-treatment efficiency. The greatest challenge was how to treat desulfurized water effectively. NSC has succeeded in developing a low-cost desulfuriza- tion process. Magnesium hydroxide has excellent load characteristics because of its high reaction rate, making it possible to achieve a high desulfurization rate by using a simple, compact absorp- tion tower. Moreover, the tower's remarkable ability to remove dust helps reduce visible smoke density. Since the absorption tower is compact, it requires little space and can easily be combined with a chimney. In this method the required absorption liquid has low adhesion because sintering dust slurry, which tends to stick and choke, is not present. Therefore, the maintenance efficiency of the 56 Protecting the Global Environment magnesium hydroxide method is significantly better than the lime-gypsum method. Since little pressure is lost in the magnesium hydroxide method, the cost for related equipment can be reduced. Lastly, the absorbent magnesium hydroxide is a stable alkali material that can be easily handled, and the environmental load that this method places when discharged into the sea is very low because the salts it produces (magnesium chloride and magnesium sulfate) are the main components of seawater. The Nippon Steel Corporation improved the so-called "Takahax" method of desulfurizing coke oven gas. It also developed its own method, called "Hirohax," for treating byproduct liquid waste. The combined "Takahax-Hirohax" method has numerous advantages. First, byproducts pose no environmental problems because nitrogen and sulfur in the coke oven gas are removed to form ammonium sulfate. Second, the method needs no external fuels because it uses stored reaction heat. Finally, operational efficiency is high because of the short treatment process and the compactness of the equipment. Investment in Environmental Pollution Control Measures Environmental investment (about 1,500 billion yen) accounts for about 10 percent of the iron and steel industry's total investment from 1971 to 1994. About 62 percent of this amount was devoted to air pollution control (Figure 4-2). Reflecting stricter standards, capital investment in pollution control increased particularly rapidly between 1974 and 1976. The iron and steel industry's in- vestment in environmental pollution control measures peaked in 1976 at more than 250 billion, about 34 percent of total investment in such technologies by all industries (Figure 4-3). NSC invested almost 400 billion yen in pollution control measures from 1970 to 1997 (Figure 4-4). The huge investments in the first half of the 1970s reflected the availability of new tech- nologies. For example, the iron and steel industry established the Flue Gas Desulfurization Test Figure 4-2. Investment in Environmental Protectioni by Japani's Iron and Steel Indlustry, by Area of Investment, 1974-94 Total Air- 1,539 billion yen 62/ Water 17% Source: Japan Steel Federation (1997) Environmental Conservation Iby fapan's Iron and Steel Inidustry 57 Figure 4-3. Investment in Environmental Protection by Japan's Iron and Steel Industry, by Year, 1971-94 Billion yen 300 250 ii 200- 150- 100 U 50 0 71727374 1711 i* 1 E I 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 Source Japan Steel Federaticn (1997). Figure 4-4. Accumulated Inivestment in Pollution Control Measures by Nippon Steel Corporation, 1973-97 Billion yen 400 300 200- 100 0 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 Source. Nippon Steel Corporation (1998a). 58 Protecting the Global Environment Committee and the Iron and Steel Industry Research Association on NO, Removal Technology. Joint research on pollution control equipment was conducted. Technology for the unique proce- dures to make steel was developed intensively at these institutions. Due to such environmnental conservation measures, NSC's 1997 emissions of sulfur oxide and nitrogen oxide were 13 percent and 58 percent of their 1973 levels, respectively (Figures 4-5 and 4-6). Organizational Approach to Environmental Conservation The Law Concerning the Improvement of Pollution Prevention Systems in Specific Factories enacted in June 1971 requires the appointment of a supervisor for pollution control and a pollution control manager, and it stipulates those persons' responsibilities and authority. The manager in charge of pollution control, an authorized person who has passed the national examination, must assist the supervisor on technical matters. In order to meet this legislative requirement, businesses have trained many pollution control managers who have national qualifications. In 1999 there were about 250,000 authorized pollution control managers in Japan. NSC had about 1,030 authorized managers at various facilities. This legislation was instrumental in * establishing an organizational system for pollution control; carrying out pollution control measures and preventing pollution; and * improving communication between factories, local government, and the local community. After environmental standards are set, company compliance is monitored, an important and very time-consuming task. Because the regulating authorities receive reliable reports on emissions levels from the authorized managers at each factory, regulation is efficient as well as effective. The Nippon Steel Corporation has set up an organized system of monitoring that enables the company to determine what the problems are, identify the sources of pollution that have an effect Figure 4-5. SO, Emission Reduction by Nippon Steel Corporation, 1973-97 Percent 100- 90 - 80 - 70- 60- 50- 40- 30- 20- 10 1973 1975 1980 1985 1990 1995 1996 1997 Source: Nippon Steel Corporation (1998a). Environmental Coniservationz by Japan's Iron anid Steel Industry 59 Figure 4-6. NO, Emission Reduction by Nippon Steel Corporation, 1973-97 Percent 100-- 90 - 80- 70 - 60- 50- 40- 30 20 10 1973 1975 1979 1983 1987 1991 1995 1996 1997 Source: Nippon Steel Corporation (1998a). and to what extent, and implement appropriate measures. NSC has developed and followed such a systematic method to monitor environmental measures based on its experience (Figure 4-7). Its step-by-step approach is summarized here: * Understand the produtction structuire. In order to promote carefully planned environmental measures, a company must understand the current condition of production ecluipment. * Analyze environmenral conditions. After ascertaining current pollution levels as quantita- tively as possible, a company should research the relationship between the environmental density levels and regulations set by the national government and local governments; re- petitive sources contributing to pollution; and target levels of environmental standards. * Research the effects o,f each source of pollution. Effects on the environment are predicted by conducting model simulations. * Prepare guidelinesfor environmental control measuires. Pollution control measures are set and prioritized for implementation. Energy Consumption and Savings by the Japanese Steel Industry In 1995 the iron and steel industry accounted for 11.4 percent of total final energy consumption in Japan (Figure 4-8). The source of 78 percent of energy consumed by the Japanese steel industry is coal, which is used as the raw material reducing agent (Figure 4-9). It has properties for reducing iron ore that cannot be duplicated by other fuels. The Japanese steel industry's energy-saving measures have focused on the reduction of oil consumption, thus conforming to the government's energy policy (since the oil shocks) of reducing oil dependency. 60 Protecting the Global Environment Figure 4-7. Nippon Steel Corporation's Environmental Monitoring System Adjustment of production structure Survey of present conditions Setting targets Emission prediction Discussion of measures |Prediction of effect X Over~~~all assessment Drafting guidelines for measures Equipment planning Construction X ~~~Review of results Operationi Source: Nippon Steel Corporation (1998a). Enivironmtietal Cotiservation by Japan's Iron and Steel Industry 61 Figure 4-8. Iron and Steel Industry's Energy Consumption Share in Total Final Energy Consumption, 1995 II-oil ancl Energy consumption i h in Japan industres _ F ~~~~3.59 million exldn thermochemical i iron and calories (Tcal) ,. steel Source: Japan Steel Federatior (1997). Figure 4-9. Energy Consumption of Japan's Ironi anid Steel Industry, by Energy Type, 1995 Electricity , - 15% -& I Coal-equivalent energy consumption Coal 67.14 million tonnes 787. Source: Japan Steel Federatior, (1997) 62 Protecting the Global Environment Energy-saving measures by the industry have changed over time as energy prices have changed (Table 4-5). Responding to the first oil shock, energy-saving measures during the 1974-78 period focused on relatively small-scale capital investment such as operational improvement and small- scale waste heat recovery. Dependent on petroleum fuels for 20 percent of its energy consump- tion in the late 1970s, the Japanese steel industry realized the importance of significantly reduc- ing its dependence on oil. A shift from heavy oil to coke was achieved by replacing the heavy oil used in reheat furnaces by coke oven gas. By 1982 there was a shift to 100 percent use of coke. After the second oil shock in 1979, continuous casting was implemented and large-scale capi- tal investment in process development, such as introduction of large-scale waste heat recovery equipment, was undertaken. Examples are the coke dry quenching (CDQ) system, blast furnace top pressure recovery turbines (TRT), and sinter waste heat recovery equipment. As oil and coal prices stabilized in the mid-1980s, the steel industry made an effort to reduce its purchases of electrieity, which had become a relatively expensive form of energy. Companies built power generation facilities that made use of the waste energy that was generated in the steel-making process. Consequently, the electricity purchase ratio declined from 31 percent in 1980 to 13 percent in 1995. Global warming has become a serious concern for all people. Energy-saving must be consid- ered not only from the traditional viewpoint, to save costs, but also from the global viewpoint, to preserve the world's environment. The steel industry has drawn up a voluntary action program to control the global warming effect, reduce waste, and promote recycling (Box 4-1). Energy-Saving Technologies in the Steel Industry Technological changes created the improvements in energy consumption in the steel industry. The three most important technologies for saving energy were the coke dry quenching system, the top pressure recovery turbine, and the continuous casting process. Table 4-5. Energy-Saving Activities and Achievements of the Japanese Iron and Steel Industry Time period Energy-saving activity Acliievement 1974-78 Operational improvements such as reduction of blast 10.4% reduction in energy furnace fuel cost; implementation of measures using use (compared with the relatively small-scale energy-saving equipment first half of 1973) 1979-83 Implementation of measures using large-scale energy- 8.6% (compared with the saving equipment mainly for waste heat recovery; first half of 1978) development of non-oil-using processes (blast furnaces using only coke, increased use of byproduct gas, gas-using reheat furnaces) 1984-88 Promotion of waste heat recovery and introduction of 2.8% (compared with energy management systems; introduction of continuous the second half of 1983) casting systems in all processes, hot charge rolling, and pulverized coal injection; drastic change in production structure and shift to high-quality steel products 1989-98 Dissemination of information on the problem of global warming; voluntary action program to reduce carbon dioxide emissions, reduce waste, and promote recycling Source: Japan Steel Federation. Environmental Conservation by Japan's Iron and Steel Inidustry 63 Box 4-1. Japanese Industry's Initiative: The Role of Keidanren The foundation of the Japanese industry's involvement in environmental issues is found in the Keidanren Global Environmental Chiarter, announced in 1991. The charter stated explicitly that "endeav- oring to deal with environmental problems is an essential condition of corporate existence and activi- ties." It also declared the organization's intentions to pursue voluntary and active efforts to preserve the environment. This concept is translated into more concrete language in the Keidanreni Appeal on the Environment, published in 1996. A number of goals are affirmed: dealing with global warming, build- ing a society oriented toward recycling, establishing environmental management and au(diting sys- tems, and incorporating environmental concerns in overseas business activities. With the public's grovwing awareness of pollution, pressure for environmental reforms mounted. The Japanese government chaired the Third Conference of Parties in Kyoto. Private industry took the initiative in 1997 and announced the Keidanren Voluntary Action Plan on the Environment. It was a significant step. The plan provided a framework for the steady implementation of environmental measures at all levels of Japanese industry. By declaring specific objectives and conducting follow-up surveys each year, the plan promoted accountability for environmental measures. This created "in- centives in the form of putblic prornises" and brought to bear the maximum amount of voluntary effort. The industry-wide framework was then broken down by particular industries. Responsibility for policy formulation was assigned to a specific organization in each industry-in the case of the iron and steel industry, to the tron and Steel Federation. These designated organizations are also respon- sible for the follow-up system and for publication of results. Forty-one industries and 142 industrial organizations participate(i in the plan. As for global warming, the 1997 action plan states that the goal is "to reduce C02 emissions from the industrial and energy-conversion sectors to below 1990 levels by 2010." To ensure transparency, each industry's action plan and findings of the follow-up surveys must be reported to the Industrial Structure Council and other bodies for third-party review. In Basic Priiciplesfor the Promotion of Mea- sures Dealing with Global Warming, adopted by the Japanese government in June 1998, thie policies spelled out in the Keidanren Voluntary Action Plan are identified. Source: Keidanren (1991, 1996, 1997). CoKE DRY QUENCHING (CDQ) SYSTEM. In the traditional process used before the 1980s, hot coke had to be taken out of the coke oven and cooled directly with water, causing valuable energy to dissipate into the atmosphere. The coke dry quenching system, however, cools hot coke with inert gas instead of water and recovers the heat from coke (in the form of steam through a waste heat boiler) for use in power generation. About 200 to 300 million calories per ton (Mcal/t) are saved. ToP PRESSURE RECOVEE'Y TURBINE (TRT). Top pressure of the blast furnace gas is recovered for electric power by an expansion turbine. Shifting the dust collection method from the wet type to the dry type can further improve efficiency. Approximately 90 to 120 Mcal/t are saved. CONTINUOUS CASTING (CC) PROCESS. While the previous production process contained three steps (ingot making, soaking pit, and dividing/rolling), continuous casting shortens these processes into one, thus saving energy and improving the yield rate. About 150 to 200 Mcal/t are saved. Energy-Saving Investment and Economic Efficiency in the Steel Industry At the time of the second oil shock in 1979, energy-saving investment by the steel industry as a whole was a little less than 100 billion yen. Investment peaked in 1982, decreased iemporarily, 64 Protecting the Global Environment Figure 4-10. Energy Saving Investment by Japan's Iron and Steel Industry, 1979-95 Billion yen 250 200 - 150 100 50- 0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Source: Japan Steel Federation (1997). and then recovered to reach a second peak in 1992 that was partly caused by the need to replace or upgrade the 1982 investment (Figure 4-10). The efficiency of energy-saving investment in Japan has changed over time as the example of one company, referred to as Company A, shows (Figure 4-11). In 1974 the energy saved was 40 Tcal per 100 million yen of investment by Company A. In 1987, however, investment efficiency plunged to 10 Tcal per 100 million yen of investment. This shows that during the first half of the 1970s, when energy efficiency was significantly improved, the reduction rate of energy consump- tion based on one investment unit was very high, thereby substantially reducing the cost of fuels and materials. Following the oil crises, the Nippon Steel Corporation successfully reduced energy consump- tion by improving energy efficiency and introducing new waste heat recovery systems. However, measures for energy efficiency improvement at NSC reached their limits in the 1990s and invest- ment in waste heat recovery and operational improvement diminished. To further reduce energy consumption in the future and control the global warming effect, next-generation technologies and highly energy efficient equipment such as efficient industry-owned power generators are needed. Energy-Saving Achievements by the Steel Industry The steel industry's massive efforts to save energy include operational improvements, produc- tion process reduction, and waste energy recovery. The energy needed to produce one unit of steel in Japan declined by 20 percent after 1973. Consequently, the Japanese steel industry has achieved the highest energy efficiency and the least environmental load in the world, due not only to advanced technologies in production and operation, but also to a high dissemination rate of waste energy recovery equipment. Environmental Conservation by Japan's Iron and Steel Industry 65 Figure 4-11. Energy-Saving Investment Efficiency: 7he Example of Company A, 1974-87 Number of projects Investment efficiency (tcal/100 million yen) 300 5 E3 Number of projects - Efficiency 250 -4 200 3 150 2 100 1 50 0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Source: Nippon Steel Corporaition, internal reports. The dissemination rate of the three major types of waste energy recovery equipment (CDQ, TRT, and BOF gas recovery equipment) is remarkably high in Japan compared to other steel- producing countries in the Organization for Economic Cooperation and Development (OECD). A survey by the Iron and Steel Institute of Japan in 1996 indicated that while the dissemination rate of the coke dry quenching system in Japan is 85 percent, it is zero in the United States, United Kingdom, and France. In stark contrast to the 100 percent dissemination of the top pressure re- covery turbine in Japan, in the United States it is only 2 percent and in the United Kingdom and France it is zero. Moreover, Japan has achieved 100 percent dissemination of BOF gas recovery equipment compared with 11 percent by the United States and 18 percent by the United King- dom (Figure 4-12). Continuous casting is a typical production-bypassing and concatenation process that saves energy. More than 90 percent of Japan's steel-making facilities introduced this process in the second half of the 1980s, before all other industrial countries. These efforts have helped Japan's steel industry achieve the world's highest energy efficiency. Japan compares well to the other major steel-producing countries. The energy unit cost (energy consumption required for one unit production of steel) is lower in Japan than in the United States, United Kingdom, Germany, and France by 18 percent, 12 percent, 3 percent, and 11 percent respectively. To present a broader perspective, we note that China, a major steel producer among developing countries, has an energy unit cost that is about 50 percent higher than that of Japan (Figure 4-13). Global Warming and the Siteel Industry's Voluntary Action Program In preparing a voluntary action program for global warming control measures, the steel industry did not limit itself to energy-saving production processes but rather took into account the industry's 66 Protecting the Global Environment Figure 4-12. Diffusion Rate of Energy-saving System Coke Dry Quenching Top Pressure Recovery BOF Gas Recovery (CDQ) System Turbine (TRT) System System Japan Japan Japan Republic Republic Republic m of Korea of Korea of Korea United United United Statesa Sta tes States United United United _ Kingdoma Kingdoma Kingdom Germany Germany Germanya Francea France Francea I I I I I I I l l l I 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 Percent Percent Percent a Zero percent. Figure 4-13. Energy Efficiency of Iron and Steel Industry in Major Steel-Producing Countries, 1994 Index 150 140 _ f %watr 130 -.. 120- 110 . 100 -.- 910 _- ' '-'- - -- 80 Japan United United Germany France China States Kingdom Source: Japan Steel Federation (1997). Environniental Cotnservation by Japan's Iron and Steel Industry 67 potential and its advanced technologies. The voluntary action program includes the following five measures: * Energy-saving efforts in steel-making processes; * Effective utilization of waste plastics; * Distribution of unused energy to surrounding areas; * Contribution to energy-saving in society, with steel products and byproducts; * Contribution to overseas energy-saving through technical assistance. ENERGY-SAVING INITIATIVES. The steel industry intends to reduce its energy consumption in 2010 to 90 percent of the 1990 level. In addition, by establishing an effective logistics system, it plans to reduce energy consumption by a further 1.5 percent, for example through utilizing waste plastics in blast furnaces. The industry will accelerate the introduction of energy-saving measures that have already been developed as well as promote next-generation steel-making technologies. In the past, en- ergy-saving measures were carried out on the basis of economic rationalization. The voluntary action program, however, 3hould be implemented according to a carefully preparecl timetable that takes into account the replacement timing for existing equipment and the program's goals, since the program includes energy-saving measures that have low investment efficiency. The implementation rate of measures for which technology development has been completed' is as high as 83 percent. The action program will attempt to increase this rate to 91 percent. A next- generation coke oven has been under development since 1994 as part of an eight-year national project. Coal is rapidly heated before being placed in the coke oven, and this enables dry distilla- tion at a lower temperature. The energy consumption expected from this new coke oven is ap- proximately 20 percent low er than from existing coke ovens. The utilization of waste plastics in blast furnaces is another measure included in the action plan. One million tons of waste plastics are expected to be utilized, which is equivalent to 11 percent of all waste plastics in Japan. In order to achieve this goal, two problems must be solved. First, conditions required for implementation must be established (for example, a product collec- tion system). Second, technical issues must be addressed. Examples of these issues are separate recovery of foreign matter (matter other than general plastics) and dechlorination technology for PVC waste plastics. OTHER GLOBAL WARMING COUNTERMEASURES. Most of the waste heat generated at steelworks is recovered by the coke dry quenching system and used wherever possible for power generation and preheating within the facilities. The remaining medium- and low-temperature waste heat, such as sensible heat, cannot be used at the works, even if recovered. However, the waste heat that cannot be utilized at the works can be used efficiently, if it can be supplied to the local com- munity. In fact, the local cornmunity's consumption of this otherwise wasted heat can be as high as 1 percent of the total energy consumed by the steelworks. Although the steel industry is determined to promote the use of such waste heat, national and local government initiatives are necessary because infrastructure and systems must be estab- lished to transport waste heat to the user, and huge investment sums are involved. The steel industry has moved ahead not only by developing steel-making processes that save energy but also by providing society with energy-saving products (such as lighter cars, thinner 1. Implementation rate = ertergy-saving effect by measures already implemented / energy-saving effect by measures for which technology development has been completed. 68 Protecting the Global Environment steel cans, and lighter steel materials for construction). In addition:,the industry is developing and disseminating products that shorten the process times at users' facilities. The steel products provided by NSC also help reduce environmental load when they are used in society. Cars built of high-strength steel are lighter because less steel is used, and they consume less gasoline. In addition, more corrosion-resistant steel makes cars more durable. An energy assessment of these effects is based on life cycle assessment (LCA). Although high-performance steel takes more energy to produce due to the increase in the number of processes, it saves energy in the long run by improving the products' energy efficiency and shortening the production pro- cesses for users. Japan's steel industry has actively provided technical assistance to overseas steel producers by disseminating advanced energy-saving technologies. With highly cost-effective countermea- sures against global warming, these technologies can contribute to joint implementation and Clean Development Mechanisms (CDM) promoted by the government. The steel industry is committed to participating in global projects to reduce CO2 emissions. NSC's Actions on Environmental Issues The Nippon Steel Corporation's recent environmental conservation activities are summarized in this section. To reduce environmental load at every stage of business activity, the Nagoya steel- works acquired (in March 1996) ISO] 4001 certification (an international standard for environ- mental management systems). It was the first steelworks to do so in the steel industry world- wide, followed by the Kimitsu steelworks in March 1998. Every steelworks in Japan plans to acquire this certification in due course. NSC has steadily developed new technologies for energy saving to help control global warm- ing. One example is completion of the continuous hot rolling process at the Oita steelworks in 1998. In addition, to reduce hazardous air pollutants, the company started voluntary manage- ment activities. By preventing leakage from the coke oven and improving dust collection, NSC controlled benzene generated in the coke dry distillation process. Based on the Water Pollution Control Law, a new effluent standard for nitrogen was instituted in October 1998. At the Hikari steelworks, a high-efficiency biological nitrogen removal technol- ogy has been developed and implemented. The company also has stepped up the recycling of byproducts such as slag, dust, and sludge generated in production processes. In 1997 it achieved a recycling rate of more than 98 percent. As a step towards building a recycling society and in accordance with the voluntary action program by steel-makers, NSC has set the following goal: reducing its final disposal amount by 2010 to 25 percent of the 1990 level. The whole steel indus- try has been promoting the recycling of steel cans. (The rate of the recycling improved from 43.6 percent in 1990 to 79.6 percent in 1997.) Environmental Management Policy Nippon Steel as a whole has been tackling environmental issues for the purpose of making soci- ety more conservation oriented. In addition, Nippon Steel now aims to conduct business activi- ties in harmony with the total ecological system, to enhance the maintenance and improvement of the living environment, to prevent obstacles to environmental conservation such as hazardous air pollutants, and to promote global environmental conservation measures including those for the protection of the ozone layer and prevention of the greenhouse effect. Nippon Steel conducts its business activities with the goal in mind of reducing environrnental load at all stages, including acquisition of raw materials and supplies, production, product trans- port, product use, and scrap disposal. To promote these ends, Nippon Steel collaborates with other industries, including its users. Environnental Conservation by Japan's Iron and Steel tndnistry 69 Japan's international technical assistance is cost effective in addressing global environmental issues. Nippon Steel has developed environmental conservation and energy-saving technolo- gies, and it is experienced in transferring them overseas with the support of the Japanese govern- ment. In starting new business activities in overseas countries, Nippon Steel fully considers their natural and societal environments to ensure environmental conservation. Environmental Management Committee As concerns about global warming increase, businesses must meet ever-stricter requirements to reduce carbon dioxide, recycle resources, and safely handle hazardous materials. Companies must also satisfy the demands of the marketplace and the needs of consumers by developing products with low environmental loads. In response, the Nippon Steel Corporation established an Environmental Management Committee on April 1, 1998. The objectives of this committee are to enhance environmental efforts in general business management including production, sales, creation of new businesses, and technology development to support these activities. The commit- tee informs all members about relevant facts, issues, or problems regarding the environment. It then discusses and adjusts the policies in response. Efforts to Control Global Warming The steel industry's volun tary action plan achieved a 6 percent energy reduction during the pe- riod from 1990 to 1995. Companies are now required to achieve another 4 percent energy reduc- tion by 2010. In NSC's plan, goals for energy reduction are set at 2.0 percent in 2005 (middle year) and at 4.4 percent in 2010 (iinal year). NSC has redoubled its efforts to achieve these goals, imple- menting measures that are more economically challenging than previous ones. One example is the accelerated introducticn of established technologies into production processes. Efforts to Create a Socioeconomic System with Environmentally Sound Material Cycle The accumulated volume of steel products in Japan is estimated at 1.2 billion tons. Ferrous scrap, after its service life, is recovered and recycled as a material, amounting to 32 million tons a year. The steel-making process generates about 40 million tons of byproduct a year. Its main compo- nents are slag and dust sludge. Blast furnace slag is utilized almost entirely for cement and road- bed materials; about 93 percent of steel-making slag is recycled mainly for use in civil engineer- ing, soil improvement, and road-bed materials. The dust sludge recycling rate is almost 90 percent. Announcing a target of reducing final disposal by 75 percent by 2010 (compared with 1990), NSC has been engaged in research and development of recycling, such as improving the quality of stainless slag and dezincification of dust sludge. Furthermore, the company has contributed to recycling and waste reduction by effectively utilizing byproducts generated in the production processes of other industries. The sludge from paper manufacturing as well as chemical sub- stances generated in the alunminum production process can be used as heat insulators or auxiliary substances for steel-making; a nickel catalyst in oil and food refining can be used as a stainless material; and iron powder generated in the recycling of waste acid from semiconductor produc- tion can be used as a steel-making material. The company thus has promoted recycling and waste reduction not only in the steel industry but also in society as a whole. International Cooperation As noted earlier, with the advanced energy-saving technologies it has developed, NSC has ac- tively provided technical assistance to foreign countries. The company will further contribute to 70 Protecting the Global Environment international society and preservation of the global environment through projects to reduce CO2 emissions in developing countries and by transferring environmental conservation technologies to these countries. NSC has participated in the green helmet project, a model project set up by the New Energy Development Organization. In this project, NSC is transferring to China energy- saving technologies such as those for blast furnaces and hot stove waste heat recovery, coal hu- midification, and coke oven dry quenching. NSC also is assisting East European countries, Brazil, and Mongolia by sending experts, accepting trainees, conducting field surveys, and holding semi- nars, in accordance with each country's needs. Contribution to Communities NSC has steelworks all over Japan, from Muroran in Hokkaido to Oita in Kyushu. Each of the steelworks has signed the Environmental Protection Agreement (agreement on environmental control) and the Industrial Landscaping Agreement with the local government that administers its facilities. These agreements cover air, water, waste, noise, vibration, and offensive odor types of pollution. They also include standards for sulfur content in fuels and materials that are not prescribed in national laws. Some of the agreements stipulate standards that are severer than those in the national laws, reflecting local characteristics. While complying with laws for envi- ronmental conservation, NSC also abides by its agreements with local governments, thus pro- tecting the local environment and reducing the environmental load. In an effort to protect the environment, NSC launched its "native woods" project in 1971, using a close planting of seedlings method and a direct planting of acorns method. After twenty years, woods as high as 10 meters have grown into habitats for birds such as pheasants and thrushes and for animals such as raccoons, dogs, and hares. Suggestions for Addressing Environmental Issues in Developing Countries There are many reasons for developing countries' slow progress introducing environmental con- servation technologies. Here we discuss some of the technological, financial, economic, adminis- trative, and social barriers these countries face. Barriers to Progress Technological barriers present a formidable obstacle. Since most environmental conservation tech- nologies lack universal applicability, generalization and standardization of the technologies are difficult. Software technologies, know-how that is a particularly important part of technology, tend to be kept within companies. Insufficient monitoring of contamination and operational con- ditions also impedes developing countries' ability to decide what measures to take. Other barriers are financial. It is difficult to raise funds for projects that do not produce short- term economic benefits. Investment decisions are hard to make because of the difficulty in calcu- lating environmental values and other cost-benefit values. In developing countries, interest rates tend to be high, so small- and medium-size companies cannot raise funds easily. Moreover, in developing countries, energy prices tend to be set artificially low. The medium- to long-term energy price trend is unclear, which also makes cost-benefit calculations difficult. Insufficient environmental admninistration in developing countries dampens investment sen- timent. Governments of these countries do not have adequate policies and measures for the com- mercialization, application, and standardization of environmental conservation technologies. Because of institutional barriers, companies lack incentives to adopt these technologies. Those that do, receive insufficient financial and institutional support from government. Environmental Conservation by Japan's Iron and Steel Industry 71 Finally, there are social barriers. Developing countries have limited human resources for adopt- ing environmental conservation technologies. There is also a serious concern that stricter envi- ronmental standards may damage economic vitality. NSC's Technology Transfer to China The transfer of coke oven dry quenching equipment to China exemplifies the potential for Activi- ties Implemented Jointly (AII) between Japan and that country. Numerous valuable lessons for developing countries were learned from this experience. First, parts should be procured locally wherever possible. This will make future dissemina- tion of the technology easier. It is necessary, however, to recognize whether a part's quality is uneven and to adjust for suchl unevenness in the design. Self-help efforts should be encouraged. Second, to avoid interfacing problems, existing equipment or locally procured equipment should be compatible with new equipment. In addition, specifications should be commensurate with the technological level of the other party. In the CDQ project, generated steam is led to a turbine procured in China for power generation. While a high-pressure turbine is used in Japan, the turbine procured in China is low pressure. Third, the technologies that are transferred should be maintainable by the other party, or the transfer should contain both hardware and software, including maintenance technology. Fourth, training, including practice in operation and maintenance, is needed after the technol- ogy is transferred. Advance practice at facilities where similar equipment is in operation is effec- tive. Through experience at the donor countries' facilities, trainees can acquire knowledge and learn the details of operational management. Trainees should learn how to encourage improve- ments and how to do the work. Technologies cannot be established unless the developing coun- try has the requisite human resources. Lessonsfrom NSC's Experience Barriers to the introduction of environmental conservation technologies in developing countries can be surmounted. The solutions will depend on each country's economic and social conditions. Those in charge of environmental policy and economic development in developing countries must search for the most efficient solutions by studying measures taken by industrial countries such as Japan. From NSC's environmental efforts discussed in this report, the following conclu- sions can be drawn. ECONOMIC EFFICIENCY. The maintenance of a sound business structure requires economic ef- ficiency. Before developing countries introduce costly leading-edge technology, they should con- sider a combination of energy-saving technology and high-cost performance and encl-of-pipe technology that directly controls emissions. ENVIRONMENTAL MANAGEMENT. It is important that the managers of industries in developing countries understand the significance of environmental conservation and construct an internal management system that institutes proper environmental controls. TECHNOLOGICAL CAPACIT'Y DEVELOPMENT. In the case of Japan, private firms were ernthusias- tic about environmental technology R&D. Behind their eagerness was a perception th.at a high level of environmental technology would increase their competitiveness. In the case of develop- ing countries, it would be more reasonable to introduce technologies already developed in indus- trial countries. But they still mn.ust acquire the technological capacity to operate and maintain the equipment, not just install it. 72 Protecting the Global Environment ENVIRONMENTAL POLICY CHOICE. In most countries environmental policies accompany legal obligations such as emissions regulations. But Japan often set emissions targets and published performance data without legal recourse in order to promote private initiatives by industry. In this way Japan avoided a situation where strict environmental regulations become nothing more that scraps of paper because companies cannot observe them. Japan's approach motivates pri- vate firms to actively engage in environmental conservation because their actions are always watched by the community through a published track record of emissions indicators. It should be noted that in tackling environrmental problems, countries need to achieve balance between the ideal and what is feasible in reality. Lastly, providing economic incentives, such as preferential tax treatment for companies that quickly achieve the emissions target, would be worth consider- ing, although this practice was not common in Japan. References Committee of Kitakyushu for Cleaner Production and Technology. 1998. Environment-Protection-Type Pro- duction Technology. Tokyo: Nikkan Kogyo Shinbun. Imura, Hidefumi. 1995. Environmental Problems in China. Tokyo: Toyo Keizai, Inc. .1998. Cases of Technology Transfer (Intergovernmental Panel on Climate Change). Tokyo: Toyo Keizai, Inc. Institute of Developing Economics. 1996. Environmental Laws in the Developing Countries: Southeast Asia and South Asia. Tokyo. Japan Institute of Energy Economics. 1992. Japanese Energy Industry's Research Report on International Coop- eration in Tackling Air Pollution Problems in China. Tokyo. Japan Steel Federation. 1989. Research Report on Energy Use by Honkei Steel Company and the Feasibility of Energy -Saving. Tokyo. 1990. Earth-Friendly Steel Manufacturing. Tokyo. 1996. Report on Total Measures Concerning Generated Objects from an Integrated Steel Mill (Shougang Corp.) in China. Tokyo. 1997. Steel and Green Earth. Tokyo. 1998. Japanese Steel Industry's Outlines of the Challenges of Global Warming. Tokyo. Keidanren (Federation of Economic Organizations). 1991. Global Environment Charter. Tokyo. 1996. Keidanren Appeal on the Environment. 1997. Keidanren Voluntary Action Plan on the Environment (Final Report). Tokyo. Kitakyushu Environment Bureau. 1991. Initernational Environmental Cooperation in Kitakyushu. Kitakyushu- city, Japan. NEDO (New Energy Development Organization). Japan Steel Federation and Metallurgy Industry Depart- ment of the National Planning Comnnittee of China. 1997. Meeting of Chinese and Japanese Steel Industries on Energy Saving. Nippon Steel Corporation. 1990a. Environmentally Friendly Antidotes by Nippon Steel Corporation: Targeting the Realization of a Comfortable Environment. Tokyo. 1990b. From Seven Seas to Seven Seas: A Thirty-Year History of Nagoya Steelworks. Tokyo. 1990c. Nippon Steel Corporation's List of Measures to Tackle Environmental Problems.Tokyo. 1996. Environmental Management Policy. Tokyo. 1997. Engineering Enterprises of Nippon Steel Corporation. Tokyo. 1998a. Environmental Report. Tokyo. 1998b. Guidebook of Nippon Steel Corporation. Tokyo. Environmental Conservation by Japan's Iron and Steel Industry 73 Research Institute of Global Industrial Culture. 1997. Research Report on Technology Transfer in the Asian Region. Tokyo. . 1998. Research Report on Technology Transfer in Asia Region. Tokyo. Research Institute of International Trade and Industry. 1996. Energy Consumption and Environmental Prob- lems in China. Tokyo. Takahashi, Makoto. 1999. Environmental Governance and the Steel Industry: Air Quality. Tokyo: Institute for Global Environmental Strategies. 5 Environmental Conservation by Japan's Electric Power Industry: An Example of the Electric Power Development Company Junichi Tsunoda Tomohiko Inui Akie Takeuchi Japan's electric power industry, after successfully controlling domestic pollution problems, has turned to the emerging global issues associated with climate change. To achieve the world's high- est efficiency power generation, the industry is focusing on technology development as well as operation and management. Motivation for these efforts comes from a combination of factors: Japan's strict environmental regulations, the general public's awareness of the dangers of global warming, high energy prices, and the notion of social responsibility of quasi-public corporations. Thanks to these factors, Japan's sulfur oxide (SO.) emissions have drastically decreased, increases in nitrogen oxide (NO,) emissions remain low, and Japan's rate of emissions of carbon dioxide (CO2) per unit of GDP is one of the world's lowest. Although Japan's industries are highly energy efficient already, the government has pledged to further reduce CO2 emissions to help combat global environmental problems. In 1996 the power generation industry accounted for about a quarter of all CO2 emissions in Japan. Clearly, the industry plays a leading role in reducing CO2 emissions, and it is striving to attain an even higher level of efficiency in energy use. Worldwide emissions of carbon dioxide are expected to continue to increase, mainly in devel- oping countries. According to a 1998 estimation by the International Energy Agency (IEA), global CO2 emissions will rise, from 1990 to 2020, by around 9,800 million tons; in the "business as usual" scenario, more than 70 percent of this amount will be from developing countries. One reason for this is that coal-fired power generation, which emits more CO2 per unit of electricity generated than most other fossil fuels, will increase to satisfy the rapidly growing power demand in developing countries. The increase in coal-fired power generation will also lead to increases in SO. and NO, emissions, which are already causing regional pollution problems and contributing to global warming. One solution is to shift from coal to other energy sources that have a less harmful impact on the environment. This option, however, is not feasible in countries such as China and India, where there are large coal reserves, and it is economical to use coal. Therefore, environmental safeguards in coal-fired power plants are critically important in these countries. Japan's experience addressing environmental problems in coal power generation can be a useful point of reference. This chapter presents the case of the Electric Power Development Company. It has been oper- ating coal-fired power plants in response to government requests to convert from oil to coal to reduce Japan's dependence on imported oil. The company has successfully resolved regional environmental problems in cooperation with the government and local communities, and it has made great strides in reducing the greenhouse gases (GHGs) associated with global warming. 75 76 Protecting the Global Environment Since coal-fired power plants are expected to play an important role in Japan's power generation in the future, the company will continue to conduct research and development (R&D) and tech- nological development activities for further improvement of energy efficiency. Although it may be difficult to replicate these measures in developing countries, the experiences fully described here could contribute to the creation of sound environmental policy in such countries. Japan's Electric Power Industry Japan's electric power businesses are classified into two categories under the Electricity Utilities Industry Law: the vertically integrated power supply industry that supplies electric power to meet general demand in particular areas and the wholesale power industry that mainly supplies electric power to power companies irrespective of area. The first type consists of ten regional electric power companies, such as Tokyo Electric Power Company for the Tokyo metropolitan area. The second type includes the Electric Power Development Company (EPDC). Apart from their self-generated power, public power companies purchase power from the wholesalers to distribute to consumers. Structure of the Industry The present structure of electric power companies started in 1951, one year after the government issued the Ordinance on Public Utilities and the Ordinance on Reorganization of Electric Utilities in response to the demand of the American occupation army. In accordance with the ordinances, a private, integrated company for the generation, transmission, and distribution of electric power was founded for each of the nine regions in Japan. A structure of nine electric power companies, each of which had an exclusive supply privilege for its region, was thus started. Basically, the same organization has continued ever since (although it expanded to a structure of ten electric power companies after Okinawa Electric Power Company was founded following the reversion of Okinawa to Japan). In 1952 the Electric Power Development Company, Ltd. was founded based on the newly established Electric Power Development Promotion Law. Industry Trends in Energy and Environmental Measures Since the two oil shocks, diversification of energy sources and energy saving have strongly been promoted in Japan. Coal-fired power generation was dominant until the 1960s, when there was a progressive shift from coal to oil, which became the leading fuel for power generation to meet the rapidly increasing power demand from economic growth. Thermal generation from oil steadily increased, but with the first oil crisis in 1973 and the International Energy Agency's 1979 prohibi- tion on construction of new oil-burning thermal generation plants to reduce dependency on oil, a shift to liquefied natural gas (LNG) or coal began in the early 1980s (Figure 5-1). Dependent on imported resources for most of its energy supply, Japan has examined all alternative sources of energy including nuclear power and has continually pursued the best energy mix among them. The scarcity of its natural resources has made Japan an energy-saving society since the oil crises. As consumers and industry became more keen on energy saving, electric utility companies improved energy efficiency and thus succeeded in cutting down CO2 emissions per kilowatt hour (Figure 5-2). While there was just under a threefold increase in power generation from 1970 to 1995 (from 304 billion kWh to 878 billion kWh), CO2 emission increases were just under twofold (from 48 million tons to 84 million tons carbon equivalent) during the same period.' CO2 emissions per 1. Estimated by the Institute of Energy Economics, Japan. Environmental Conservation by Japan's Electric Power Industry 77 Figure 5-1. Japan's Energy Sources, 1960-95 Billions of kilowatt hours of electricity 900 W Nuclear power 800 - Liquefied petroleum gases 700 _ - Liquefied natural gas 33.2% 700 ~ Coal 600 - Oil Hydropower 3.5% 500- 22.0% 400 - 300 - 13.5m 200- 100 9.8%/ 0 1960 1965 1970 1975 1980 1985 1990 1995 Note: LPG includes other gases and geothermal and bituminous material Source: Ministry of International Trade and Industry of Japan, Agency of Natural Resources and Energy. Figure 5-2. CO2 Emissions from Power Generation Index Kilograms of carbon per kilowatt hour 300 0.20 280 0.18 260 0.16 CO2 emissions per unit of electricity 240 - - 0.14 220 ......... 0.12 200 0.10 180 Real GD 0.08 160 - 0.06 140 - 0.04 120 02 emissions 0.02 100 I 0 1970 1975 1980 1985 1990 1995 Note: 1970 = 100. Source: Japan Federation of Electric Power Companies (1997). 78 Protecting the Global Environment unit of power generated continued to decrease. They declined from 158 grams of carbon per kilowatt hour (g-C/kWh) in 1970 to about 96g-C/kWh in 1996. Japan compares favorably to other developed countries. While Japan's CO2 emissions rate is higher than the rate in Canada, where the ratio of hydroelectric plants is relatively high, and in France, where the ratio of nuclear power plants is relatively high, it is lower than the figures in the United States, United Kingdom, Germany, and Italy.2 When the comparison is limited to ther- mal power plants, Japan's figure shows relatively high energy efficiency (Tables 5-1 and 5-2). As a result, the CO2 emissions rate from Japan's thermal power plants is the lowest among devel- oped countries. As for the local environmental problems, the Japanese electric power industry successfully overcame pollution concerns that had become serious social issues in the rapid economic growth phase in the 1960s and 1970s. Each electric power company drew up its own action plan to ad- dress environmental pTroblems and has carried out full environmental measures by strictly sub- scribing to the plan. Specifically, by introducing nuclear energy and new energy sources ("clean energy"), high-quality fuel at thermal power plants, and flue gas desulfurization and denitrifica- tion equipment, the industry reduced NO, to about one twentieth and one third their levels of 20 years ago, respectively. The levels are now among the lowest in the world. Electricity Pricing Electricity rates in Japan are based on the average cost of supplying electricity. This method, the Total Cost of Service Method, is stipulated in Article 19 of the Electricity Utilities Industry Law. The article provides that general power utilities draw up a supply contract, including electricity rates, and obtain authorization of the Minister of International Trade and Industry. The contract will be authorized if the Minister thinks it reflects "proper costs, based on efficient business manage- ment, plus fair return." "Proper costs" are calculated by adding up expenses for personnel, fuel, maintenance, and depreciation, as well as costs for wastewater treatment, exhaust gas treatment, and other environmental measures. "Fair return" is calculated on the Rate Base Method by mul- tiplying business assets invested (including facilities for generation, transmission, and distribu- tion) by a certain rate of return (4.4 percent in 1998). Adding up the above-mentioned costs and remuneration and deducting the target figure for managerial effort (to encourage better manage- ment) gives the total cost, which is used as the basis for calculating electricity rates. Table 5-1. Net Thermal Efficiency and Transmission/Distribution Loss Factor, 1995 (Percent) United United Item Japan States Canada Kingdom France Germany Italy Net thermal efficiency 37.5 33.5 30.8 36.3 34.5 34.7 38.6 Transmission/ distribution loss factor 5.5 5.6 8.0 7.6 7.3 5.0 6.7 Note: Net thermal efficiency value for Canada and Germany are for 1994. Source: Japan Federation of Electric Power Companies (1996a, b). 2. Survey by the Japan Federation of Electric Power Companies. Environmental Conservation by Japan's Electric Power Industry 79 Table 5-2. Carbon Dioxide Emissions per Unit of Electricity Generated, 1996 (Kilograms of carbon per kilowvatt hour) United United Average emissions Japan States Canada Kingdom France Germany Italy For thermal power plants 0.16 0.23 0.22 0.19 0.21 0.25 0.17 For all power plants 0.11) 0.16 0.05 0.13 0.02 0.16 0.14 Source. OECD (1998). This cost calculation method allows electric power companies to take necessary measures to protect the environment and pass on the costs to consumers, thus recovering the environmental cost of power generation.. Although this system tends to drive up the electricity price in Japan (it is higher than in other countries), it was Japan's choice to spend more on environmental protec- tion and energy security. 13ut there was no explicit cost and benefit analysis in this decision. Whether the level of spending was the best allocation of resources remains to be answered. Thermal Power Generation and Atmospheric Pollution In the thermal power generation process, fossil fuel is burned in a boiler, and substances such as soot, particulates, SO., cnd NO, are discharged into the atmosphere. The sulfur oxide that is generated during the combustion process as a result of the reaction between the fuel's sulfur component and oxygen in the air is thought to cause acid rain. Most of the NO. is produced by combustion in a boiler. It, too, is considered to cause acid rain. The industry is actively taking measures to control these emissions. Japan compares favorably with other industrial countries in emissions of sulfur oxide and nitrogen oxide (Figure 5-3). Reduction of SO., NO., and particulate emissions can be achieved through the use of high- quality fuels such as heavy/crude oil and coal with low sulfur and nitrogen, and liquefied natural gas that contains no sulfur or particulate matter. Adoption of LNG for energy genera- tion substantially reduc,es emissions. However, there are huge requirements for initial invest- ment for generating facilities and for ensuring availability of long-term supply. In the case of the Tokyo Metropolitan Area, which faced significant and increasing air pollution problems, Tokyo Electric Power Company received financial assistance from the government, including loans from the Developrnent Bank of Japan (with concessionary terms) to support the adoption of LNG energy sources. SO., NO,, and particulates can be removed through the installation of flue gas desulfurizers (FGDs), selective catalytic reduction (SCR) equipment, and electrostatic precipitators. NO, re- duction can also be achieved through improved combustion methods such as two-stage combus- tion or through low-NO, burners. In addition, complete combustion management and monitor- ing of the emission source should be undertaken. Since coal contains large quantities of sulfur, nitrogen, and ash compared with other fossil fuels used for thermal power generation, combustion improvements and flue gas treatment should be combined to reduce the environmental load. Coal also produces more soot and par- ticulate matter in flue gas than heavy oil because there is more ash. So most coal-fired power plants are equipped with highly efficient precipitators, which remove more than 99 percent of the particulate. 80 Protecting the Global Environment Figure 5-3. SO, and NO, Emissions per Unit of Electricity Generated Grams per kilowatt hour 7 SO, emissions 6 X NO, emissions 5 - 4- 3- 2- 0 United Germany United France Canada Italy Japan States 1994 Kingdom 1994 1994 1992 1997 1995 1995 Note: The figures for Germany anid France include private power generation in industries. Those for other countries are for the power utility industry. Source: Japan Federation of Electric Power Companies (1997). Global Warming and the Industry's Voluntary Action Plan Fossil fuel combustion also emits carbon dioxide, which is the principal cause of global warming. Emitting nearly a quarter of the total emissions of carbon dioxide, the electric power industry is fully committed to achieving reductions in many aspects of its business. Preceding the Third Conference of Parties (COP3) to the International Framework Convention on Climate Change in Kyoto in 1997, many private Japanese companies voluntarily drew up action plans to address overall environmental problems. Electric power companies have been taking the lead in making various efforts to protect the global environment (Box 5-1). In its "Environmental Action Plan" in 1996, the Federation of Electric Power Companies de- clared its aim to counter global warming by limiting increases in the overall emissions of the electric power industry. Even though electric power generation in 2010 is forecasted to be 1.5 times the 1990 level, the increase in CO2 emissions is targeted to be only 1.2 times that level. On the demand side, it is important to promote energy saving and load leveling. Electric power companies are developing and promoting highly energy efficient electric devices and dis- seminating useful information on energy saving and the environment. The industry's efforts on the energy supply side are concentrated in three categories. First, the electric power industry is seeking a balanced composition of power sources. It is expanding the use of clean energy, mainly by establishing nuclear power plants and managing the nuclear fuel cycle, increasing the use of natural gas, and developing and promoting clean coal technologies. Renewable energy and new energy sources also are being developed. Environmental Conservation by Japan's Electric Power Inidustry 81 Second, the industry is itying to use energy more efficiently. Generators have been improved year by year, and now thermal power plants with plant thermal efficiency exceeding 50 percent are being constructed. Transmission loss is now less than 10 percent. The electric power indus- try will construct even more highly efficient power generation and transmission equipment, and it is focusing efforts on the effective use of unused energy such as heat from wast e incinera- tion facilities. Third, environmental protection technologies are being introduced. The industry will develop CO2 collection and treatment technologies for thermal power plants. Techniques to reduce the energy consumed when collecting C02, and research regarding this application to thermal power plants, are both needed before these technologies can come into practical use. The industry is also involved in international efforts to promote environmental protection technologies. As part of the Kyoto initiatives, joint country efforts to reduce carbon emissions (Activities Implemented Jointly or AIJ) were instituied. Government Subsidiesfor iEnvironmental Measures The biggest problem implementing environmental measures is economic. Environmental equip- ment requires large amounts of initial investment and funding, and operating the equipment Box 5-1. Environmental Action Plan of the Electric Power Industry This plan was issued in 1996 and published the following year. It includes the following measures against global warming. 1. Promotion of the optimum combination of power sources, centering on nuclear power genera- tion for which CO2 emissions are extremely low. 2. Upgrading energy utilization efficiency, including continued improvement of thermal efficiency at thermal power plants, adoption of combined cycle power generation systems, and a reduction in transmission and distribution loss factors. 3. Introduction and promotion of renewable energy sources, such as solar and wind power genera- tion systems. 4. Further energy-conservation in electricity usage, including the development and installation of such equipment as regenerative heat pumps and utilization of untapped energy sources. 5. Development of technologies related to CO2 recovery, disposal and fixation. To supply the primary energy requirements for early next century, the Federation of Electric Power Companies believes that it is necessary to expand nuclear power generation by approximately 70,000 megawatts by 2010. Within fifteen years, the industry intends to aggressively tackle new energy development of about 30,(l00 megawatts. Furthermore, the industry wants to increase the rate of nuclear power generation by reducing the time required for regular inspections without sacrificing safety. With the continued development of nuclear energy, the entire power industry should strive to reduce CO2 emissions per umit of electricity by about 20 percent in 2010 relative to 1990. If this mea- sure is achieved, total CO2 emission levels in 2010 should be restricted to below 1.2 times the 1990 levels, whereas the growth rate of power generation is forecast to reach about 1.5 times those levels. To further reduce total CO., emissions, energy conservation must occur in electricity usage through the introduction of highly efficient equipment and the adoption of untapped energy sources. The electric power industry actively supports these industrial trends. Source: Japan Federation of Electric Power Companies (1997). 82 Protecting the Global Environmient requires power to run the devices and expendable supplies like treatment chemicals. Power gen- eration itself requires large amounts of capital investment, and additional investment signifi- cantly burdens companies. Electric power companies must be socially responsible and take envi- ronmental measures while meeting their responsibility to provide a steady supply of energy at an affordable price. Electric companies need to improve business efficiency to moderate the increase in costs. The government has introduced assistance programs to relieve the financial burden and to give business the incentive to protect the environment. Following are the main efforts by the government to support environrmental measures in the electric power industry: (1) a low-interest- rate loan program through the Japan Development Bank for pollution control facilities, energy efficiency enhancement facilities, and recycling facilities; (2) preferential tax treatment through accelerated depreciation of equipment for environmental measures, reduction or exemption of fixed property taxes related to environmental facilities, and tax deductions on energy-saving technology R&D; and (3) subsidy for R&D of environment-friendly technology. Profile of the Electric Power Development Company Electric Power Development Company, Ltd., a wholesaler of electricity, operates hydroelectric, coal-fired, and geothermal power plants that it has constructed at sixty-five sites in Japan (Table 5-3). They have an installment capacity of about 14,000 megawatts (MW). It has also constructed extra-high-voltage transmission lines that form a connection between the business areas of the electric power companies. These lines enable the companies to efficiently trade electricity among themselves depending on their supply capacity, and they give flexibility and efficiency to the Japanese power supply system. There are plans to construct three more coal-fired power plants and a nuclear power plant. History EPDC was founded in 1952 when the Japanese economy was recovering from the devastation of war. The supply of electric power, so essential for production, lagged far behind demand and Table 5-3. Facilities and Capacity of EPDC, 2000 Generating facilities (authorized maximum output) 58 hydroelectric plants: 8,260,800 kW 7 thermal power plants: 5,654,500 kW All 65 plants: 13,915,300 kW Transmission facilities (length spanned) 2,422.7 km ultra-high voltage transmission lines: 2,088.3 km DC transmission lines: 167.4 km Transforming stations 4 stations: 4,791,000 kVA Frequency modulation stations 1 station: 300,000 kVA AC/DC conversion stations 2 stations: 600,000 kVA Wireless communication facilities 560, 908ch-km Power sales (FY1997) Hydroelectric: 13,728,721 MWh Thermal power: 34,024,362 MWh Total: 47,753,083 MWh Source: Electric Power Development Company. Environmental Conservation by Japan's Electric Power Indiustry 83 was a serious obstacle to economic development. Developing new power sources required huge funds and materials. Since the newly established electric power companies could not procure the necessary long-term funds, injections of government funds into the industry were necessary. The Power Development Promotion Law was enacted to alleviate the extreme imbalance between elec- tric power supply and demand and to support a project that was a national priority. Under the law, EPDC was founded with 100 percent capital from the Japanese government as a special public corporation that had direct access to public funds. In the early years of EPDC (the 1950s), large-scale, storage-type hydroelectric power plants were developed throughout Japan and helped satisfy the rapidly growing demand for power through their wholesale operations to the nine electric power companies. Following this period came the construction of coal-fired power plants, which used domestic coal as fuel. Converting coal-fired power plants into large-scale heavy/crude oil thermal power plants satisfied the rising demand for electric power. The conversion led to unemployment problems in the coal industry, and the government requested EPDC to construct coal-fired power plants to increase the de- mand for coal. Several therrmal power plants were completed and were commissioned into ser- vice, starting with Isogo Plarnt No.1 (265 MW) and Takehara Plant No.1 (250 MW) in 1967. After the oil shock in 1973, diversification of fuel sources was strongly requested to ensure the long-term stable supply of energy in Japan, which has few domestic resources. To shift away from oil, rapid development of hydroelectric plants, coal-fired power plants, and nuclear power plants was encouraged. EPDC cooperated with the government's energy policy by developing large-scale coal-fired power plants, which mainly used imported coal. Through the years EPDC has implemented national power source development policies such as fuel diversification, green technology, and efficiency enhancement technology development. With good results the com- pany has attained its original objective to advance government policy. Recently, lively discussion on across-the-board reform of Japan's social system and its high- cost and over-regulated economic system has been gathering momentum. Deregulation and ad- ministrative reform of public-private role sharing is now under way. The streamlining of public corporations is one such development. The electric power industry is no exception. A 1995 amend- ment to the Electric Utility Industry Law introduced a bid system to the electricity wholesale mar- ket to encourage competition. As a result, some independent power producers (IPPs) entered the power generation market. Under these circumstances, the Japanese government has decided that it will sell off its shares in EPDC in FY 2003 and that EPDC, as a completely private company, will serve as a major player in the new competitive market of the electric power industry. Stockholders and Fundraising EPDC was founded as a corporation with special status to implement Japan's energy policy. Originally the Japanese government owned 100 percent of its stock, but currently about one-third of ownership is held by nine electric power companies. EPDC is different from a private com- pany and has a special privilege to borrow loans directly from the Fiscal Investment and Loan Program (FILP) operated by the Ministry of Finance. This pool of funds is collected from the public (through postal savings, for example), and it is backed by the government's credibility. The money is used to directly finance special status corporations such as EPDC, and it indirectly finances the private sector through governmental financial institutions such as the Japan Devel- opment Bank. FILP has effectively provided funds to critical industrial sectors to boost economic development, especially in the years after the war when there was a shortage of savings. Since the supply of electric power was a national priority in the rebuilding of Japan's economy, EPDC was able to secure FILP loans for building large-scale power sources. Energy policies in every period have provided for funding on more favorable terms than have been available commercially. 84 Protecting the Global Environment EPDC and Environmental Protection During nearly fifty years of dam and generation plant construction and operation, EPDC has faced conflicts between environmental conservation and energy source development. Villages were submerged, uprooting the people who had been living there, and the shapes of mountains and rivers were changed for the construction of dams. Reclamation of land for constructing power plants changed the coasts, and smoke from thermal power plants polluted the surrounding air. As this destruction of nature and the dark sides of economic development came into the spot- light, and as society's consciousness of the environment grew, EPDC recognized the need to bal- ance the three Es (environmental protection, energy security, and economic growth). It then be- gan to take action to minimize the impact of its operations on the environment. EPDC planted trees to restore mountains. It learned techniques to eliminate soot, smoke, sulfur oxide, and nitro- gen oxide from the smoke stacks of thermal power plants. The company thus found that business could be compatible with protecting the environment if environmental dangers were faced squarely. In 1993 EPDC drew up the following environmental action guidelines as its basic prin- ciples on the environment (Box 5-2). Efforts to Counter Local Environmental Problems The rapid pace of economic growth in the 1960s increased industrial production and energy con- sumption and led to the formation of large-scale petrochemical industrial complexes. The scaling up of dedicated oil-burning power plants produced massive quantities of pollutants. In Yokkaichi City the effects of "Yokkaichi asthma" and "stinking fish" began to be felt around 1961, instantly casting the area into the public limelight as a polluted city. In this period when the public was becoming aware of environmental problems and was demanding heavy-handed controls on the electric power industry, the EPDC was planning to construct the Isogo coal-fired power plant. This was in response to the government's request in the Basic Program for Coal Industry for increases in coal demand. The EPDC's reaction to this environmental challenge became a model case for thermal power plant construction in Japan. Box 5-2. EPDC's Action Guidelines on Environmental Protection, 1993 1. We will make efforts to protect the global-scale environment as well as local environment by cleaner and more highly efficient thermal power plants, greater utilization of water resources in hydroelectric power plants, and safe development of nuclear power plants. We will also develop new technologies to utilize renewable and other unutilized energy sources. 2. We will respect natural environments and local communities, and build and operate power plants in harmony with surrounding natural environments and local communities. 3. We will make efforts not only in power generation and transmission but also in every business field to eliminate all possible waste, and to achieve effective use and recycling of natural re- sources. 4. Every employee in the company will be aware of environmental concerns of everyday work, and will act as a local citizen and a global citizen, coping with everyday-life environmental concerns. 5. We will cooperate with every country in the world to develop new technologies for effective energy utilization and environmental protection. 6. We will team with local citizens to consider energy and environmental problems. Source: Electric Power Development Company (1993). Enviroinmenztal Conservation by Japan's Electric Power Industry 85 Following is a description of the process leading up to the construction of the Isogo thermal power plant; the focus is on environmental concerns. As noted earlier, environmental problems had become by this stage a significant social issue with residents and local communities staunchly opposing expansion plans for factories and power plants. In this social context, the Yokohama municipal government commissioned four local academics to examine pollution prevention mea- sures for the nearly complE ted Negishi Bay coastal industrial zone. They made the following nine recommendations to the Yokohama government: * That the municipal authorities should review their industrial location and town planning schemes; * That it would be desirable to have the Isogo power plant site relocated; * That it would be desirable to reinforce the pollution supervisory network; * That the health care system for residents should be intensified and additional emergency facilities established; * That the municipal government should establish its own set of pollution prevention stan- dards and intensify government guidance; * That the organization of the Yokohama pollution control administration should be rein- forced; * That it would be desirable for pollution research centers to be established to enhance basic and applied research on pollution control; * That the municipal authorities should actively speak out against the pollution responses of the national governrnent; and * That the municipal authorities should adhere to a set of "open information principles" relating to pollution problems. These recornmendations were later included in the pollution policy of the Yokohama munici- pal government. Consequently, EPDC's Isogo thermal power plant provided the first example in Japan of a full-scale pollution prevention agreement. The Yokohama municipal government de- manded that EPDC conform with its pollution prevention measures. EPDC tried to reassure the municipal government, municipal assembly, and local residents' groups of the ecological sound- ness of the power plant. It documented the Wakamatsu thermal power plant's realization of a 98 percent particulate extraction rate in actual operation and the results of wind tunnel experiments at the Mitsubishi Heavy Industries Nagasaki shipyard. Despite these efforts by EPDC to alleviate concerns, the municipal government maintained its cautious stance and brought the matter up for deliberation with the Anti-pollution Measure Council. The Yokohama government went on to lobby the Ministry of Intemnational Trade and Industry (MITI) to have stringent nat-ional-level guidance and supervision of the pollution prevention measures imposed on the Isogo thermal power plant, and to make budgetary provisions for investment in antipollution facilities. The MITI responded by saying that it would take steps to comply with the basic demands of the Yokohama government. The Yokohama government later presented EPDC with a fourteen-point set of antipollution measures, including requirements that the smoke stacks be 120 meters tall, that a high-grade dust catcher of at least 98 percent efficiency be used to keep ash and soot below 0.6g/Nm3, and that low-sulfur coal be used at all times and the output concentration of sulfurous gas be no greater than 500 parts per million. EPDC immediately indicated that it would comply with these mea- sures and committed itself to the construction of the Isogo power plant. The company's full accEptance of the Yokohama municipal government's demands was sig- nificant in two respects. First, it made the Yokohama government the pioneer of antipollution policy. Following this success, the Yokohama government enforced a series of similar pollution prevention provisions for companies setting up operations in the Negishi Bay industrial zone. 86 Protecting the Global Environment This style of administration came to be known as the "Yokohama method" and was propagated throughout Japan to all local governments. It later contributed to the national government's Basic Lawfor Environmental Pollution Control. Second, EPDC gained self-assurance in the application of measures to fight pollution. Al- though the antipollution movement would not gain national momentum until later, EPDC's abil- ity to comply with what were at the time inconceivably strict provisions gave it confidence to go on and gain a solid local reputation for antipollution measures. THE ADVANTAGES OF VOLUNTARY AGREEMENTS. Voluntary agreements on pollution control between individual plants and local governments have numerous advantages. First, the local government can set standards that are severer than laws based on consensus among related par- ties. Second, unlike nationwide laws that are uniform, voluntary agreements can reflect the geo- graphical and social conditions of a particular area. In the Yokohama case, Yokohama City be- longs to the Tokyo metropolitan area; it serves as a major residential as well as commercial area. The industrial zone is nearby. Therefore, the concentration of factories in a small area, combined with other sources of urban pollution such as exhausted gas from automobiles, necessitates stricter environmental controls than the national standard in order to protect the health of citizens. Third, voluntary agreements are a very effective means of controlling and supervising pollution sources. The targeted level of each pollutant can vary from plant to plant depending on technical conditions and the nature of facilities. The company and the local government negotiate a target that is technically feasible. In this case, a study was carried out by a group of academics, and the agree- ment was made based on the results of the study. Fourth, as local residents' concerns about the environment have grown, voluntary agreements can improve corporate images and relation- ships with local communities. TIGHTER GOVERNMENT STANDARDS. In 1971 the Environment Agency was formed, signifying tighter government control over environmental protection. The agency's aim was to accelerate antipollution measures centering around fourteen pollution-related statutes. This policy was aided by the ruling in the 1972 Yokkaichi pollution case. The health risks associated with sulfur oxides (SO.) were recognized, giving a considerable boost to public support for strict regulation of air pollutants. Within this social context, the Environment Agency revised the emissions standards for sulfur oxides in 1973, from the original maximum daily average of 0.05 parts per million to a maximum daily average of 0.04 ppm. It incrementally imposed k-value regulations, which set output values based on the height of stacks and other parameters of factories and power plants. There was a gradual tightening of the standards to achieve the mandated level of air quality. During this process, it became apparent that imposing emissions regulations on individual polluting sources would not adequately maintain environmental quality in areas with concentrated industry. This led to the introduction of an areawide pollutant load control system as part of the 1974 amend- ment of the Clean Air Act. EPDC's FLUE GAS DESULFURIZATION UNITS. In 1973 EPDC decided to fit three thermal power plants with five flue gas desulfurization units (FGDs), a technology it had been developing for some time. It then petitioned the government for aid, arguing that in an industry that already required high levels of capital investment, the installation of such devices pushed electric utility companies beyond workable economic bounds. The government responded with three alterna- tive financial aid plans for the installation of FGDs: capital subscription for the construction of desulfurization units; lump-sum subsidies for desulfurization unit construction; and annual sub- sidies for the operation of desulfurization units. The latter was adopted as the main aid type. It Environmental Conservation by Japan's Electric Powver Industry 87 was also decided that operating costs for desulfurization units should be incorporated into elec- tricity charges, thus providing electricity utility companies with an avenue to recompense their additional outlays. The advent of FGDs inflated the cost of power generation an estimated 17 percent, but government subsidy receipts kept the final increase to the power companies down to 11 percent, which was directly recouped through an increase in electricity tariffs. The subsidy for this expensive pollution control equipment was introduced at a very early stage. As a large consumer of domestic coal, EPDC had been encouraged to use coal even though it contains a higher percentage of sulfur than does other fossil fuels. EPDC was obliged to install desulfurization units before its competitors, who were shifting to oil, did. A new technology is usually expensive in terms of investment and operational costs, and initial government support is needed to develop know -how and demonstrate success before the technology, which does not contribute to profit, can become widely used. Having recognized its necessity, the government decided to support EPDC'" introduction of the FGD technology from the United States as a test case. Once a technology becomes well established, the subsidy is abolished based on the polluter pays principle (PPP), and the cost of such equipment is born partly by the company and partly by consumers of electricity. EPDC utilized a full-flow FGD method known as the "wet lime-gypsum process." P'ositioning the desulfurization units within the confined surroundings of the power plants presented con- siderable difficulties, since coal-fired power generation, by nature, involves large-scale facilities. In the Isogo power plant, part of the coal yard was given up to house the desulfurization unit common to turbines 1 and 2; for optimal use of the space, the gas ducts were vertically separated into three levels. The construction of the absorption tower was so complicated and elaborate that the president of a U.S.-based chemical company is said to have commented, "this is a jigsaw puzzle, magic, the hand of god!" Later, on an inspection tour in 1981, an executive of the U.S. Environmental Protection Agency (EPA) praised the desulfurization technology in the highest terms, describing the Isogo plant as "the world's best anti-pollution facility." Figures 5-4 and 5-5 indicate changes in outputs of SO, and NO, from EPDC power plants per unit of power generated. The effectiveness of the environmental provisions adopted by EPDC, even when compared with those used in other developed nations, is clearly superior. OTHER ENvIRONMENT-FRIENDLY TECHNOLOGIES. Without EPDC's longstanding efforts to de- velop new technology, the construction of coal-fired power plants compatible with stricter envi- ronmental control standards would have been difficult. The company, with government financial aid, has been developing full-scale flue gas denitrification facilities for coal-fired power plants at Takehara Plant No. 1 since the 1970s. EPDC was one of the pioneers in this development field, and its first flue gas denitrification facilities were installed in a commercial plant in 1982. The technique spread not only in Japan but to Europe and to other countries. EPDC's overseas techni- cal cooperation projects flourished. Use of flue gas denitrification facilities by Power Plant Diirunrohr in Austria in 1983 was particularly noteworthy because EPDC's environmental mea- sures received high acclaim from the developed world. Denitrification and desulfurization facili- ties now have become standard for coal-fired power plants in many countries. The company also has been developing new problem-solving techniques that respond to modern needs. One of these is the dry activated carbon method, a simultaneous desulfurization and denitrification technology that EPDC has been developing for more than twenty years with financial aid from the government. The technique not only offers advanced desulfurization and denitrification, but also effectively treats trace substances for which tougher controls are expected to be enacted in the future. The technique has been demonstrated and adopted in EPDC's Takehara Plant No. 2 for desulfurization. It has several advantages: it requires only small amounts of wa- ter; it requires less energy to operate because large auxiliary machines such as slurry pumps are 88 Protecting the Global Environment Figure 5-4. SO, Reductions by the Electric Power Development Company, 1971-99 Emissions in grams of sulfur oxide per kilowatt hour of electricity generated 8 7 _ No measure Average for United States, United Kingdom, France, Germany, Italy, Canada, 1993-94 6 _ 5 4 \ Introduction 3 -\ of flue gas Testing of deuFuGDaio practical application \ (FGD) Introduction of FGD of atmospheric 2- for imported coal fluidized-bed combustion 1 (AFBC) 1971 1973 1976 1981 1986 1991 1996 1999 Source: Electric Power Development Company (1998a). Figure 5-5. NO, Reductions by the Electric Power Development Company, 1971-99 Emissions in grams of nitrogen oxide per kilowatt hour of electricity generated 4.0 No measure 3.5 - Combustion improvement Average for United States, United Kingdom, 3.0 - * 2-step combustion France, Germany, Italy, Canada, 1993-94 \ Low NOx burner 2.5 2.0 - Application of activated carbon method 1.5 - denitrification Introduction of selective to fluidized-bed 1.0 - catalytic reduction (SCR) combustion plants 1.0 -. 0.5 - 1971 1973 1976 1981 1986 1991 1996 1999 Source: Electric Power Development Company (1998a) Environmental Conservation by Japan's Electric Power Industry 89 not needed; and denitrification performance is more stable because the technique reuses acti- vated carbon in cycles. The technique is attracting the attention of many urban area plants as an advanced environmental rneasure, and it may also be applied to emissions treatment for refuse derived fuel (RDF) thermal power plants where proper treatment for heavy metals, dioxins, and other substances is needed. As mentioned earlier, many of the environment-friendly R&D activities of EPDC have re- ceived government support. The government has established two special accounts to provide funding for the power utility industry: the Special Account for Coal, Oil and Energy Demand Structure Adjustment Measures and the Special Account for Electric Power Development Pro- motion Measures. The sources of funds for the former are energy taxes and taxes on various fossil fuels such as coal, crude oi.l, gasoline, LPG, and LNG. The revenue for the latter comes from an electricity tax, which is explicitly included in electricity prices. Neither account is dedicated ex- clusively to environmental measures as their names might imply: however, considerable amounts are allocated to R&D for pollution control technology, energy-saving technology, and new energy development. Indeed, new initiatives on clean energy development have been implemented un- der partnerships between the public and private sectors. In order to provide stable financial re- sources for these programs, a part of the taxes on oil and electricity sales is earmarked for the Special Accounts. The support for R&D projects can take these forms: direct subsidy for the R&D project of an individual company; contract research from the Ministry of International Trade and Industry and the New Energy Development Organization, a government-funded research organization; joint research with NEDO; and government participation in power companies' joint research projects. Efforts to Reduce CO2 Emissions Carbon dioxide emissions involved in power generation come from many sources. In addition to fuel combustion in thermal power plants, sources include (i) construction of mining and trans- portation equipment, fuel refining facilities, and power plants; and (ii) operation of equipment and facilities. Figure 5-6 shows that the emissions of coal-fired power plants (270 kilograms of carbon per megawatt hour) are remarkably high compared to other power sources. However, coal supply and price are stable, thanks to immense deposits and widespread distribution. There- fore, coal is still an important energy source for the world, especially for developing countries such as China with large domestic reserves of coal. IMPROVEMENT IN EFFICIENCY IN THERMAL POWER PLANTS. In Japan, CO2 emissions reductions by the Electric Power Development Company were an unintentional result of its attempts to save energy. CO2 emissions levels are directly correlated with the consumption of fossil fuels. Efforts to improve thermal efficiency during the oil crises of the 1970s resulted in a large reduction in the CO2 emissions rate. Initiallv, the motivation for thermal efficiency improvement was provided by the hike in energy prices, but even after the prices stabilized, the importance of thermal efficiency improvement technology was recognized because of the global warming issue and the growing awareness of the need to reduce CO2 emissions. CO2 reduction through improved plant efficiency can be economically beneficial and thus compatible with economic growth; therefore, it is a real- istic and effective way of coping with the global warming problem because it can be carried out in developed and developing countries. The EPDC diligently introduced the best available technologies and actively involved itself in R&D for thermal efficiency improvement. These efforts have placed its achievement at the fore- front of the world. Improved plant efficiency reduces CO2 emissions per unit of energy by using less fuel. EPDC is promoting the pressurized fluidized-bed boiler combustion (PFBC) method; 90 Protecting the Global Environment Figure 5-6. CO2 Emissions by Power Sources in Japan Emissions in kilograms of carbon dioxide per megawatt hours 300 Sources of CO2 emissions - Fuel 250 Facility and operation 200 150 100 50 0 Coal- Oil- LNG- Tidal Wave Solar Wind Geo- Nuclear Hydro- fired fired fired power power power power thermal power power power Source- Central Research Institute of the Electric Power Industry. the target is a plant efficiency of 42 percent (Table 5-4). If this efficiency is realized, the company's C02 emissions per one kilowatt hour will be reduced by about 10 percent. The pulverized coal-fired generation system prevails in Japan as the established method of coal-fired generation. In this system steam generated by the burning of pulverized coal in a boiler drives a turbine. Higher pressure and temperature increase the thermal efficiency and therefore reduce fuel consumption. The history of coal-fired power generation has been a history of efforts to increase the scale of the boiler and turbine in order to raise the thermal efficiency by attaining higher steam pressure and temperature. A supercritical unit of 24 Mpa (Mega pascals) in pres- sure and 538/566 in temperature was introduced in the 1960s. After the oil crisis, development started on an ultrasupercritical unit with higher thermal efficiency. Currently, R&D is being con- ducted for the purpose of achieving a steam temperature of 630 degrees C. As a new approach, EPDC is developing a power generation system that combines steam and gas turbines. Current mainstream technologies in combined power generation use liquefied natural gas as fuel. To diversify power sources, EPDC is developing coal-using combined power genera- tion forms such as the pressurized fluidized-bed combustion (Box 5-3) and integrated coal gasifi- cation combined cycle (Box 5-4). Compared with the traditional pulverized coal thermal genera- tion, PFBC will improve relative efficiency by about 10 percent. It performs desulfurization inside the boiler and restrains NO, emissions, thus helpi-ng protect the surrounding environment. PFBC, in the demonstration stage at the Wakamatsu Power Plant, is being commercialized in other plants in Japan. IGCC is being tested at a pilot plant, and if the system is put into practice, thermal efficiency is expected to be even higher. EPDC has pioneered these technologies with financial assistance from the govemnment. Environmental Conservation by Japan's Electric Power Itidustry 91 Table 5-4. Thermal Efficiency and CO2 Emissions of Coal-fired Power Generation Power generation system Net thermal efficiency (%) CO2 emissions (kg-C/kWh) Pulverized coal-fired (China) 28 0.4 Pulverized coal-fired (EPDC, Isogo plant) 36 0.31 Pulverized coal-fired (EPDC, Matsuura plant) 38 0.28 Pressurized fluidized-bed combustion combined cycle 42 0.25 Integrated coal gasification combined cycle 44 0.23 Molten carbonate fuel cells 50 0.20 Source: Electric Power Development Company (1998a). IMPROVEMENT IN OPERATIONS AND MAINTENANCE. Introduction of efficient plants will im- prove thermal efficiency drastically but large amounts of investment are required. It is probably easier to wait to introduce new technology at times of new construction or major expansion, while in the meantime improving the operational or management aspects of the existing plants. In operating power facilities, efficiency varies with the operator. In coal-fired power plants, differences in the skills of the operator lead to (small) differences in combustion efficiency, steam volume, and power used in the plant, thus affecting the efficiency of the whole plant. EPDC, which strives "never to waste even one grain of coal," is raising the efficiency of each plant to the limit. It has been trying to improve the skills of its operators so that they can always achieve optimum operation. The company also has been improving peripheral equipment such as mea- suring and data processing devices so that operators can make the best decisions by grasping the current operating status (such as the numbers of mills, pumps, and fans used; the condition of the Box 5-3. Pressurized Fluidized-bed Boiler Combined Cycle The Electric Power Development Company began to develop atmospheric fluidized-bed combustion (AFBC) technology in 1981 using a national government grant. Fluidized-bed combustion technol- ogy bums pulverized coal on a fluidized bed. Since limestone is used as the fluidized bed material, the AFBC system removes SO, within the combustion process and thus does not require a flue gas desulfurization unit. Other major strengths of AFBC are more adaptability to different kinds of coal, occupation of less space because the FGD unit is not needed, and generation of less NO, since the combustion temperature is lower. EPDC has built on the technological base developed in Sweden and other countries with new, home-grown Japanese technologies (for example, ceramic filters that improve the reliability of the gas turbine, and use of the PFBC system in combination with ultra-high-temperature steam turbines (USC-T) to improve efficiency. The results were first embodied in the Wakamatsu 50 megawatt AFBC/ USC-T demonstration plant. With the conclusion of demonstration testing at Wakamatsu, work be- gan on a 70 megawatt PFE,C combined-cycle power plant in April 1992. PFBC enhances the basic strengths of AFBC. Pressurized combustion is more economic on the whole, since facilities can be more compact and construction periods shorter. It is also more efficient since it is suitable for combined-cycle power generation, in which gas turbines powered by high- temperature, high-pressure combustion exhaust gas are used in conjunction with steam turbines to generate electricity. PFBC Itechnology is one of the most promising means of reducing carbon dioxide emissions, a significant cause of global warming. Source: Electric Power Development Company (1998b). 92 Protecting the Global Enivironment Box 5-4. Integrated Coal Gasification Combined Cycle The idea behind integrated coal gasification combined-cycle (IGCC) power generation is to create fuel gas from coal that can be burned to turn gas turbines. It offers vast improvements over the heat efficiency limitations of conventional coal-fired power plants. Indeed, the system promises high effi- ciency even with small-capacity units. As gas turbines achieve higher temperatures and better per- formance in the future, further gains in heat efficiency can be expected. Coal gasification also has the advantage of limiting the output of carbon dioxide gas. When coal is gasified, either in the air or in a combination of oxygen-based oxidants and steam, it generates a gas composed primarily of flammable hydrogen and carbon monoxide. In a combined- cycle generation system, this gas is fed into the combustor of the gas turbine, where it is burned, generating heat to drive the turbine and produce electricity. The heat of the turbine's exhaust gases can also be used by heat recovery boilers to tum water into steam that will drive a turbine, generating more electricity. The Electric Power Development Company has been an active participant in projects sponsored by the national government and the New Energy Development Organization. The development of practical IGCC technology will be a priority. Source: Electric Power Development Company (1998b). burning coal; and the adherence of ash to coal) more quickly, precisely, and easily. EPDC also periodically overhauls and repairs its facilities to maintain optimal conditions. Other Efforts EPDC is also seriously engaged in the development of renewable energy and unused energy; this includes more effective use of water resources in hydroelectric plants, development of safer nuclear power plants (in Aomori prefecture a nuclear plant is being constructed), and use of natural energy. Geothermal power generation is now economically feasible, and power generation using refuse derived fuel (RDF) technology is being applied in commercial endeavors. An alternative solution to the global warming problem would be to collect and treat the CO2 in flue gas rather than restraining overall emissions levels. The huge amounts of energy required to do this have made implementation of this alternative infeasible. Some technological break- throughs are needed. EPDC has already started research on development of a CO2 solidification technique. Coal ash generated by coal-fired power plants has been used in cement and fertilizers. Usage for ground reinforcement material, fly ash cement, and building materials is promoted. By 1996 more than 60 percent of the coal ash being generated at EPDC plants was recycled. International Cooperation As one of the most technologically advanced countries in the world, Japan has an obligation to provide technical assistance to developing countries. EPDC has, at the request of central and local governments, cooperated on generation and transmission projects around the world, earn- ing in the process a reputation for reliability and excellence. The company had completed 150 projects in 45 countries around the world as of March 1998. These projects include hydroelectric and thermal power development and related research, and environment-related technology trans- Environmental Conservation by fapan's Electric Power Industry 93 fer in areas such as SO, and NO, reduction. It has sent 174 experts to 29 countries and accepted 1,775 trainees from foreign governments and electric power companies. As China and Southeast Asia industrialize, their energy consumption will increase rapidly Because the ratio of coal consumption to primary energy consumption is relatively high and their coal contains a relatively high percentage of sulfur (2 to 3 percent compared with 1 percent in Japan), the environment is likely to deteriorate rapidly. MITI drew up a "Green Aid Program" to encourage the use of low-cost, simple desulfurization systems based on Japan's advanced tech- niques for protecting the environment. In this program EPDC is sharing its technical develop- ment expertise. In the future EPDC plans to provide a more comprehensive international cooperation pro- gram that uses its experiences in hydroelectric, coal-fired, and geothermal power development and transmission projects. It wishes to make such projects more sound by providing assistance in project management know-how, engineering, and operational maintenance. Cost and Effectiveness of Thermal Efficiency Technology There are many ways to improve the thermal efficiency of coal-fired power plants. Plants can be replaced, depleted equipment can be rehabilitated, auxiliary equipment can be introduced, and operation and management can be improved. Plant Replacement Replacing subcritical coal-fired power plants, which continue to be built in most non-OECD coun- tries, with supercritical (SC) or ultrasupercritical (USC) plants will improve thermal efficiency substantially. According to the study by the Coal Industry Advisory Board of the International Energy Agency, SC plant efficiency is about 3 percentage points higher than subcritical plants, and USC plant efficiency is about 7 percentage points higher (Figure 5-7). Supercritical and ultrasupercritical plants cost just as much as subcritical plants, but their lower fuel costs will result in total cost reduction per kilowatt hour of electricity generation com- pared with subcritical plants. Thus, investment in SC or USC plants is commercially feasible and profitable, while reducing emissions of both CO2 and air pollutants. SC plants have been built and operated in hundreds of places, and this technology has already been proven. Maintenance Table 5-5 describes thermal efficiency enhancements and reductions in CO2 emissions through power plant retrofitting. Wie assume a 300 megawatt subcritical plant with steam pressure of 169kg/cm2 and main and reheated steam temperature of 566 degrees C, which is widely used in developing countries. Because the initial condition of the equipment, installation costs, and the prices and quality of fuel differ from country to country, it is difficult to directly apply these calculations to a specific plant. Proper consideration of target efficiency enhancement figures based on a study of the actuaal status of the plant would make it possible to propose the optimal set of modifications, both irL terms of cost and environment, and produce a plan many times more attractive to the power plant owner. Generally speaking, these plant modifications are one of the possible options for plants already in operation, for they require less initial investment, and if the current design and status of the plant are properly diagnosed and an optimal plan is imple- mented, they could be very cost effective. Since the calculations in Table 5-5 are based on Australian coal, the calorific value and carbon content per unit will differ greatly from those of lower grade coals. Assuming that average grade 94 Protecting the Global Environment Figure 5-7. Thermal Efficiency of Subcritical, Supercritical, and Ultrasupercritical Coal-Fired Power Plants Millions of tons of carbon dioxide emitted per year Percent 5.5 55 FM C02 emissions -Thermal efficiency 5.0 -50 4.5 -45 4.0 40 3.5 35 3.0 - - _ _ _ _ -3 Subcritical Supercritical Ultrasupercri tica l plant plant plant Source- IEA Coal Industry Advisory Board. bituminous coal is used, an increase in relative plant efficiency of 1 percent or more should facili- tate a 8.5g/kW reduction in CO, output for a 300MW-class coal-fired power plant. Assuming that the power plant runs at an average annual capacity of 70 percent, this correlates to an annual reduction in CO2 emissions of 15,640 tons, and a 5,700 ton per year reduction in coal consump- tion. Given that the coal price in Japan is about 5,000 yen per ton at CIF prices, the annual savings in fuel cost works out at 28.5 million yen. If a power plant were retrofitted as detailed in Table 5-5, it would take almost twenty years to recover the cost of facility modifications through savings in fuel costs, making the modifications somewhat less than economical. However, in terms of the effectiveness of the modifications in reducing CO2, NO., and SO. emissions, while it is not possible to perform a cost conversion, the cost outlay would generate a more significant benefit than the figures suggest, and on a national level, investment effectiveness would certainly be achieved. Note that since the modification costs have been calculated based on Japanese prices, they are slightly inflated compared with what they would be if the same investment took place in a devel- oping country. It should be possible to implement the same modifications at lower cost in a devel- oping country because of cheaper local labor costs and other factors. Cost and Effectiveness of Pollution Control Equipment Examples of air pollution control equipment are selective catalytic reduction (SCR) systems, flue gas desulfurization (FGD) units, and electrostatic precipitators (ESP). Table 5-6 shows the rela- tive cost of pollution control devices to total plant cost at a coal-fired power plant in Japan. The Environimental Conservation by Japan's Electric Pozwer Industny 95 Table 5-5. Thermal Efficiency Enhancements and the Associated Cost Relative increase in thermal efficiency Equipment Retrofitting activity (%) Costa (yen/kW) Boiler Modify boiler structure & burner 0.2 to 0.4 4,100 Increase the number of soot blowers 0.1 (approx.) 200 Turbine Replace the steam passage parts 3 to 4 3,000 Auxiliary equipment Insiall gas recirculating fan 0.1 to 0.3 150 Recovery in degree of vacuum 0.7 to 1.3 400 Axial flow FDF _b 600c Combined effect 4.1 to 6.1 8,450d a. Prices in Japan. b. Effective for partial load. The power required for medium loads is half that of centrifugal FDE c Includes installation cost. d. Combined installation cost is 5000 yen/kW. Source: Electric Power Development Company. emissions level at the flue top, with only a dust precipitator, would be 1,000 parts per million for sulfur oxide, 300 to 600 ppm for nitrogen oxide, and 10 to 30g/m3N for soot and dust. Dust is reduced to 300 milligrams per cubic meter of nitrogen (mg/m3N) by an electrostatic precipitator with a removal rate of 99 percent, and to 30mg/m3N through the dust removal effect of a wet- type flue gas desulfurization unit. With a wet-type FGD unit, SO, emission will be reduced by as much as 90 percent to 100 ppm. With some additional improvement of peripheral equipment, it could be reduced to 50 pprn for SO. and 10mg/m3N for soot and dust. As for NO, emission, it can reduce to 150 to 200 ppm lhrough combustion improvement provided by low NO, burners and two-step combustion. Selective catalytic reduction is used in combination with this equipment. NO, emissions would be reduced to 45 to 60 ppm with the combination. Table 5-6. Cost Composition of Pollution Control Environmental Equipment at a Coal-Fired Power Plant Cost composition of equipment Effect of equipment as a percentage Equipment before/after use of the total plant cost Wet-type limestone-gypsum desulfurization unit 1,000/50ppm 10.5 Denitrification device (dry-type ammonia selective catalytic reducer method) 300-600/45ppm 3.0 Combustion improvement (Low-NO, burner) 300-600/150-200ppm 0.6 Wastewater treatment equiprnent 2.2 Electric dust precipitator 10,000-30,000/300mg/m3N 3.1 Major equipment of plant 80.6 96 Protecting the Global Environment Implications for Developing Countries' Energy and Environmental Policies Most of the measures to control pollution that can be taken at power plants are end-of-pipe tech- nologies, and they bear certain additional costs for the power producer. In principle, the pollu- tion control cost should be reflected in higher electricity rates because environmental pollution is a negative extemality of power generation operations that needs to be internalized. However, since electricity is essential in industry and people's daily lives, too steep a rise in price might result in adjustment costs that are unacceptably high, both politically and socially. In Japan's case, government subsidy was introduced to mitigate the sudden hike in the price of electricity. Despite strict environmental standards, the Electric Power Development Company managed to limit the electricity price hike to only 11 percent due to its own cost reduction efforts and government aid. Note that the government measures were just for a smooth transition and were gradually abolished. The ultimate goal of optimal resource use requires that power producers and consumers eventually bear the entire environmental cost of electricity. In order to internalize the cost of environmental conservation, it is necessary to set environ- mental standards and effectively enforce them. But in many developing countries, monitoring and enforcement of the standards are reported to be problematic. In EPDC's case, the local community had become more conscious of the environment and was demanding strict envi- ronmental standards. Strong pressure from local government and the support of the residents greatly influenced the setting of standards and their enforcement. Considering the importance of community relations to EPDC, voluntary agreement was as important as legal requirements. Pressure from local government and the residents was effective not only initially but also at the monitoring stage. Since the local community had strong interests and relatively abundant in- formation on technology and on the company's environmental data, it could effectively moni- tor EPDC. The Japanese government is extensively involved in environment-friendly technology devel- opment. Clean coal technology plays an indispensable role in EPDC's ability to control pollution and reduce CO2 emissions without harming production. But commitment to cutting-edge tech- nology development is very costly and risky for a private company. The Japanese Ministry of International Trade and Industry conducted large-scale research on these technologies and acted as a sponsor and coordinator of research among private companies in order to mitigate the risk and financial constraints. The basic idea of Japan's environmental standard setting is that it should be based on the "best available technology. " At the same time the government is investing heavily in raising the level of "the best available technology" to achieve desirable environmental stan- dards. EPDC has developed pollution control technology and improved efficiency while funding R&D. Joint research among companies in the power utility sector or with the government is cost effective and becoming more common. CO2 emissions cannot be avoided in the coal-fired power generation process, but by correlat- ing it to fuel cost, it is possible to simultaneously pursue profit maximization and CO2 reduction. For this incentive to be effective, fuel price must be above a certain level. The EPDC's efficiency enhancement efforts saw major progress after the oil crisis. The fuel price hike and the fear of continuous price increases provided strong incentive for active involvement in R&D, and the company achieved the world's highest level of clean coal technology in the process of pursuing thermal efficiency. It is important to note that in Japan, while government regulates electricity and gas rates for consumers (based on the cost of generation or supply, plus a fair return to suppliers), there is no intervention on oil input prices, except for the taxes earmarking funds for the special energy accounts. By contrast, in many developing countries, energy price is kept unreasonably low un- der some form of government intervention either by direct control or subsidy provision. As a Environmental Conservation by Japan's Electric Power Inidustry 97 result, an electric power company is not likely to recover any investment in energy-saving equip- ment through fuel cost reduction. Supporting the introduction of proven efficiency enhancing technology such as supercritical plants, along with changes in energy pricing policy, will be ben- eficial for both CO2 reduction and long-run national economic development. References Electric Power Development Company. 1993. EPDC's Environmental Measures: In Pursuit of Energy Security and Environmental Conservation (in Japanese). Tokyo. . 1998a. EPDC Environmental Action Report (in Japanese). Tokyo. . 1998b. "Thermal Power Generation Technology." Research Report, vol. 100 (in Japanese). Tokyo. International Energy Agency. 1998. World Energy Outlook. Paris: OECD. - Coal Industry Advisoiy Board. 1998. Regional Trends in Energy-Efficient, Coal-Fired, Power Generation Technologies. Paris: OECD. Japan Federation of Electric PDwer Companies. 1996a. Electricity Industry Handbookfor Japan. lbkyo. 1996b. Overseas Electricity Industry Statistics. Tokyo. 1997. Energy and the Environment. Tokyo. OECD. 1998. Energy Balances, 1995-96. Paris. Takagi, Shintaro, and Toshinori Kojima. 1998. Energy and the Environment (in Japanese). Tokyo: Federation of Electric Power Companies. Takahashi, Masaki. 1998. "Technologies for Reducing Emissions in Coal-Fired Power Plants." Energy Issues, no. 14. Washington, D.C.: World Bank. 6 Reforestation of an Indonesian Tropical Forest: The Win-Win Approach of a Private Japanese Firm Noriyuki Kobayashi Hiroyuki Kato Forests provide a variety of products and services. The raw materials for housing and many products made out of woocd are extracted from the forest. In many parts of the world, wood is an important fuel. Paper products are derived from wood fiber. Trees cleanse the air by absorbing carbon dioxide and adding oxygen. Forests provide shelter and sanctuary for wildlife, and play an important role in the ecology of watersheds that supply much of our drinking water. The dramatic growth int the world's population, from 3 billion in 1960 to around 6 billion today, has greatly affected forestry, particularly in developing countries. The growing population's need for greater food supply has led to a massive increase in cropland. By the early 1990s, almost 40 percent of the earth's land surface had been converted to cropland and permanent pasture, largely at the expense of forests and grassland (World Resources Institute, 1997, p. 201). Further- more, since per capita consumption of industrial forest products is responsive to income change at low levels of income, the economic growth in developing countries and transition economies intensifies the competitive situation between demand for commercial logging and that for agri- cultural use. Poor enforcement of property rights and frequent forest fires are other factors that exacerbate the situation. Due to these pressures from population and economic growth, deforestation is proceeding at an unprecedented rate. Since a large proportion of the poor in developing countries live near forests and are dependent on their resources, deforestation makes it difficult for them to obtain food and fuel. In the western part of Africa, female family members have to commute on foot for several hours to obtain wood for fuel every day. Furthermore, deforestation undermines the en- vironmental functions of forests and intensifies global warrning, decreases biodiversity, causes decline in agricultural productivity, and increases soil erosion and desertification. The challenge is to meet the growing demand for agricultural production and forest products while safeguarding the environmental functions of forests. In this effort we should not and can- not stop commercial logging, conversions of land for agricultural purposes, and the use of wood as fuel wood per se. Rather, appropriate forest management, namely sustainable forest manage- ment, which incorporates biological as well as social functions of forests, needs to be considered in addition to the purely economic functions. Forest conservation requires us to confront intractable problems such as overpopulation, eco- nomic stagnation, uneven allocation of resources, and poverty. While we are unable to solve all of these problems, pragmatic changes in technology, management, and attitudes will make progress possible. One promising avenue is to help communities in and around the forests develop alter- natives to current destructive practices by cultivating extractive products that can be harvested without long-term damage to forest ecosystems. This approach depends on working with and supporting the people who live in the forest and know it best. The Sumitomo Forestry Company, Ltd., one of Japan's largest forestry firms, operates the Sebulu experimental forest project in the eastern part of Kalimantan, Indonesia. This project's 99 100 Protecting the Global Environment unique approach to reforestation involves not only artificial plantation but also social forestry- resettling of the local people who practice slash-and-bum farming and involving them in refores- tation. The goal is to provide income opportunities for local people while replicating the original ecosystem as closely as possible. Before discussing the Sebulu experimental forest, we explain the functions of tropical forests and current causes of deforestation in Indonesia. The chapter also assesses social forestry, includ- ing its economic viability compared with slash-and-bum farming. The required input/output and cost/price data for this analysis were gathered from the existing survey and on-site inter- views with farmers. Carbon sequestration from reforestation and research activities in the experi- mental forest that complement reforestation efforts also are discussed. We conclude this case study by drawing lessons from the Sebulu experimental forest that are applicable to other devel- oping countries. Forests and the Environment Forests provide a variety of products and services, only some of which can be expressed in mon- etary terms. Forests mitigate global warming, conserve the biodiversity of the planet, and protect soil and water resources. These are the most significant benefits of forests, but the environmental functions are also the most difficult to quantify. In this section we discuss the commercial and social functions of forests as well as their environmental benefits. Commercial Functions Forest products are major sources of income, foreign exchange, and employment. The Food and Agriculture Organization (1998, p. 35) estimated that in 1997 forestry contributed to 2 percent of GNP and 3 percent of merchandise trade at a global level. Although developed countries contrib- ute more than 80 percent of the world's industrial forest production, it represents only 1 percent of their GNP compared with 4 percent in developing countries. The actual economic value of forests is larger than those numbers imply, since forestry in this context includes only processed products and excludes nonwooden products as well as nonmarketed and intangible functions. The commercial functions of forests differ from region to region, especially between tropical and nontropical regions. Comparing production and consumption patterns in tropical (mainly developing) countries and nontropical (mainly developed) countries, we find that the nontropi- cal regions accounted for 83 percent of production and consumption of industrial round wood in 1994, and the tropical regions accounted for three-quarters of production and consumption of fuelwood and charcoal. Contrary to the general perception, developed countries are the domi- nant traders of forest products: 81 percent of total exports and 29 percent of total imports in 1994 (World Resources Institute, 1997). Yet the share of developing countries in the production of roundwood products increased rapidly between 1970 and 1994 (Figure 6-1), and the relative importance of developed and devel- oping countries in production and consumption of wood forest products is expected to change. For example, two in five people in the world, mostly in developing countries, rely on fuelwood and charcoal as their main sources of domestic energy for cooking and heating. The rapid popu- lation increase in developing countries in the 1970s and 1980s raised environmental concerns about the consequences of demand for fuelwood and charcoal: deforestation and desertification. Forests also provide nonwood forest products. These products include a vast array of animal and plant resources: food such as meats, fruits, nuts, and spices; fibers used in furniture and construction; and plant or animal products for medical and cosmetic uses. They are distinguished from cash crops such as cocoa and nibber, because they are wild or semidomesticated and are Reforestation of an Indonesian Tropical Forest 101 Figure 6-1. Word Production of Roundwood Millions of meters 4,000 [ Developing countries Developecd countries 3,000 55% 61 'lo 2,000 49%/ 1,000 SlOb 45% 39% 0 1970 1990 1994 Source: FAO (1998). important to the subsistence of the indigenous people living in and around forests. An estimated 80 percent of the population in developing countries depend on nonwood forest products to meet their health and nutrilional needs (FAO, 1998, p. 35). In some cases families engage in small- size processing to produce craft goods such as rattan work. Environmental Functions As noted earlier, one of the most significant benefits of forests is their ability to mitigate global warming. The earth's mean temperarure has increased 0.3 to 0.6 degrees Celsius over the past 100 years. Much of this global warming is believed to be from the increased concentrations of green- house gases in the atmosphere. Combustion of fossil fuels by the industrial sector is a major factor in the level of greenhouse gases, followed by deforestation and degradation of forests.' In a matter of a few decades, industrialization actually puts back into the atmosphere the equivalent of the carbon that nature had fixed into fossil fuels over the course of millions of years. Climate models project that, if current trends in greenhouse gas emissions continue through 2030, the earth could experience between a 1.5 and 4.5 degree Celsius rise in temperature, which would be comparable to the total warming since the last ice age, 18,000 years ago. 1. The Food and Agriculture Organization's definition of deforestation is depletion of tree crown cover to less than 20 percent for developed countries and 10 percent for developing countries (FAO, 1998, p. 174). Deforestation also includes the conversion of forests to other uses such as cropland and shifting cultivation; forests that have been logged and left to regenerate are not included (World Resources Institute, 1997, p. 203). Degradation refers to changes within the forest class that negatively affect the stand or site, lowering the production capacity. 102 Protecting the Global Envronnment The effects of a rise in global temperature would include a decline in nontropical forests, increases in air pollution, tropical diseases, species extinction, a northward movement of agricul- tural production, and a rise in sea level by as much as 1.5 meters. Although the best way to reduce greenhouse gas emissions is by controlling the combustion of fossil fuels, forests can mitigate global warming as well. One hectare of forest can absorb several hundreds of tons of carbon dioxide.2 Forests also contribute to the purification of the air by acting as a filter of compounds. The surface area of leaves reach 5 to 15 times the land surface area of forests and absorb compounds floating in the air. Carbon dioxide is released into the atmosphere when forests are cleared or degraded or when trees die. If trees are burned, other greenhouse gases, including nitrogen oxide and carbon mon- oxide, are added to the air as well. Thus deforestation, especially in the tropical regions, elimi- nates a potentially significant means of ameliorating the rise in carbon dioxide emissions. Tropi- cal forests have the greatest potential for sequestering carbon. It is estimated that through regeneration and reduced deforestation, they could increase the carbon storage capacity in the world's forests by 80 percent (FAO, 1998, p. 42). The diversity of the forms of life on the planet is diminishing at an unprecedented rate. This extinction of species is an irreversible process, and deforestation is a major source of the extinc- tion, because it destroys the most biologically active habitats. Scientists began warning in the 1980s that one-quarter or even a half of the earth's species could be lost over a few decades, largely from the destruction of tropical forests, which are estimated to host more than 50 per- cent (at most 90 percent) of the "existing" species. The quantities of bird, fish, plants, and in- sects that are endemic to the tropical forests are unmatched anywhere else on the planet. Fur- thermore, tropical forests contribute genetic material that increases the disease resistance of agricultural crops such as coffee and that provide some entirely new foods. However, this ge- netic diversity in agricultural crops eroded rapidly during the twentieth century because wild strains were lost in the conversion of forest to land. It is also important to note that approxi- mately one-quarter of all prescription drugs include the extract of substances found in tropical plants. Thus deforestation leads to the extinction of some species, the reduction of genetic varia- tion, and lessens the ability of humans to respond to diseases and keep the world's food supply secure from pests and climate change. Forests protect the productivity of soil. Trees are part of the nitrogen chain, enriching the soil when their residues decompose. Roots of trees absorb nonorganic compounds from the deep soil and release nutrients and improve the soil structure when they decompose into organic com- pounds that are necessary for plants. Deforestation and overexploitation of forests are major causes of soil degradation and, ultimately, desertification.3 The impact of deforestation on soil productivity is especially high in the tropical regions; once trees are cut down, the topsoil can easily be washed away during rainy seasons because it is thinner than that of nontropical forests. Strong sunlight accelerates the soil degradation. Forests serve as watersheds that feed hydroelectric projects and supply water, not only for the communities located around the forests but also for those downstream. Forests are adjustable bulbs for balancing the earth's water table (for example, by reducing floodwater in rainy seasons and by raising the water level of rivers in dry seasons). Maintaining a good forest cover is essen- tial for safeguarding a reliable and clean water supply for downstream agricultural lands. The 2. Trees release some carbon dioxide as a byproduct of respiration. The extent of net absorption depends on the age and species of the trees: the younger the trees, the larger the net absorption. 3. Desertification is defined as land degradation in arid, semi-arid, and dry subhumid areas resulting from various factors including climatic variations and human activities (FAO, 1998, p. 39). Reforestation of an Indonesian Tropical Forest 103 loss of forests not only increases the surface water flows that erode soil and its nutrients, but also changes the amount of water evaporation and rainfall. Social Functions The value of forests' social functions, although large, is difficult to estimate. Forests are used for recreational activities such as hunting and bird-watching and sports activities such as hiking and mountain climbing. Their scenery provides immeasurable pleasure. In some cultures forests have spiritual and religious meanings that are specific to the community. Therefore, the degree to which a community is socially att,ached to the forest will determine the quality-of-life benefits that can be derived. Since these benefits vary between communities, an economic value is difficult to assign to them. Changes in Forest Cover in Indonesia The FAO defines developed-country forest area as "land with tree crown cover of more than 20 percent of the area," while for developing countries, it refers to an "ecosystem with a minimum of 10 percent crown cover of trees and/or bamboo, generally associated with wild flora, fauna and natural soil condition, and not subject to agricultural practice." By that definition 3,454 mil- lion hectares, which correspond to 26.6 percent of the world's terrestrial surface, were covered by forests in 1995. Developing countries account for 56.8 percent of the world's forests, and tropical forests, nearly all of which are located in developing countries, occupied 1,760 million hectares (FAO, 1998).4 Indonesia is a leading country in terms of forested land mass and second only to Brazil in tropical forest area. The total forested land area is 144 million hectares according to government proclamations (110 million according to the FAO). The average annual loss is said to be in the range of 0.9 to 1.3 million hectares. The average annual rate of loss was 1.0 percent during the first half of the 1990s. The forestry and forest product industries are both key industries in Indonesia with an annual turnover of 13.5 billion U.S. dollars, accounting for 2 percent of Indonesia's GDP. They employ 1.5 million people, which corresponds to 7.5 percent of the total population. Full-scale development in natural forests on islands such as Kalimantan and Surnatra only began in the 1960s. The hisiory of this development can be divided into three main periods. The first period of natural forest development extended from the 1970s to the early 1980s and was characterized by raw wood exports. A system of forest harvesting concessions was established, and development rights were granted for a series of forest plots. Foreign investment in forest area development was subsequently allowed, leading to involvement by companies from around the world in what came to be known as the "Green Olympics," signifying the commencement of full- scale forest area development. In the second period of development, from the late 1980s to 1990, domestic industrialization based on plywood production was promoted in Indonesia. An industrialization policy in effect since the beginning of the 1980s required companies possessing development rights to supply logs domestically. This led to year-to-year drops in raw wood exports. The major export item shifted to plywood, making Indonesia the world's leading plywood manufacturer, with more than 120 factories. 4. All data in this section are derived from FAO (1998). 104 Protecting the Global Environment The third period of development, beginning in the 1990s and continuing to the present day, has concentrated on sustainable forestry management. With the ever-growing prominence of environmental issues, the depletion of the world's tropical forests has become a global concern and has shifted the spotlight to Indonesian forestry policy. In the 1990s, what had been a produc- tion-oriented forestry policy shifted towards sustainability through such measures as the reduc- tion of logging output and a drive for plantation development, for which the Indonesian govern- ment has been commended by international organizations such as FAO. The forest industry policy, administered as part of the 1995-2000 five-year plan for national development, calls for forest product production to be 15 percent lower than that for the preceding stage. Causes of Deforestation Why is deforestation occurring so rapidly when the benefits from forests are so significant? A study of forest land cover changes in the tropics between 1980 and 1990 carried out through Forest Resource Assessment 1990 indicates the nature of changes in forest area. For Asian forests, gradual changes as a result of rural population pressure and abrupt changes due to government policy for resettlement and commercialization of agriculture are responsible. However, other eco- nomic, social, and legal factors are also critical. COMMERCIAL LOGGING. Commercial logging is one cause of forest loss. Loggers bulldoze roads deep into the forests to log the most valuable trees. Logs are then dragged out of the forest, leaving behind a trail of ecological havoc. Some of the current tree-cutting methods are inappro- priate. So, too, are the roads that knife into the forest, allowing for the removal of trees and the entry of settlers. These roads provide access to remote forest areas for farmers, miners, land specu- lators, and ranchers who value the forest only for the land beneath it. This phenomenon has been well documented in parts of the Amazon and Indonesia. Commercial logging is usually associated with economic rent. Although governments have a variety of policy instruments to extract this rent from the logging companies, they typically give concessions for forest harvesting and do not capture all of the rent. As a result, the cost of harvest- ing is artificially reduced, and loggers can afford to harvest much more forest land than would otherwise be economically efficient. CONVERSION TO AGRICULTURAL LAND. Forests generate income and employment; therefore, population growth and poverty put pressures on forests. It is important to note that there is an interwoven relationship among population growth, poverty, and government incentives behind the conversion of forests to agricultural land. Since many of the world's poor live near forests and are dependent on forest land and re- sources for their livelihood, and since nearly all of the increase in population by the year 2010 is expected to occur in developing countries, forests will continue to play a particularly important role in providing products and income for those people. In fact, rural population growth, coupled with agricultural expansion, especially in Africa and Asia, is a major cause of changes in forest cover (Figure 6-2). The poverty of rural farmers results in the conversion of forests to agricultural lands. They see unclaimed forest land as an opportunity to own land. Antipoverty policy by governments actu- ally exacerbates the situation. Nations confronted with masses of farmers see unowned or pub- licly owned forests as a politically more viable source of land for the landless. Without land, those farmers are forced to migrate into the urban areas, causing a rise in unemployment and crime. Since it is politically difficult for the government to take land from the rich and distribute it to the poor, the government is forced to open up forests to the farmers. Reforestation of an Indonesian Tropical Forest 105 Figure 6-2. Changes in Forest Cover, 1990-95 Millions of hectares Percent 4.0 0.4 i-l 1990 3.5 1995 - 0.2 - Annual change 3.0 0.0 2.5 -0.2 2.0 --0.4 1.5 --0.6 1.0 0.5 - | | 4-0.8 Africa Asia Indo- Oceania Europe Former North South Brazil World ne,.ia USSR and America Central America Source: FAO (1998). For example, in Brazil, acquiring land by squatting has been formally recognized since 1850. A squatter acquires the right to continue using the land by living on a plot of unclaimed public land and using it effectively for at least a year and a day. If these conditions are met for five years, the squatter acquires ownership of the land, including the right to transfer it to others. A claimant gets land title for an amownt up to three times the amount cleared of forest. The more deforesta- tion the squatter engages in, the larger the amount of land he acquires. Deforestation is a neces- sary step for landless farmers to acquire land. In Indonesia the transmigration policy that encour- ages farmers to migrate from heavily concentrated Java to other islands has contributed to the opening up of forests owned by the national government. Both examples imply that the systems of land rights under antipoverty policy are faulty. EXTERNALITY. Forests have no clear owner, even though they physically belong to countries. They are slow to grow and expensive to protect. Once gone, they appear to be irreplaceable. Their trees may yield long-term benefits to local people and countries in which they stancl; however, once they are chopped down, they only yield quick profits to a lucky or ruthless few. Sustainable management of forests is likely to be less profitable than clearing them and grow- ing trees for commercial uses. Externality provides the key to resolving this paradox. The eco- nomic benefits from forests come at the expense of environmental benefits. For example, for coun- tries with the forests, effects such as global warming and biodiversity loss are largely external, whereas the costs of preventing deforestation are internal. The loss of biodiversity is a deeper concern of developed countries; the technologies to exploit the forest gene pool for pharmaceutical products are in use in developed countries. Similarly, most of the damage from global warming 106 Protecting the Global Environment would be felt outside the borders of the countries being deforested. The fact that the strongest opposition to the loss of biodiversity comes from developed countries, not from the countries that are home to the tropical forests (a typical example of so-called international externality), is indicative of why deforestation continues and developing-country governments themselves solve the problem on their own. In sum, the pressures from poor farmers seeking more land, timber companies in pursuit of wood products, miners seeking to tap precious metals, and hunters seeking game are very real in the countries with tropical forests. At a time when they are saddled with huge external debts, those countries are encouraging overexploitation of their resource endowments in order to gen- erate foreign exchange earnings. Numerous perverse incentives offered by government have long encouraged deforestation by local people and migrants: for example, tax credits that allow land speculators to offset the costs of clearing forest land for cattle ranching; and subsidies for crops, livestock, and the building of access roads. Poorly defined ownership adds to the pressures for clearance. Establishing legal title to land is often cumbersome. The list of losers from deforestation includes local people who have lived in and derived their livelihood from these forests for a very long time. As the loggers and squatters push deeper and deeper into forests, the local people are forced to relocate farther and farther away from their traditional lands. Understanding and cooperation from the local community are indispensable for long-term forest management. It is clear that attempts to exclude from forest management those who are dependent on forests for their food, fuel, and other products result in failure. The local community should be managerially involved at the beginning stage and needs to benefit from its participation in forest management. Overview of the Sebulu Experimental Forest Sumitomo Forestry initiated the Sebulu experimental forest to address deforestation concerns in the Indonesian tropical forest. It has restored areas damaged or destroyed by forest fires and slash-and-burn farming. The goal is to replicate the conditions of the original forest as closely as possible and to establish sustainable forest utilization for the local people. The project in- cludes natural reforestation of waste land, artificial plantation of dipterocarps and other trees, and implementation of social forestry with local farmers who have been practicing slash-and- burn farming. Characteristics of the Site The experimental forest is located at Sebulu in Kutai District, East Kalimantan Province, Indone- sia (S 0°16'13"; E 116°59'15"). It is about 60 kilometers northwest of the province capital, Samarinda. In the 1970s, P.T. Kutai Timber Indonesia (KTI, a joint venture of Sumitomo Forestry and local interests) began forest development in the area around the current experimental forest. The main role of the forestry operation was to supply lumber to the company's plywood opera- tion in Java. KTI gained an excellent reputation for its sustainable forest management, which was based on selective cutting with the silvicultural technique called TPTI, stipulated by the Indonesian government. During 1982-83, Kalimantan was swept by forest fires on an unprec- edented scale. Damage from the fires, which, according to one estimate, destroyed 3.1 million hectares of forest, forced KTI to terminate its forestry operations and to relinquish its conces- sion right to the government. Since then, local people have been practicing slash-and-burn farming and illegal logging. An aerial survey in July 1995 indicated that a quarter of the area had undergone repeated slash-and- Reforestation of an Indonesian Tropical Forest 107 burn farming after the forest fires of thirteen years earlier. Sparse forest cover had survived along the mountain ridges, but most of it was lost in the fires that raged between February and May of 1998. As a result, the area is now mainly wasteland. Average arnual precipitation within the experimental forest is 1,850 millimeters (mm), and the average temperature is around 28 degrees Celsius. The period between April ancl October is normally the dry season, but in recent years abnormal weather patterns have been frequent. Rainfall was extremely low in the second half of 1997 and the first half of 1998, and conditions remained abnormally dry between February and April. The severity of this dry period is appar- ent from the rainfall figures for 1998, which show that rainfall amounted to 81.5 mm in the Janu- ary to March period, compared with 631.5 mm in the April to June period, 576.5 mm in the July to September period, and 513.5 mm in the October to November period (Ministry of Forestry, 1998). The likelihood of frequent climatic abnormalities in the future means that forest fire prevention and measures to halt slash-and-burn farming are extremely important. The topography of the experimental forest area consists of rolling hills with numerous high and low areas. Elevation varies between 100 and 300 meters. While soil characteristics do not present a hurdle to the growth of vegetation, the area as a whole is not especially fertile. The geological structure consists of alternating layers of sandstone and shale, and there are scattered areas of highly acidic sulfate soil that are unsuitable for the growth of vegetation. Even today the experimental forest area and the surrounding areas are still affected by large- scale slash-and-burn farming and illegal logging. The residential section of Sebulu Ule village (population 6,000) lies on the southern side of the experimental forest and extends along the Mahakam River. A settlernent of about 1,500 migrant families from Java lies on the northern boundary of the experimental forest, as does P.T. Suruya Hutani Jaya's (SHJ) industrial forest plantation, which extends for 200,000 hectares into the hinterland. A medium-density fiberboard plant owned by SHJ and an open-cast coal mine are located on the western side of the experimen- tal forest. Partly because of those industrial activities, the area around the experimental forest has developed rapidly during the past ten years. There is considerable traffic along an asphalt road linking the area to Samarinda. The area is typical of a region in which tropical forests are threat- ened with deforestation. Main Activities A total area of 3,000 hectares was established as the Sebulu experimental forest in 1991. As stated earlier, the experimental lorest is intended to replicate the conditions of the original forest as closely as possible, and therefore Sumitomo Forestry decided to base the project on the planting of dipterocarp trees, which are indigenous to tropical Southeast Asia. The project consists of three main activities: natural reforestation of wasteland (promoting the growth of natural saplings.); artificial plantation of dipterocarps and fast-growing trees and fruit trees; and social forestry to improve the standard of living of the local people. The proper mix of these three is expected to establish a model for sustainable tropical forest management in har- mony with the local environment. The cultivation of fruit trees and crops contributes to the live- lihoods of local residents. In addition, commercialization is being investigated for fast-growing species such as sungkai. In order to replicate the original forest, the stakeholders need to know the characteristics of dipterocarps and the natural conditions of the site. In this respect, research on soil conditions, as well as physiological and ecological characteristics of dipterocarps, has been completed to sup- port the development of the experimental forest. The results are then utilized systematically in applied research (nursery and planting), which is seen as a way of creating sustainable forest management systems. 108 Protectinig the Global Enivironnment During the first stage of the project, which began in November 1991, a wide range of technolo- gies suitable for local conditions was developed and implemented. The five-year second stage of the project began in April 1996. By December 1998 the company had established about 405 hectares of artificial plantation. Seventy percent are dipterocarps trees, and the others are fast- growing trees such as sungkai and fruit trees including papaya and mango. Since the experimen- tal forest was damaged by the forest fires that swept through the whole of East Kalimantan Prov- ince in March 1998, replacement planting has been under way. Management System and Policy The Sebulu experimental forest is managed by KTI, a joint venture between Sumitomo Forestry and the Forest Research and Development Agency (FORDA) of the Indonesian Ministry of For- estry. Sumitomo Forestry provides financial, technical, and technological assistance and conducts research activities in conjunction with the Laboratory of Silviculture of the University of Tokyo's Department of Agriculture. Moreover, Sumitomo Forestry is also carrying out tasks assigned to it as a member of the Research Association for Reforestation of Tropical Forests (RETROF), which is affiliated with the Forestry Agency of Japan. The experimental forest is eligible for government research funding from RETROF. A steering committee with members from the Indonesian Ministry of Forestry, KTI, Sumitomo Forestry, and the University of Tokyo is held once a year in order to decide the research topics and evaluate the outcomes of the experimental forest. Major activities in the experimental forest are supervised by a working committee (with members from the ministry and KTI). There are some blocks where technicians from FORDA conduct on-site research. Many divisions of Sumitomo Forestry are cooperating in the implementation of the Sebulu experimental forest under the leadership of the Green Environmental R&D Division. The Tsukuba Research Institute is playing an important role in research and technological development activi- ties, and three researchers are involved in developing the experimental forest. The first is respon- sible for seedling growing, planting, silviculture, and social forestry; the second for cuttings and tissue culture; and the third for forest product utilization. In addition to their research work at the institute, the researchers travel to Sebulu four or five times each year for three to four weeks to participate in joint research with KTI and FORDA's technicians. In the Green Environmental R&D Division, most of the project-related work is handled by two staff members. One is permanently stationed at the Sebulu experimental forest to supervise research and manage the experimental forest in cooperation with KTI staff. The basic issues considered in relation to the tropical forest reforestation project are continu- ity, public benefit, and international significance. It was decided that the experimental forest should contribute to cooperation in the field of environmental technology and that it should involve research and technological development at the highest level. The public importance and public benefit are ensured through the joint management of the experimental forest by KTI and the Indonesian Ministry of Forestry. This arrangement also facilitates technology transfers and ensures that the project is firmly based in the Sebulu region. Joint implementation by Sumitomo Forestry and KTI ensures that the project has interna- tional significance. Researchers from Sumitomo Forestry and the University of Tokyo and techni- cians from KTI and FORDA spend extended periods of time at the site. Their participation in joint research activities turns the experimental forest into a forum for international technological cooperation. The involvement of the Laboratory of Silviculture of the University of Tokyo in joint research activities maintains high scientific standards. The project is expected to yield major public ben- Reforestation of an Indonesian Tropical Forest 109 efits through its contribution to tropical forest research. Experts' guidance throughout the project has laid the foundations for research activities with excellent results. The experimental forest can be an example of cooperation between the industrial and academic sectors. The Research Association for Reforestation of Tropical Forests For years Japan participated in international cooperation in the forestry sector primarily at the governmental level. Evidence that much could be gained through private sector participation in tropical forest conservation and the development of reforestation technology led to the decision to create a research association involving industry, academia, and government. The Research Association for Reforestation of Tropical Forests, established in July 1991 by the Industrial Tech- nology Research Association Law, has ten corporate members and is under the jurisdiction of the Forestry Agency. The research association's operations are modeled on a system first introduced in the United Kingdom in 11917. Japan is the only country in the world to apply this system to the restoration of tropical forests. The creation of RETROF gave impetus to Sumitomo Forestry's efforts to establish the Sebulu experimental forest. The organization has also played an important role in subsequent research activities in the experimental forest. RETROF has established four research themes, the most important of which is the clevelopment of a social forestry system.5 A Comparison of the Sebulu and Wanariset Forest Projects Different from other reforestation projects in the region, the Sebulu experimental forest is a plat- form for industry, government, and academia to come together to achieve tropical forest regen- eration. Sumitomo Forestrv and KTI use the Sebulu plot not as just another industrial plantation but to carry out genuine research without direct profit to themselves. Based in Samboja, nestled between Balikpapan and Samarinda in East Kalimantan, the Wanariset forest research station is owned by the Indonesian Ministry of Forestry and run through funding and technical support from a Dutch foundation. Wanariset has established enrichment planting techniques for forest production based on selective felling (that is, techniques for shaded areas), whereas at Sebulu, planting techniques suited to both shaded and open areas have been developed. With regard to propagation methods, Wanariset has developed dipterocarps cutting techniques, whereas Sebu]u has been successful in developing both tissue culture and cutting techniques. Tissue culture makes it possible to produce seedlings from superior trees. When com- bined with cutting techniques, it makes the mass production of seedlings feasible. The Wanariset cutting technique is based on hydroponic cultivation, while the Sebulu method uses sand as the cutting medium, making il technically simpler and giving it the potential for wider acceptance. For mass production of grafted seedlings, a spear plot from which spears can be cultivated in large quantities is required. Wanariset has successfully applied tea cultivation methods to the development of cutting stock nurturing techniques to be able to produce spears efficiently. 5. In 1996 RETROF began the second phase of its research activities. Research themes of the second phase are development of nursing techniques for fast-growing tropical tree species, development of silvi- cultural techniques for tropical forests, development of a social forestry system, and development of utili- zation techniques for forest products. A total of eight companies, including Sumitomo Forestry, Oji Paper, and Toyota Motor, are actively engaged in this research. The budget for RETROF in 1997 was 151 million yen, out of which 78 million was subsidy. 110 Protecting the Global Environment Driving Forces behind the Experimental Forest Sumitomo Forestry identified the experimental forest as a part of the answer to global environ- mental issues. It was initiated as a purely social activity, and no commercial returns were ex- pected. Forests play a vital role in protecting the global environment, and the most crucial issue affecting the world's forests is deforestation of tropical forests. Among the factors contributing to the reduction of forest areas are the conversion of forest to agricultural land, excessive grazing by cattle, and inappropriate commercial logging. It is preferable to find a solution that takes into account economic as well as environmental factors. The Sebulu experimental forest targets the problems of tropical forests and contributes to the solution of global environmental issues. Second, the reforestation of tropical forests is a field in which Sumitomo Forestry can use its unique skills and technology. The experimental forest provides an ideal opportunity to utilize experience and expertise accumulated through its many years of forest management in Japan and overseas. Third, Sumitomo Forestry regards its reforestation of tropical forests as a way of repaying a debt: Japan imports timber and plywood from Southeast Asian countries. In this sense, Sebulu embodies the corporate philosophy of a "Spirit of Appreciation of Nature." Fourth, the Sebulu experimental forest enables Japan and Sumitomo Forestry to make a vis- ible contribution. It is often said that Japanese official development assistance and private-sector foreign aid projects consist of financial assistance or the mere construction of facilities, with the result that Japanese involvement is invisible. Business corporations commonly contribute to soci- ety or the international community by funding nongovernmental organizations or making dona- tions to universities and research institutes. Rarely do they undertake projects that involve direct participation by their employees. The experimental forest is a project where the company, and Japan, can play a visible role. The company wanted a project through which its employees could work with local people to overcome difficulties. Fifth, the experimental forest forms part of Japan's technical assistance in environmental tech- nology, a field where Japan has a competitive advantage. There are various efforts to overcome the problems affecting tropical forests, and reforestation is seen as an area of environmental tech- nology in which Japan's private sector can make an important contribution through international cooperation. Why in Sebulu? Tropical forest research requires an appropriate site, suitable researchers, and facilities where the researchers can reside for long periods. Indonesia, Malaysia, the Philippines, and Papua New Guinea were among the countries considered during the planning stage of this experimental forest. Sebulu, Indonesia, was eventually selected as the research site for the following reasons. First, there is a long history of ties between Japan and Indonesia. From the Japanese perspec- tive, tropical forests have long been regarded as part of the region known as the South Seas. Java and Borneo are prominent among the place names that the Japanese associate with that part of the world. Moreover, many Japanese view the South Seas with a kind of longing. In Japan tropi- cal timber has always been called "South Seas timber," and Japan's traditional source for such timber was Indonesia. Second, Sumitomo Forestry has operated for many years in Indonesia. It has been involved in Sebulu for more than twenty-five years through its links with KTI, which has built a relationship of trust with the local communities. In the prewar era the Forestry Division of Sumitomo Holding Company, the forerunner of Sumitomo Forestry, developed a pine plantation near Lake Toba in Sumatra. The plantation served as a watershed forest for the lake. The company also operated Reforestation of an Indonesian Tropical Forest III rubber plantations in West Kalimantan and Java. In 1970 it established KTI and began forest development activities in Sebulu. KTI maintained the production potential of its forests through sustainable forest management based on selective cutting. KTI also played an active role in hu- man resource development and provided community infrastructure such as schools, mosques, and sports grounds in the Sebulu region. Despite the tragic forest fires of historic severity in 1982 and 1983, which forced KTI to close down its operations, KTI and Sumitomo Forestry left the area an important legacy in the form of a labor force with large numbers of highly skilled people. Social Forestry in the Sebulu Experimental Forest The key facet of the Sebulu experimental forest is social forestry. Its goal is to develop alternatives to slash-and-bum farming that provide more stable income opportunities for local people. This section discusses social forestry methodology employed in the experimental forest, and then, by estimating cash flows, it tries to assess the economic viability of social forestry relative to slash- and-bum farming. The required input/output and cost/price data for this analysis were gath- ered from the existing survey and on-site interviews with farmers. Slash-and-burn farming accounts for 60 percent of the loss of forests in Indonesia. The "sustainability" of slash-and-bum farming is ruptured when pressures from population growth intensify. To increase output, farmers are induced to either shorten fallow periods or convert more forest to agricultural land. In Indonesia transmigration policy has been encouraging farm- ers in heavily concentratecl Java to migrate to other islands, including Kalimantan. However, the fertility of the land where these migrants settle is often poorer than that of the land cultivated by the indigenous people, and they have been forced to perpetuate the slash-and-bum process. The increasing number of new migrants and the appearance of the second generation intensify the demand for land. In preparation for the establishment of the Sebulu experimental forest, Sumitomo Forestry dispatched survey teams three times between 1989 and 1991. A report by Professor Satohiko Sasaki of the University of Tokyo, the leader of the third team, stated that the area around Sebulu has been affected by forest fires, secondary logging, human settlement, slash-and-burn farming and other factors. Little of hhe forest remains. In view of the customs and practices of local people, it will be necessary to take steps to protect the experimental area from slash-and-burn farming. We would need to devise a unique solution to this problem through dialogue with residents and research into their way of life." Professor Sasaki's team decided that the basic concept for the Sebulu experimental forest should be reforestation and technological development that would contribute to the living standards of the local people. It is hoped that the introduction of social forestry will improve the potential for successful reforestation by reducing dependence on slash-and-bum farming. Article 2-(2) of the agreement between the Indonesian Ministry of Forestry and KTI regarding the joint management of the Sebulu experimenta t forest defines the scope of activities for the project, and social forestry activities are identified as key facets. In 1995 Sumitomo Forestry conducted an economic survey in the Sebulu region in order to understand the local economy. The KTI staff surveyed 756 households to obtain data such as occupation, income, and number of family members.6 Approximately 46 percent of the house- holds had come from other parts of East Kalimantan, and more than 80 percent of those house- holds had migrated in the past fifteen years. The major occupations reported were in forestry, 6. For the summary of the survey, see Ministry of Forestry (1996, pp. 73-77). 112 Protecting the Global Environment manufacturing at sawmills, transportation, and trading, most of which have ties to illegal log- ging. Slash-and-bum farmers engaged in illegal logging during slack seasons. Thus the survey confirmed that the Sebulu forest area was threatened by population growth and was a practical site for social forestry. Experimentation and Implementation Local participation is critical to social forestry, and the range of categories of local participants is broad: communities, villages, cooperatives, schools, and individual farmers. The Sebulu experi- mental forest focused on individual farmers and family units as the social nucleus, mainly be- cause communities and cooperatives in the region were not well organized as joint producers. This strategy can vest management over a certain area in a specific person and thus makes the correlation between the inputs and outputs direct. Since farmers do not join unless they can per- ceive benefits from their participation, this strategy has been one of the most successful approaches used in other projects. Slash-and-bum farmers are being encouraged to switch to settled farming as a way of reduc- ing dependence on their destructive methods. This is being achieved through the creation of areas with mixed plantings of dipterocarps trees, fruit trees and crops, and through the develop- ment of fruit trees. At present, four social forestry trial zones with an area of approximately forty- three hectares have been established in the Sebulu experimental forest. As is shown in Table 6-1, the program is being implemented with the cooperation of thirteen families. The plantings in the social forestry trial zones include dipterocarps trees (50,000 seedlings), fruit trees (durian, mango), fast-growing trees (sungkai, gmelina, teak), and crops (peanuts, maize, dry-field rice). KTI's role is to provide farmers with technical guidance as well as seedlings, fertilizer, and materials. The seeds and fertilizers are given in advance so that the farmers can start cultivation even if they do not have enough cash to purchase such inputs. Farmers repay those expenses later, once they have harvested their crops or fruits. The farmers constantly consult KTI about the implementation of social forestry. Initially, social forestry in the Sebulu experimental forest was characterized by trial and error. However, after two stages were completed, the most suitable methods were standardized. FIRST STAGE. Trial planting of fruit trees started in early 1992, as soon as development of the experimental forest began. Initially, seventy-five mango trees were planted around the base camp and another seventy-two in the fruit-tree trial zone. The trees fruited three years after planting. In addition, 120 enhanced durian trees were planted near the seedling nursery to produce seeds. Mixed plantings were also undertaken. In Block 1 and other first-year planting areas, mangoes and durians were planted in the dipterocarps planting zones; cotton plants were used in mixed plantings in Blocks 5 and 8. The fruit trees grew slowly and failed to fruit because of factors that included poor soil conditions and damage caused by an insect attack. The fruit trees were all enhanced varieties, not available locally, and the seedlings were transplanted from Java by KTI. A family of slash-and-bum farmers settled in Block 7, where mixed plantings of dipterocarps trees, fast-growing trees, and crops were undertaken. The crops included maize, cassava, and pepper. The family was paid to prune and perform other management tasks in Blocks 1 to 7. This continued for approximately thirty months, after which the farmer concerned was made man- ager of the No. 2 Nursery of the dipterocarps seedlings at his own request. SECOND STAGE. In June 1994 two families of slash-and-bum farmers (migrants from Java) settled in Block 56, and a four-hectare social forestry zone was established. The area was used for Reforestation of an Indonesian Tropical Forest 113 Table 6-1. Families Participating in Social Forestry Site number Location andfamily name Method Block 56 1 Eri Mixed planting of fruit trees and crops 2 Paimii Mixed planting of fruit trees and crops Block 88 1 Namon Development of fruit trees Block 104 1 Mashudi Mixed planting of fruit trees and crops Location 31 1 Alusiuis (Aluh) Mixed planting of dipterocarps, fruit trees., and crops 2 Dasto Mixed planting of dipterocarps, fruit trees, and crops 3 Gendut and Tepung Mixed planting of dipterocarps, fruit trees, and crops 4 Gupon Mixed planting of dipterocarps, fruit trees, and crops 5 Halimah/Zuki Mixed planting of dipterocarps, fruit trees, and crops 6 Markum Mixed planting of dipterocarps, furit trees, and crops 7 Naryo Mixed planting of dipterocarps, fruit trees, and crops 8 Rubac'i Mixed planting of dipterocarps, fruit trees and crops Source: Internal project documents. mixed planting, including 426 durians, together with trees and crops. Their harvest began to decline in the second year, and crops (pumpkins, eggplants, and so on) were eaten by monkeys, wild boar, and other animaLls. The farmers became unwilling to continue with the activities and withdrew from the project. Those families had lived before in the Sebulu Ule village. It is difficult for people who had not settled in the area to come and live away from the village. Yet subsequently Block 56 was successfully settled by the Eri and Paimin families, who are expected to manage the en tire block-not only to produce crops and fruits, but also to maintain dipterocarps trees within amd around the block. For this responsibility, KTI pays each family RpI55,000 every month. In December 1995 work began on the development of an orchard in Block 88 withl a shifting cultivation farmer named Namon. A total of 766 trees were planted on a 1.95-hectare area. The trees included 250 mangoes and durians, 216 rambutans, and 50 mangosteen. The mangoes and rambutans have started to fruit. THIRD STAGE. In 1997 plans were drawn up for a large-scale social forestry area along Gang Kerbau Road. The start of this project was delayed because of forest fires. Trials of social forestry finally began in May 1998 and are now proceeding steadily. KTI consigned basic soil preparation and planting of dipterocarps seedlings to farmers. Then the farmers initiated the crop cultivation under the same scheme used in Block 56, although they do not receive salary from KTI. Mainte- nance, such as weeding and manuring, benefit not only the cultivated crops but also diptero- carps. In April 1999 the planting of fruit trees began. Definition and Interpretation of Social Forestry Theories about social fores try vary, and it appears that the concept has not yet been clearly de- fined in Japan. The World Bank defines socialforestry, based on FAO's definition, as a broad range of tree- or forest-related activities that rural landowners and community groups undertake to provide products for their own use and to generate local income (Gregersen, Draper, and Elz, 114 Protecting the Global Environment 1989, p. 3). It distinguishes social forestry from the conventional production forestry. The primary focus of social forestry is on people, on community involvement, and on those trees that offer direct and indirect benefits. Local participation and technological innovation to generate and sustain increases in land productivity are listed as common elements in social forestry. Agroforesty is regarded as a main tool in social forestry involving farmers. The Japan International Cooperation Agency (1991) defines social forestry as the use of for- estry to improve and stabilize the living standards and welfare of local residents. The Research Association for the Reforestation of Tropical Forests refers to sales of forest products to local residents and systems that enable forestry to become a basis for livelihoods (Sasaki, 1997, p. 25). RETROF also states that social forestry can help to improve the well-being of local residents while contributing to the conservation and regeneration of forests. It describes agroforestry "as a valuable tool for the implementation of social forestry" (Sasaki, 1997, pp. 357-58). Jack Westoby (1989) has offered a very interesting definition. He describes social forestry as tree planting and management, at the farm, village or community level, by or for small farmers and the landless. In his view there can be no acceptable delimitation of social forestry as a particular area of forestry science and practice. All forestry should be social. In terms of Westoby's definition, social forestry activities in the Sebulu experimental forest include the planting and management of trees, fruit trees, and crops at the level of farming households with small holdings and those without land. The experimental forest implements social forestry in its broadest sense. Economic Analysis of Social Forestry Social forestry in the Sebulu experimental forest is expected to stabilize and improve the living standard of slash-and-bum farmers through their involvement in settled cultivation and refores- tation. Therefore, successful promotion of social forestry depends on whether farmers perceive that they will actually receive benefits from it. Unless the benefits from social forestry are at least comparable with those from slash-and-bum farming, farmers will not be motivated to change their practices. This section assesses the economic viability of social forestry, especially crop cultivation, relative to slash-and-burn farming. The cash flow, obtained by calculating a gross margin that takes into account the opportunity cost of family labor as well as the variable costs of input, is used as the indicator of economic viability. In cases where fruit trees are planted in social for- estry, a spreadsheet is used for calculating multi-year cash flow; then the present value is de- rived. Costs and benefits are valued at the prices the farmers actually face with no adjustment for economic distortions. The required input/output and cost/price data were gathered from the existing survey and interviews with farmers: for slash-and-bum farming, we extended the results from the Economic Survey in the Sebulu Region in 1995; for farmers participating in social forestry, intensive inter- views were conducted by KTI and Japan Development Bank from August 1998 to February 1999. CASH FLOW OF SLASH-AND-BURN FARMING. Eight sites of slash-and-bum farming were sur- veyed through interviews with the farmers (Table 6-2). The Economic Survey produced data on cultivated area, labor input, and yields of rice. The average area was 1.85 hectares, and income per hectare ranged from Rp92,000 at Site 2 to Rpl,260,000 at Site 8; the average income per hect- are was approximately Rp449,429, which corresponded to US$204 at the exchange rate at that time (US$1 = Rp2,200). This "income," however, is not correct for two reasons. First, the cost of family labor is ex- cluded from the calculation. In the assessment of economic viability, we should be sure to include all of the factors of production. This requires us to value family labor, which does not have an Reforestation of an Indonestan Tropical Forest 115 Table 6-2. Incomefrom Slash-and-Burn Farming, 1995 Prices Site 1 2 3 4 5 6 7 8 No. of working persons 2 4 2 2 2 4 2 10 Total no. of person work days' 140 280 140 140 140 280 140 700 Area (ha) 0.8 2.55 0.85 1.01 2.67 3.04 0.64 3.25 Yield (Rp): (a) 693,000 735,000 525,000 490,000 980,000 840,000 140,000 4,200,000 Labor cost (Rp): (b) 118,000 500,000 145,000 110,000 300,000 100,000 10,000 105,000 Cutting & burning 30,000 150,000 60,000 50,000 300,000 0 6,000 0 Sowing 0 175,000 60,000 60,000 0 100,000 4,000 0 Weeding 88,000 175,000 25,000 0 0 0 0 0 Harvesting 0 0 0 0 0 0 0 105,000 Income (Rp): (a) - (b) 575,000 235,000 380,000 380,000 680,000 740,000 130,000 4,095,000 Income (Rp)/ha 718,750 92,157 447,059 376,238 254,682 243,421 203,125 1,260,000 a. The number of person wor]c days equals 3.5 days per week times 20 weeks. Note: The unit price of rice is '7,00ORp per can (7 kg). The labor cost does not include family labor. Source: Internal project docunients. explicit cost but involves an opportunity cost.7 Second, the price of rice and the cost of labor increased dramatically after- the Asian currency turrmoil and the subsequent political upheaval in Indonesia. An adjustment is needed to make slash-and-burn farming indicators consistent with the post-August 1998 interview-derived indicators of social forestry participants. As a proxy of the opportunity cost of family labor, the payment for carrying out any agricul- tural activity such as working as a laborer in fellow farmers' fields can be used. From 1995 to 1998, a nonfamily laborer's daily payment increased by 30 percent from Rp6,000 to Rp7,500. Therefore, the opportunity cost of family labor, represented here by payment for daily labor in rice fields in 1998, is Rp7,500. On the other hand, the price of rice increased from Rp7,000 per can to Rp24,500 per can. The results of these adjustments are shown in Table 6-3. The average cash flow is Rp708,850, which corresponds to US$89 at the exchange rate of US$1 = Rp8,000.5 Negative cash flow at Sites 2 and 7 does not mean that they are losing cash in a physical sense but that they should cease the slash-and-burn farming and seek another job op- portunity with positive cash flow. The large disparity in cash flow across the sites is probably due to land fertility, damages by wild boar, the working discipline of farmers, and the nature of the data collection method. The amount of Rp708,850 can be regarded as the standard slash-and-bum cash flow in the Sebulu region. If social forestry can consistently generate at least this amount, farmers will be induced to participate in social forestry instead of depending on slash-and-bum farming. 7. Opportunity cost is a familiar term in economics. If an individual works in his own firm, his labor is an input and should be counted as part of costs. His wage rate is the market price of his labor: what he would get if he sold his labor c.n the open market. However, the opportunity cost of land is excluded here. Our concem is relative (not absolute) cash flow per hectare. As long as the unit price of land is the same for slash-and-bum farming and social forestry, a reasonable assumption in the Sebulu region, whether the opportunity cost of land is included or not does not affect the result. 8. Although the Indonesian rupiah depreciated dramatically against the U.S. dollar after 1997, it be- came relatively stable at this level after the resignation of President Suharto. 116 Protecting the Global Environment Table 6-3. Cash Flow of Slash-and-Burn Farming, 1998 Prices Site 1 2 3 4 5 6 7 8 No. of working persons 2 4 2 2 2 4 2 10 Total no. of person work days 140 280 140 140 140 280 140 700 Area (ha) 0.8 2.55 0.85 1.01 2.67 3.04 0.64 3.25 Yield (Rp): (a) 2,425,500 2,572,500 1,837,500 1,715,000 3,430,000 2,940,000 490,000 14,700,000 Labor cost (Rp): (b) 153,400 650,000 188,500 143,000 390,000 130,000 13,000 136,500 Cutting & buming 39,000 195,000 78,000 65,000 390,000 0 7,800 0 Sowing 0 227,500 78,000 78,000 0 130,000 5,200 0 Weeding 114,400 227,500 32,500 0 0 0 0 0 Harvesting 0 0 0 0 0 0 0 136,500 Family labor (Rp): (c) 1,050,000 2,100,000 1,050,000 1,050,000 1,050,000 2,100,000 1,050,000 5,250,000 Cash flow (Rp): (a) - (b) - (c) 1,222,100 -177,500 599,000 522,000 1,990,000 710,000 -573,000 9,450,000 Cash flow (Rp)/ha 1,527,625 -69,608 704,706 516,832 745,318 233,553 -895,313 2,907,692 Note: The unit price of rice is 24,500 Rp per can. The labor cost is in 1995 prices times 1.3. Family labor equals the total number of person work days times Rp7,500. Source: Intemal project documents. It should be noted that average cash flow is lower than Rp708,850, if we regard fallow fields as parts of the cultivation area. Slash-and-bum farming in the Sebulu region rotates among three places every three years on average. Therefore, farmers use three times as much land as the area indicated in the table, and the average cash flow is reduced to Rp236,283, or US$30. CASH FLOW OF SOCIAL FORESTRY. Although yields from crops are occasionally monitored by Sumitomo Forestry, data which are equivalent to that of the Economic Survey," and are necessary for estimating cash flow from social forestry, are not available. Therefore, we conducted a series of interviews with all farmers listed in Table 6-1 from August 1998 to February 1999 in order to gather input/output and cost/price data. KTI gathered data on yields of various crops in the Sebulu experimental forest. Many sample plots (5 meters by 5) are established in each block, and KTI staff closely monitored them from planting to harvesting. In deriving the cash flow of Location 31, KTI predicted the total yields for each family based on these sample data and adjusted them to the actual yields based on inter- views with farmers. Our data collection in Blocks 56 and 104 (Table 6-4), and in Location 31 (Table 6-5), focused on crops, since mixed planting had just started, and even the farmers did not have full and actual records of input/output for fruit trees. The coverage of crop variety depends on the farmers' input/output records; the crops listed in the tables make up the main portion of the input/output in each block but do not cover all of the crops. Labor includes family labor, and opportunity cost is set at Rp7,500, which reflects the daily payment to a laborer in fellow farmers' crop fields.9 9. The daily payment to a laborer for crop cultivation differs from location to location, while that for rice cultivation is constantly around Rp7,500. (In some cases the payment takes the form of crops that the laborers harvest.) Based on the interviews, we assume that Rp7,500 is the upper range of the payment, and the lower range is Rp6,200 (equivalent to the salary for daily workers at KTI). Reforestation of an Indonesiani Tropical Forest 117 Table 6-4. Cash Flow of Social Forestry in Blocks 56 and 104 Location (block) 56 56 104 Family Eri Paimin Mashludi Area for crop cultivation (ha) 0.68 0.55 1.4 Maize 186,000 680,000 2,700,000 Soybeans 175,000 45,500 700,000 Green beans 185,000 62,500 252,500 Peanuts 220,000 46,000 106,500 Onion 288,000 0 450,000 Total output (a) 1,054,000 834,000 4,209,000 Soil preparation 127,500 420,000 367,500 Planting 232,500 105,000 697,500 Manuring 30,000 30,000 105,000 Mamtenance 232,500 232,500 892,500 Harvesting 135,000 232,500 712,500 Labor cost (b) 757,500 1,020,000 2,775,000 Seeds 162,000 192,500 354,500 Fertilizer 75,000 75,000 134,100 Insecticide 30,000 30,000 60,000 Equipment 1,000 1,000 1,000 Purchasing cost (c) 268,000 298,500 549,600 Total input: (d) = (b) + (c) 1,025,500 1,318,500 3,324,600 Cash flow: (a) - (d) 159,800 -484,500 884,400 Cash flow/ha (e) 28,500 -880,909 631,714 Salary from KTI /ha (f) 465,000 465,000 Cash flow/ha with salary: (e) + (f) 506,912 -415,909 631,714 Note: One term of cultivation is six months, and salary from KTI is for six months Salary/ha = (Rpl55,000/month 6 months) / 2 ha. Source: Internal project docunments. The cash flow derived here is relatively conservative. We excluded output of other vegetables such as chili, peppers, and sweet potatoes since we could not collect labor input data for planting and harvesting them, whereas a portion of labor input for soil preparation, maintenance, and manuring, which are kinds of overhead cost, may have been related to those other vegetables. In Block 56, the cash flow of Eri is Rp5O6,912, which corresponds to US$63 at the exchange rate of US$1 = Rp8,000, while that of Paimin is negative. The cultivated lands of these two families in Block 56 are located next to each other, and there seems to be little difference in land fertility. According to the KTI staff who had daily contact with the two families, the lower cash flow of Paimin was partly because his cultivation strategy, such as choice of crops, and the timing of planting were weaker and partly because of larger damages by wild boar and insects in the 1997 and 1998 seasons. The cash flow of Block 104 is estimated to be Rp631,714. Crops are raised twice a year in each block; therefore, the annual cash flow is double what is shown in Table 6-4 (Rpl,01.3,824 for Eri and Rpl,263,428 for Mashudi). These are the figures that should be compared with annual cash flow from slash-and-bum farming (Rp708,850). 118 Protecting the Global Environment Table 6-5. Cash Flow of Social Forestry in Location 31 Family Alulz Dasto Tepung Gupon Halimah Markum Naryo Rubadi Area for crop cultivation (ha) 1.14 2.05 3 7 1.15 2.2 3 21 3.2 1.26 Maize 72,699 840,719 698,669 335,978 708,888 646,408 857,504 464,720 Soybeans 0 0 122,444 26,096 0 0 0 0 Green beans 0 0 592,500 239,500 226,250 829,500 1,019,750 0 Peanuts 5,064,568 0 8,069,232 0 0 4,878,720 1,074,868 0 Total output (a) 5,137,267 840,719 9,482,844 601,573 935,138 6,354,628 2,952,122 464,720 Soil preparation 210,000 360,000 675,000 135,000 262,500 450,000 472,500 262,500 Planting 112,500 285,000 405,000 75,000 180,000 495,000 187,500 307,500 Manuring 7,500 30,000 60,000 15,000 15,000 30,000 22,500 22,500 Maintenance 750,000 240,000 2,677,500 82,500 120,000 1,935,000 862,500 180,000 Harvesting 270,000 135,000 405,000 236,250 247,500 675,000 465,000 7,500 Labor cost (b) 1,350,000 1,050,500 4,222,500 543,750 825,000 3,585,000 2,010,000 780,000 Seeds 293,750 157,500 652,500 150,750 150,000 515,000 282,500 146,250 Fertilizer 10,500 105,000 150,000 75,000 93,750 150,000 75,000 75,000 Herbicide 0 0 0 0 0 0 0 0 Insecticide 60,000 90,000 105,000 45,000 75,000 75,000 90,000 90,000 Equipment 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Purchasing cost (c) 365,250 353,500 908,500 271,750 319,750 741,000 448,500 312,250 Total input: (d) = (b) + (c) 1,715,250 1,403,500 5,131,000 815,500 1,144,750 4,326,000 2,458,500 1,092,250 Cash flow: (a) - (d) 3,422,017 -562,781 4,351,844 -258,927 -209,612 2,028,628 493,622 -627,530 Cash flow/ha 3,001,769 -274,527 1,176,174 -186,023 -95,278 631,971 154,257 -498,040 Source Internal prolect documents. In Location 31 with social forestry, like slash-and-burn farming, there is a range in cash flow per hectare, in this case from a negative figure to Rp3,001,769. Soybeans and green beans were seriously damaged by insects in most sites, which resulted in negative cash flow for some farm- ers and a large disparity in cash flow among farmers. Even with such damage, when crops are raised twice a year, the average cash flow, Rp977,576 in this location, exceeds that of slash-and- burn farming."' The average cash flow of crop cultivation for eleven of the locations under social forestry is Rp421,184, and since farmers raise crops twice a year, annual cash flow is Rp842,368 (US$105), which exceeds that of slash-and-bum farming, Rp708,850 (US$89, US$30 if consideration is paid to the fallow fields). Although we were not able to gather actual data on fruit planting in Sebulu, some limited data on long-term projection for input/output for durian and mango are available from the lit- erature written about fruit cultivation in Java (AKK, 1997; Onny, 1996; and Rahamat, 1997). Based on such literature, we tried to run a multi-year cash flow simulation for Block 88 by incorporating (1) the information obtained from farmers around the experimental forest who have fruit trees in their fields and (2) natural conditions of the Sebulu region. This simulation cannot cover rambu- tan and mangosteen, which are also planted in Block 88, because similar projections could not be 10. KTI and some farmers planted rice for the second cultivation, instead of maize, beans, and peanuts. Reforestation of an Indonestan Tropical Forest 719 found in the literature. The simulation does provide a rough picture of cash flow generation from fruit tree planting. In Block 88, soil preparation and planting were done by KTI. In addition, seedlings and fertil- izer and insecticides are provided by KTI every year. In return, KTI receives one half of the yield from the farmer as repayment of those expenses." Therefore, actual revenue for the farmer de- creases to one half of the total yield. Taking into consideration the soil and weather conditions in Sebulu, in addition to interviews with fruit farmers around the experimental forest, we assumed that the yield of durian is 85 percent of that of Java and the yield of mango is 70 percent. Out of the harvest, 80 percent is suitable for sales. Labor costs are based on interviews with the farmer in Block 88, who recorded input data. The result is shown in Cable 6-6. At the bottom of the table is the present or future value of each year's cash flow at various discount rates. Year 3 in this table is 1998, the standard year. In the fourth year, when mango trees bear fruit, the present value of the cash flow at a 10 percent discount rate is Rp'743,862 (US$89), which is almost equal to the cash flow of slash-and- burn farming. Once durian begin bearing fruit, fruit tree planting generates a much higher cash flow than does slash-and-bum farming. The issue is the negative cash flow during the first three years. In the first year the farmer faces negative cash flow of Rp315,298 to Rp440,375, depending on the discount rate. Slash-and-burn farmers are concerned about their lives in the immediate year; even the high probability of cash flow in the future may not be enough to induce them to participate in fruit tree planting unless they have other sources of cash flow. In fact, the farmer in Block 88 has his own crop fields, which KTI suspects made it easy for him to participate in social forestry. Thus, mixed planting of fruit trees and crops is a more realistic and viable approach. Although we focused on the cash flow of the crop cultivation in Blocks 56 and 104, and Loca- tion 31, they are actually planting fruit trees. Whether the cash flow of crop cultivation, after offsetting the negative cash flow during the first three years of fruit tree planting in those blocks, can exceed the Rp708,850 Df slash-and-bum farming depends on the location. Efforts to raise farmers' awareness about the long-term benefits from fruit tree planting, especially the higher cash flow in the future, are needed to overcome this hurdle. PUBLIC AWARENESS. The participation of local people is a critical element of social forestry. Convincing people to participate is a long-term process that depends on provision of advantages and publicity about social forestry. An important factor in the decision to participate is the risk averseness of the people, which is usually high among poor rural people (Gregersen, Draper, and Elz, 1989, p. 319). Also, at the initial stage, participating farmers must be carefully selected from those convinced people. In the Sebulu experimental forest, Sumitomo Forestry provides seeds, fertilizers, and equip- ment, so that the initial investment can be reduced, and technical assistance on which crops to plant and how to raise yields. Without this assistance, cash flow from social forestry could not have become comparable to that of slash-and-bum farming. The provision of these services not only introduces more efficient ways of cultivation but also mitigates the risks involved, such as damage by weather conditions or wild animals. In the community around the experimental forest, public awareness of social forestry is in- creasing. In addition, the participating farmers' attitudes began to change (for example, during the forest fires in 1998 they desperately tried to protect their blocks). Before commencing social 11. KTI will spend a part of this revenue on expenses or investment necessary for the opermtions of the experimental forest. Table 6-6. Cash Flow Projectionfor Block 88 Year 1 2 3' 4 5 6 7 8 9 10 Total yield (Rp) (a) 0 0 0 4,904,900 17,728,920 28,830,791 55,971,079 87,230,053 152,409,164 235,970,154 Durian 0 0 0 0 1,542,750 5,091,075 16,800,548 36,961,205 81,314,650 149,076,858 Mango 0 0 0 4,904,900 16,186,170 23,739,716 39,170,531 50,268,849 71,094,514 86,893,295 Revenue for the farmer (Rp): (b) = (a)/2 0 0 0 2,452,450 8,864,460 14,415,396 27,985,539 43,615,027 76,204,582 117,985,077 Labor cost (Rp): (c) 521,154 597,727 657,500 890,340 1,384,482 1,807,631 2,705,510 3,670,030 5,563,764 7,865,997 Soil preparation 0 0 0 0 0 0 0 0 0 0 Planting 0 0 0 0 0 0 0 0 0 0 Maintenance 521,154 597,727 657,500 723,250 795,575 875,133 962,646 1,058,910 1,164,801 1,281,281 Harvesting 0 0 0 167,090 588,907 932,499 1,742,865 2,611,120 4,398,963 6,584,715 Durian 0 0 0 0 37,510 123,783 408,484 898,665 1,977,062 3,624,614 Mango 0 0 0 167,090 551,397 808,716 1,334,381 1,712,455 2,421,901 2,960,101 Cash flow: (b) - (c) -521,154 -597,727 -657,500 1,562,110 7,479,978 12,607,764 25,280,029 39,944,996 70,640,818 110,119,080 Cash flow/ha (d) -260,577 -298,864 -328,750 781,055 3,739,989 6,303,882 12,640,015 19,972,498 35,320,409 55,059,540 Present value of (d) (10%) -315,298 -313,807 -328,750 743,862 3,392,280 5,445,530 10,398,971 15,648,975 26,356,633 39,129,787 Present value of (d) (20%) -375,231 -358,636 -328,750 650,879 2,597,215 3,648,080 6,095,686 8,026,499 11,828,733 15,366,107 Present value of (d) (30%) -440,375 -388,523 -328,750 600,812 2,213,011 2,869,314 4,425,620 5,379,174 7,317,548 8,774,636 a. The unit labor cost in 1998 (Year 3) is Rp7,500, and the annual increase is assumed to be 10 percent. Note: The price of durian in 1998 was Rp7,500/kg and that of mango was Rp6,500/kg. It is assumed that those prices increase by 10 percent every year after Year 4 Source: Internal project documents. Reforestation of an Indonesian Tropical Forest 121 forestry, most farmers had not worked hard to protect their crops from forest fires. The attitude of farmers toward "their" crops and land has become proprietary in nature, even though the Indo- nesian government still owns the land. This underscores the importance of participation by local residents in sustainable forest management. The benefits of social forestry, such as economic vi- ability and technical assisi-ance, are having a spill-over effect: the number of farmers who are explicitly showing their interest is increasing slowly but steadily. IMPLICATIONs. Recognizing that reforestation of the Sebulu experimental forest is not feasible without changing farmers' minds about slash-and-burn farming, Sumitomo Forestry opted for social forestry. Since the lives of most farmers are at the subsistence level, social forestry cannot work unless its cash flow generation is at least equal to that from slash-and-bum farming. We recognize the limits to our datasets because of the small number of samples and the inter- view method. Moreover, agricultural activities are greatly affected by weather conditions. (The rainy season was dry and the dry season was rainy over the 1997-98 season, but weather in 1995, when data on slash-and-burn farming were collected, was about average.) Damage by animals and insects in specific locations also influenced outcomes. But keeping these limitations in mind, we can say that crop cultivation in the Sebulu experimental forest is more economically viable than slash-and-burn farming. The average cash flow of crop cultivation in eleven locations under social forestry is Rp421,184, and since they raise crops twice a year, annual cash flow is Rp842,368, which exceeds that of slash-and-burn farming, Rp7O8,850 (Rp236,283 if consideration is paid to the fallow fields). As for fruit tree planting, a rough picture confirms that there will be negative cash flow until the trees bear fruit. Supplemental cash will be needed through crop cultivation. However, future cash flow should be quite high. Slash-and-bum farming produces fully grown rice in six to eight months, and these farmers are often employed as day laborers in illegal logging during the rest of the year. Although pay- ment for such labor improves the annual cash flow of slash-and-bum farmers, it is just a supple- ment to their slash-and-bum farming, which is the basis of their lives. Furthermore, the payment to daily laborers is unstabLe and low, because (1) it is subject to weather, (2) it is illegal, and (3) there is excess labor supply in Sebulu, where the pressure of population growth is high. In these respects, we simply compare the cash flow of farmers in social forestry with that of slash-and- burn farmers, without including the revenue from daily labor. If farmers can enjoy more stable and higher cash flow by raising crops twice a year in social forestry, they need not practice slash- and-burn farming and this, will, at the same time, diminish illegal logging. Several issues must be considered if social forestry is to expand. First, crop cultiviltion under social forestry uses the land continuously, and land productivity will decrease to some extent. Technical assistance on settled farming provided by Sumitomo Forestry and KTI is expected to counteract this negative impact. Second, in Location 31, yields from crops will decreaise because of the increase in shade as dipterocarps trees grow. In the mid-term, moving the farmers to an- other location within the e.xperimental forest to implement mixed planting of dipterocarps, fruit trees, and crops will enhance both reforestation and social forestry, keeping the farmers' income high and stable. Although quantitative assessment is difficult, social forestry benefits the environment. In the Sebulu experimental foresl:, it may have stabilized watersheds and protected forest resources by braking slash-and-burn farming. Degradation of land productivity also may have been prevented. Despite the above-mentioned outcomes, conditions for duplication in other countries, as well as in other regions of Indonesia, may not be right even though there is a need. In any case there is no single system that consistently outperforms the others, as is made evident by the dispersion in cash-flow generation, even in the Sebulu experimental forest. 122 Protecting the Global Environment Carbon Sequestration by the Sebulu Experimental Forest The Sebulu experimental forest serves as a carbon sink, which ameliorates rising carbon dioxide emissions. Annual absorption of carbon dioxide and, therefore, the amount of carbon seques- tered by the experimental forest can be calculated by using growth projections, such as height, diameter, and survival ratio of representative species of dipterocarps and the fast-growing trees.'2 Artificial Plantation During the experimental forest's second stage (1996-2001), replanting was begun following the loss of artificial plantation areas from forest fires in 1998. As of December 1998, a plantation covered an area of 505 hectares with more than 600,000 seedlings. The plan was for an average of 80 hectares to be established in each year from 2000 to 2010. Seventy percent of the seedlings planted are dipterocarps, 20 percent are sungkai, and the rest are acacia mangium and fruit trees. As Table 6-7 shows, it is estimated that trees planted by the end of 1998 will have absorbed 1,984 tons of carbon, and that the experimental forest will absorb more than 39,000 tons of carbon between 1991 and 2010, which corresponds to 146,000 tons of carbon dioxide."3 Since most areas within the Sebulu experimental forest have been used for slash-and-burn farming or have been damaged by forest fires and since it is becoming difficult for farmers to keep enough fallow periods, the baseline estimate of carbon sequestration without the experi- mental forest is considered to be zero. Based on this estimate, the Sebulu experimental forest was approved in 1996 by the Japanese government as the "Japan Programme for Activities Imple- mented Jointly (AIJ) under the Pilot Phase."'4 Some readers may feel that the estimated carbon sequestration per hectare in the Sebulu ex- perimental forest from 1991 to 2010, 28.5 tons per hectare, is too small. It should be noted that ages of the trees vary. New area is established every year, so the forest will include seedlings as well as twenty-year-old trees. If the experimental forest consisted of only twenty-year-old diptero- carps trees, it could sequestrate 93 tons of carbon per hectare. One hectare of twenty-year-old Japanese cedar, which is the major species in Japan's forests, can sequestrate 65 tons of carbon. Reforestation costs can be categorized as seedling production costs, planting costs, and forest development (weeding) costs. Seedlings can be grown in-house from seed or purchased from either Wanariset or the local residents. The order of planting work is clearing, site preparation, stake installation, and actual planting. After planting, early-stage forest development involves weeding and vine removal, with weeding required for the first four to five years after planting (three to four times in the first year, two to three times in the second year, and once or twice annually in years 3, 4, and 5). Each stage of the work can be carried out directly, or it can be 12. There is no single formula to calculate the amount of carbon sequestration, because the tree growth is affected by various factors such as soil condition and climate. The one employed here is based on data accumulated through Sumitomo Forestry's operation in Southeast Asia. 13. This estimate does not include (1) reduction in carbon dioxide emissions arising from decreases in slash-and-bum farming or (2) absorption by secondary forests in abandoned fields that used to be used for slash-and-bum farming. The research on the latter has been conducted in the experimental forest, and the outcome will be discussed in the next section. 14. At the first meeting of the Conference of the Parties (COP) to the United Nations Framework Con- vention on Climate Change, it was decided to establish a pilot phase for Activities Implemented Jointly (AIJ), which could be regarded as a trial phase for Joint Implementation JI); it is open to developing coun- tries. The estimated amount of carbon sequestration in the application to AUJ is different from that shown in this case study, which incorporated the actual records of artificial plantation after the application. Reforestation of ani Indonesian Tropical Forest 123 Table 6-7. Estimated Carbon Sequestration by the Sebulu Experimental Forest, 1991-2010 Accumulated Areas of areas of Accumulated amount of carbon sequestration artificial artificial (carbon tons) plantation plantation Acacia Yeara (M2) (M2) Total Dipterocarps Sungkai manigium 1991 5.0 5.0 1.7 0.3 0.6 0.9 1992 17.4 22.4 13.4 3.5 2.7 7.2 1993 31.0 53.4 51.8 15.1 7.6 29.1 1994 47.2 100.6 143.2 41.4 18.4 83.4 1995 83.1 183.7 333.5 94.8 41.7 196.9 1996 85.0 268.7 684.0 198.0 80.8 405.2 1997 35.4 304.1 1,224.9 359.9 140.9 724.1 1998 100.4 404.6 1,983.8 590.3 243.3 1,150.2 1999 100.0 504.6 3,022.0 951.4 385.9 1,684.7 2000 80.0 584.6 4,348.1 1,449.9 581.8 2,316.4 2001 80.0 664.6 5,947.1 2,116.5 844.6 2,986.0 2002 80.0 744.6 7,815.2 2,988.1 1183.3 3,679.7 2003 80.0 824.6 10,194.6 4,099.8 1,608.2 4,486.6 2004 80.0 904.6 12,911.3 5,487.0 2,128.4 5,295.9 2005 80.0 984.6 16,027.8 7,181.6 2,752.6 6,093.6 2006 80.0 1,064.6 19,612.9 9,218.8 3,488.2 6,905.9 2007 80.0 1,144.6 23,709.6 11,632.7 4,342.8 7,734.0 2008 80.0 1,224.6 28,354.7 14,456.2 5,323.4 8,575.0 2009 80.0 1,304.6 33,587.5 17,724.4 6,432.4 9,430.6 2010 80.0 1,384.6 39,443.9 21,465.1 7,676.7 10,302.1 a. Areas of artificial plantation for 1991 to 1998 are actual records; areas for 1999 to 2010 are planned numbers Source. Authors' computations. subcontracted, but it must be in line with the growth in the size of the experimental forest. The subcontract method has been the prevailing method since 1994. Table 6-8 shows a trial cost analysis of the initial stage of reforestation at the Sebulu experi- mental forest. Between 199'1 and 1993, the preplanting cost for a density of 2,500 trees per hectare was Rpl,097,785 per hectare under direct control; Rpl,225,000 per hectare has been the cost for subcontract planting empl]oyed since 1994. The breakdown of the preplanting costs for the 1991- 93 period is 56.9 percent lor seedling production, 5.5 percent for clearing and site preparation, 19.4 percent for stake installation, and 18.2 percent for planting; there is not a significant differ- ence in the composition when the subcontract is employed. Weeding costs were Rpl,200,000 per hectare between 1991 and 1994; therefore, reforestation costs in 1994 were Rp2,425,000 per hect- are, which corresponds to US$1,102 at the exchange rate of US$1 = Rp2,200. The most recent direct costs of reforestation were estimated to be Rp3,072,500, or US$385 per hectare, at the exchange rate of US$1 = Rp8,000 in 1999. Since the Sebulu experimental forest can sequestrate 28.5 tons of cearbon per hectare, the direct cost for artificial plantation in the experi- mental forest can be recovered, if carbon is traded at or above the price of US$13.5 per ton in the carbon emission trading market.'5 15. The costs estimated here are direct ones and do not include the administrative cost, of KTI, raw material, and equipment costs. 124 Protecting the Global Environment Table 6-8. Artificial Plantation Costs by Activity, Selected Years 1991-99 Unit: Rp Activitya 1991-93 period 1994 1999 Seedlingb 625,000 750,000 635,000 (56.9%) (61.2%) (49.9%) Clearing and ground preparation' 60,000 100,000 250,000 (5/5%) (8.2%) (19.6%) Stake installationd 212,765 187,500 200,000 (19.4%) (15.3%) (15.7%) Plantinge 200,000 187,500 187,500 (18.2%) (15.3%) (14.7%) Subtotal 1,097,765 1,225,000 1,272,500 (100%) (100%) (100%) Weeding 1,200,000 1,200,000 1,800,000 Total 2,297,765 2,425,000 3,072,500 a. Direct control was employed dunng the 1991-93 period; the subcontract method has prevailed since 1994. The daily wage for clearing and ground preparation, stake installation, and planting under direct control was Rp4,000 per day. b The purchase cost was Rp250 per seedling for the 1991-93 period, Rp300 for 1994, and Rp254 for 1999. c. Rp0oo,000 per hectare under the subcontract method. d. Forty-seven seedlings per person per day for direct control and Rp75 per seedling for subcontract work. e. Fifty seedlings per person per day for direct control and Rp75 for subcontract work. Note 2,500 trees per hectare. Source: Internal project documents. Carbon Sequestration of Fallow Forest There is little agreement on how well slash-and-burn farming fallow acts as a carbon sink. Some say that population pressure is so huge that slash-and-bum farmers become unable to rotate between fields; others say that fallow fields, abandoned as part of the slash-and-bum farming cycle, are soon covered with secondary forest. Although it is not included in the above calcula- tions, the carbon absorbed by fallow forests, which grew in the aftermath of slash-and-bum farm- ing, has been estimated in the experimental forest (Ministry of Forestry, 1995, pp. 84-87). Before the 1982-83 wildfires, the site of the experimental forest was a lowland evergreen rain forest dominated by dipterocarps, and the above-ground biomass of the forest was 509 tons per hectare. After the fires the area was changed into secondary forest of pioneer species or grass- land. Based on plot-by-plot measurement, above-ground biomass of one-year-old forests ranged from 8 to 9 tons per hectare, that of five-year-old forests ranged from 23 to 27 tons, and that of ten- year-old forests ranged from 45 to 68 tons. The estimated mean biomass of tropical dry forest in South and Southeast Asia is 83 tons per hectare, which implies that the carbon storage of fallow forests is considerable. Based on biomass measurements, carbon storage in fallow forests is an estimated 3.6 to 4 tons per hectare in one-year-old forests, 10 to 12 tons in five-year-old forests, and 20 to 30 tons in ten- year-old forests.'6 Since the tropical rain forest area in the Asia and the Pacific region in 1980 was 16. This may be an overestimation, because the total plot area is small and actual forests have various forest cover types. Reforestation of an Indonesian Tropical Forest 125 19 million hectares and the forest cover that changed to fallow during the 1980s was approxi- mately 5.2 percent, fallow area in the region was 10.35 million hectares (Ministry of Forestry, 1995, pp. 84-87). If the carbon storage capacity of this fallow was equivalent to that in the experi- mental forest, the new capacity would be 134 million tons. On the other hand, carbon released to the atmosphere by deforestation in Asia and the Pacific region is estimated to be 2,390 million tons. Thus fallow forests absorb 5.6 percent of the carbon released to the atmosphere. These re- sults imply that, if abandoned fields become forests, the carbon storage of those forests is large. Even fallow forests might :'help to offset the effect of anthropogenic carbon dioxide ernissions. Implications A model case, the Sebulu experimental forest can encourage other forestry firms in developed countries, especially Japan, to participate in the Joint Implementation (JI) and Clean Develop- ment Mechanism (CDM) projects. The experimental forest also represents a small step to recover the ecosystem, especially in terms of biodiversity. Several habitats of the orangutan once existed within the boundary of what is now the experimental forest. However, after forest fires in 1982 and 1983, they were seen less often. Slash-and-burn farming, illegal logging, and repeated forest fires forced them out of the area. As the rehabilitation of the tropical forest with indigenous trees proceeded, the orangutan began to come back to the Sebulu area, as did other animals such as wild boar and deer. The planting and maintenance of the trees in the Sebulu experimental forest generated em- ployment as well as environmental benefits. Between seventy and one hundred people in Sebulu are daily employed in reforestation. Research Activities in the Sebulu Experimental Forest Because of the complexity of tropical forests, sustainable management is difficult. The diversity of tree species in these forests has limited the success of management practices developed under other environments, and uniform management systems are out of place. Unfortunately, financial investment in research ancl development on genetic tree improvement, ecologically sound silvi- cultural and management practices, appropriate technologies for the economic recovery of harvestable timber, and commercialization of nontimber forest products have progressed little (D'Silva and Appanah, 1993, pp. 29, 32). Sumitomo Forestry dec ided to base the tropical rainforest rehabilitation in Sebulu on the plant- ing of dipterocarps. The unstable supply of seedlings because of this tree's erratic flowering and other characteristics cause a shortage of planting stocks. Tree-growing technology for replication of the original forest is difherent from that used in commercial forest plantations. Therefore, the company recognized that iesearch and development in a number of areas (such as seed, nursery, silviculture, and genetic improvement of dipterocarps) as well as studies of planting site condi- tions were necessary for the implementation of the Sebulu experimental forest. Research and Development As stated earlier, research and development in the Sebulu experimental forest is implemented jointly by Sumitomo Forestry, KTI, the Forest Research and Development Agency, the University of Tokyo, and the Research Association for Reforestation of Tropical Forests. This institutional setting can effectively facilitate guidelines and input material for experiments, process data, dis- seminate information, and provide financial resources. The major activities and their outcomes are described in this section. 126 Protecting the Global Environment PEDOLOGICAL, EDAPHOLOGICAL, AND GEOLOGICAL STUDIES. The bedrock in the Sebulu experi- mental forest is made up of thin rock layers composed of various elements such as sulfur, iron, manganese, calcium, and phosphorous. The bedrock additionally contains a seam of coal, sur- rounded by rock layers containing iron sulfides, a source for acid sulfate soil. The soil distributed throughout the forest area has inconsistent chemical properties, leading to disparity in levels of trace soluble ferric and manganese and metathetic calcium. The soil's overall characteristics are a pH around 5; a carbon content of 2 percent in the 10 to 20 centimeters deep A-horizon, signifying a lack of organic matter; and an extremely low percolation speed in the subsoil. The physical properties of the soil are thought to have an effect on the growth of the trees. A marked disparity in the growth of planted trees in the Sebulu experimental forest led to the establishment of experimental plots and the examination of the chemical and physical properties of the soil, the root growth, photosynthesis, and the nitrogen content in foliage. Comparison of a plot where trees had reached a height of around 4 meters within a year of planting and a plot where trees had reached only about 1 meter in the same period revealed that the soil in the poor- growing plot was hard and compact, and roots had not penetrated below a depth of 12 centime- ters. It is believed that the underdeveloped root system had retarded absorption of nutrients and water and stunted the growth of the trees. The acid sulfate soil is highly acidic and not suitable for the growing of plants. The area is not suited to forestry.'7 In cases where planting is intended to rehabilitate degraded or spoiled land, however, acid-tolerant tree species such as Acacia mangiIum would be apt. Shorea roxburghi of dipterocarps is also acid tolerant and can survive in the area of sulfurous soil in the experimental forest; however, growth is slow. The poor permeability and porosity of the soil affect the survival rate of any seedlings, and further research is required to determine the optimum size of holes for seedling planting. To study the possibility of planting in hard-soil areas, Sumitomo Forestry began experimentation in 1999 on growth enhancements through cultivated planting. SEEDLING NURSERY. From results of research on environmental conditions for a seedling nurs- ery, it is evident that the stomatal reaction to light and the air, including vapor-pressure deficit, is highly sensitive to varying soil conditions (such as the presence of soil moisture and the inhibi- tion of root growth). Additionally, dipterocarps trees are highly adapted to dry soil conditions because they are able to offset water loss through transpiration by decreasing foliage when the soil gets dry. Given sufficient soil moisture, they increase foliage to grow actively. Based on this, it can be speculated that once dipterocarps trees have fully rooted, normal dry soil conditions will not lead to trees dying. The key issue in the planting of trees in open areas where they are exposed to direct sunlight, as occurs for fields after slash-and-burn farming, is the rooting rate. Traditionally, dipterocarps seedlings are said to not survive in open areas exposed to sunlight. In the experimental forest potted seedlings of seven varieties of the Shorea genus were nursed in both shaded and open areas, and the relative growth rates were compared. For Shorea leprosula, seedlings grown in open areas showed better growth in terms of both the diameter at the base of the trees and root devel- opment. For Shorea stenoptera, on the other hand, the seedlings grown in shaded conditions grew faster. For the remaining five varieties, no significant difference in growth for the two condition 17. Block 88 and Location 31 for social forestry are two of the better quality areas within the experimen- tal forest. Plans are afoot for analysis of the physical and chemical properties of the soil in these areas and research on the correlation between soil quality and crop yield rates. Reforestation of an Indonesian Tropical Forest 127 types was seen. The leaf aiea weight of all varieties other than Shorea seminis was greater for unshaded seedlings (Ministry of Forestry, 1996, pp. 68-72). This research demonstrated that, ex- cept for a few selected varieties, it is possible to produce sun-resilient hardy seedlings. Based on these research findings, high mortality rates for dipterocarps in open area planting are attributable to nursing I echniques and planting methods rather than to the low tolerance of the species to exposed conclitions. Most deaths in planted seedlings occur in the few months of relatively high rainfall, when trees are not going to be affected by dry soil conditions. It is now well known that introducing ectomycorrhiza to the root zone improves the availabil- ity of nutrients to tree root:,, but when the experimental forest was established, there was little research on root inoculation techniques during nursing. It is not practical to manually inoculate around 100,000 seedlings, and some cheap, simple, and reliable method of inoculating seedlings to the maximum effect was required. In 1992 Sumitomo Forestry's Tsukuba Research Institute experimented with inoculation of potted dipterocarps seedlings on trays in a greenhouse. Trees near the inoculated plants became infected by way of mycorrhiza spreading between neighboring pots through holes in the pots, and growth was more rapid than for uninfected seedlings. To investigate the practical implica- tions of these results in nursery plots, a 1 meter by 5 meter bed was established within the experi- mental forest in February 1994, and 1,155 potted seedLings were used to verify the effect when trees inoculated with Scleroderma fungi were planted at 2 meter intervals. Trees close to the inocu- lated trees tended to grow taller. As the distance from inoculated trees increased, the proportion of relatively small trees grew. Mycorrhizae occurred more frequently nearer the inoculated trees. The evidence demonstrates that by planting inoculated trees at various points in the nursery bed and having the Scleroderma infect other plants through subsoil mycorrhiza, large quantities of seedlings in a nursery bed can be inoculated (Sota, 1995, pp. 171-95). This method is currently being employed within the Sebulu experimental forest, and there is additional ongoing research into the relation between the potting-mix soil morphology and fungus infection. The aim of the research is to develop a soil type that supports consistent, reliable infection. The growth of seedlings and the success of seedling production are affected greatly by the type of media placed in the pot with the seedling. In 1994, in an attempt to develop the optimum potting mix, seedlings were planted in thirty-five different forms of soil made up from various combinations of red soil, sand, surface forest soil, NPK, TSP, urea, cow manure, and other sub- stances. This revealed that fertilizer made up from a combination of organic cow manure and the chemical fertilizers NPK and urea produced the best growth rates. Use of organic fertilizer is desirable wherever possible. The seedling mix now utilized in the experimental forest is 70 per- cent lower stratum red soil, 10 percent cow manure, and 20 percent sand. Research continues on the optimum soil for nursing seedlings. Around 170,000 dipterocarps seeds were obtained from the upper reaches of the Mahakam River in February 1994. Then full-scale production of seedlings from seeds commenced utilizing the research outcomes. PLANTING. Four different planting methods were tried: open planting, where trees are planted in completely cleared plots; line planting, where strips between 6 and 20 meters wide are cleared for planting; gap planting, where a square with side lengths between 5 and 20 meters is cleared for planting; and planting under canopy, where the forest is thinned and grounded after planting. For open planting, trees w ere experimentally planted at different densities. The major difference in the planting environment for seedlings comes in the degree of exposure to direct sunlight, which is longest in open planting, diminishes for line and gap planting according to the width of the cleared area, and is shortest in planting under canopy. 128 Protecting the Global Environment According to the traditional wisdom, saplings of dipterocarps will not survive in open areas exposed to bright light. Dipterocarps seedlings reportedly exhibit greater root taking and growth rates when nurtured in lightly shaded conditions than when grown in open areas. However, in experiments within the Sebulu experimental forest, seedlings grew to nearly 2 meters in a year even when open planted, suggesting that according to soil and other environmental conditions, they will grow sufficiently even in bright light. All areas used for planting trials had been used for slash-and-bum farming. They differed in the types of vegetation and trees growing naturally on them, according to the amount of time that had elapsed since being cleared. The particular plant- ing method for a given area is selected based on the purpose of the planting experiment and the state of natural vegetation on that site. The six most common varieties of dipterocarps were tested for reforestation suitability. Their survival and growth rates were followed under the four planting methods. Generally speaking, trees planted under canopy took root the best, whereas open-planted and widely line-planted trees grew the fastest. Shorea leprosula and Dryobalanops lanceolata both root and grow well in direct sunlight and are considered the most suitable varieties for reforestation because of the ready availability of seedlings. The next most suitable varieties are Shorea multiflora and Shorea ovalis. Shorea seminis grows slowly and is labor intensive since it requires weeding of the sur- rounding area. Shorea paciflora has the lowest survival rate of the six varieties tested and is a slow grower, so it is perhaps best for planting under canopy Based on the findings of these physiologi- cal and ecological characteristics, different varieties of the same dipterocarps genus appear to have different developmental qualities, and no single planting method is going to be optimal for them all. Collecting more varieties and carrying out planting experiments on them will increase the number of varieties suitable for reforestation purposes. TISSUE CULTURE TECHNIQUE. The seedling production costs account for nearly 60 percent of preplanting costs. The price per purchased seedling was Rp250 between 1991 and 1993, and Rp300 in 1994. The cost of growing seedlings from the seed, including seed collection costs, was Rp68.5 per tree. It is apparent that the cost of in-house growing of seedlings from seed is as much as 80 percent cheaper than purchasing ready-grown seedlings. By switching to in-house seedling production and pegging back the nearly 60 percent share of overall costs occupied by seedling production, growers can reduce reforestation costs dramatically. Since 1994 the experimental for- est has switched over extensively to in-house seedling production. However, there is unavoidable instability in seed supplies, since dipterocarps release seeds only once in several years, and the number of mother trees is decreasing rapidly. Even if seeds were available, they remain viable only for a relatively short time (one or two weeks). To alleviate this, it is vital that large-scale cutting techniques through genetic improvement are developed. The company has succeeded in establishing a tissue culture technique that makes mass propa- gation of Shorea roxburghi, one of the dipterocarps species, possible for the first time anywhere in the world. Multiple shoots were induced from a shoot apex. Many shoots elongate from those multiple shoots, which can be proliferated repeatedly. Large numbers of high-quality plantlets can be produced in a short time regardless of the season. Moreover, it will be possible to produce clones of "elite" trees with desirable characteristics such as varieties resilient to disease and in- sect damage and those that bear high-quality wood.8 This propagation technique enhances the rehabilitation of tropical forests that were damaged by forest fires or slash-and-bum farming in recent years. It may be applied to generate other tree 18. For details, please refer to the Web site of Sumitomo Forestry Co., Ltd. (http://www.sfc.co.jp/ rainforest.htm). Reforestation of an Indonesian Tropical Forest 129 species whose seeds have short periods of viability, a typical characteristic of many tropical trees, thereby helping to conserve and protect the genetic resources of such trees from extinction. If applied to yield improvernent and nitrogen fixation, social forestry can extend to such regions of marginal soil where subsistence agricultural production on a small scale has persisted. Thus sus- tainable forest management, especially social forestry, in Sebulu is expected to benefit from fur- ther application of tissue culture techniques. The Sebulu experimental forest was not initiated as a business of the Sumitomo Forestry Com- pany but as a purely social activity. No commercial returns were expected. The experimental forest put Sumitomo Forestry in a win-win situation, however, because it could develop the tis- sue culture technique, which will be protected by patent. Dissemination of Researcht Outcomes Outcomes of research activities in forest management often are poorly disseminated. The finan- cial resources available for research and development are limited, and most of the funds are spent on research in lieu of dissemination of research results. The personnel rotation system of many forestry projects supported by developed countries keeps experts and consultants at the project sites for two to five years. This short stay often undermines the continuity of the research activities, and valuable observations and research results are not applied. KTI and Sumitomo Forestry have developed a sense of mutual trust and achievement through their long-standing partnership in Indonesia. For the furtherance of the Sebulu project and diffusion of technology, art environment must be provided in which researchers from Japan can reside for long periods. This would be difficult without the mutual trust and support of the local residents. Furthermore, capable local staff must be secured by KTI in order for the forest to be man- aged smoothly and technology diffusion to take place. Fortunately, many former KTI field staff were still living in Sebulu Ule village, and they have acted as integral members of the project administration team from the inception of the experimental forest to the present. UJnder their supervision, younger stafh members have been trained as local administrative staff who plant and measure the growth o F the forest and accumulate experimental data. Traditional local skills acquired when the stand started as a timber concern more than twenty years ago are being resurrected as reforestation skills. Indeed, the skills of the local people help technology diffu- sion to progress well. Successful transfer of research outcomes requires capable staff hired locally, foreign staff who speak the local language, an equal partnership between local and foreign staff, and diffusion of the latest technical skillsthirough locally available materials and tools. Lessons Learned from the Sebulu Experimental Forest The final outcome of the Sebulu experimental forest is yet to be seen, since it takes many years for trees to grow and sociall forestry was initiated only a few years ago. Despite criticism that most of the social forestry projects in Southeast Asia have not been successful, we can say that the experimental forest has been on the right path to achieving its initial objectives: replication of the conditions of the original tropical forest as closely as possible and stabilization of and improvement in the income level of the local community. This concluding section draws les- sons from the Sebulu experimental forest that may be applicable to reforestation and social forestry projects in other countries. 130 Protectinig the Global Environmetit Factors for Success: Applicability to Other Countries No one model will be effective in all ciases. Projects are subject to the particular constraints and opportunities existing in the local communities. In the Sebulu experimental forest the strong tie between the Japanese forestry industry and Indonesia was important. The unique setting for this project, however, does not preclude the applicability of the win-win approach to other countries. Planners should consider successful practices in existing projects to see if at least some of them can be adopted. The success of the Sebulu experimental forest is attributable to several factors. First, a private firm took the initiative for the project. It developed the technique and technology necessary to replicate the original tropical forest. As stated before, it is difficult to propagate dipterocarps, which are indigenous to Kalimantan. The firm's know-how in forest management based on its long-term operations in many countries, including Indonesia, and on-site research and develop- ment activities made it possible to restore not only the forest of dipterocarps but also the original ecosystem in the region. The Sumitomo Forestry Company had less administrative overlay and more autonomy than other entities. Without the initiative by such a company, the stakeholders, including local people, would have relied on fast-growing trees or easy-to-propagate trees exotic to the project sites. Advanced knowledge was translated into easy-to-understand words, and the equipment necessary for the implementation of the experimental forest was locally procured. This enabled the technique and technology of reforestation to be easily used by the local people. A second factor in the Sebulu success story is the long-term commitment of Sumitomo For- estry. It initiated the project out of social considerations based on corporate philosophy and be- cause research and development was needed to propagate dipterocarps. In its implementation of social forestry, the company took steps to provide farmers with techniques and knowledge re- garding more productive settlement cultivation. This kind of commitment strengthens the local community's awareness of the Sebulu experimental forest, thereby increasing the participation of former slash-and-burn farmers. Again, serious consideration needs to be given to business entity initiatives in order to facilitate long-term follow-up. A third factor is the data and information collected in the preparation and implementation processes. Planners need information from prospective participants in order to define objectives and approaches properly (Gregersen, Draper, and Elz, 1989, pp. 119-30). In the case of the Sebulu experimental forest, a survey team led by a professor was dispatched three times to design the basic concepts of the project. Information about the local communities was accumulated during the long-term operation of Sumitomo Forestry. This helped the mission reach the decision for social forestry. Once the project was implemented, the Economic Survey was taken so that Sumitomo Forestry could understand the priorities of people in the local community and the resources avail- able to them in the Sebulu region. Observation of physical conditions, such as types of crops, conditions of trees and crops, and conditions of soils, by KTI staff has been providing information necessary for adjustments. Fourth, cooperation with the local community was a priority. In Indonesia land is owned by the government, and the government gave KTI the right to use the area for the experimental forest. Slash-and-burn farming is still competing with the experimental forest for the land. How- ever, the company never tried to expel slash-and-burn farmers from the experimental forest, even when it encountered them cutting trees. The law may hold no meaning for these farmers; enforced banishment would have generated tension between farmers and the company, under- mining the existence of the experimental forest. Sumitomo Forestry tries to communicate with slash-and-bum farmers and then allows time for them to understand the importance of the forest as well as the benefits from social forestry. In addition, it emphasizes the dissemination of infor- mation from farmers participating in social forestry to slash-and-burn farmers. Reforestation of an Intdonesiani Tropical Forest 131 The priority given to the local community is also observed in human resource management. Although Sumitomo Forestry has provided the initiative and the financial, technical, and tech- nological support, the actual implementation has been done by KTI. Its staff consists of local people with only one Japanese expert from Sumitomo Forestry. The local staff, whc have dis- cretion in the daily operations, attract the interests of the community, because they are a part of the community. A fifth factor contributing to the project's success was sufficient infrastructure for starting the experimental forest. In 1970 KTI was established, and it has remained committed to selective cutting to maintain forest resources. Human resources and physical infrastructure (roacds, schools, and other public facilities that KTI provided during its heyday) have been maintained, even after KTI was forced to stop its operations in 1983. There are many former employees with forest management know-how as well as sympathy toward Sumitomo Forestry. The company, on the other hand, has acquired knowledge of local organizations and economic structures. These strong ties with Indonesia, especially in the Sebulu area, have facilitated cooperation with the local com- munity. Sumitomo Forestry admits that it could not have been involved in reforestation in Latin America, where it has no ties, because a relationship of trust with the local people is a prerequi- site for gaining support for social forestry. However, the experience of the Sebulu experimental forest bodes well for North-South cooperation such as between European firms and African coUn- tries and between U.S. firms and Latin American countries. Sixth, the Sebulu experimental forest involves the private sector, the public sector, and academia under the umbrella of the Research Association for Reforestation of Tropical Forests (RETROF). Cooperation between Sumitomo Forestry and the University of Tokyo has been mutually benefi- cial. The experimental forest serves as a site of field research and experiment for facultv members and students, and Sumitomo Forestry can mobilize the university's resources for its research activities in dipterocarps propagation. Financial support by the Japanese government, through RETROF, has enhanced the technological cooperation between Sumitomo Forestry and Indone- sia. Promotion of across-the-sector research for reforestation helped to speed up the research activities in the experimental forest. This framework is a model for collaboration between the private, public, and academic sectors in various countries. Future Tasks The Sebulu experimental forest is still ongoing, and many tasks remain for the future. For ex- ample, the ultimate success of the experimental forest will occur when it no longer requires finan- cial, technical, and technological assistance from Sumitomo Forestry and RETROF. In order for the experimental forest to become self-reliant, local farmers need to accumulate more know-how, and the experimental forest must be able to generate its own operational resources. In response to population growth around the experimental forest, social forestry needs to expand. There is no end to the line of farmers who claim land tenure within the boundary of the Sebulu experimental forest. As the number of those farmers increases, the "no-concern-for-speed" approach to social forestry is no longer manageable. By itself, the Sebulu experimental forest cannot end the deforestation caused by slash-and- bum farming. Plantation ol: dipterocarps via the tissue culture technique is not a panacea; nor is social forestry. The main problem lies in the system of landed property rights. Unfortunately, this issue is out of the control ol Sumitomo Forestry, and we can only suggest that the Sebulu experi- mental forest be used as an example to encourage proper management of land by the authorities. Also beyond the control of Sumitomo Forestry is the stability of the social and economic situation in the region. Although remote from Jakarta, the Sebulu region is not insulated from the distur- bances arising from political turmoil and price hikes. 132 Protecting the Global Environment References AKK. 1997. Budidaya Durian. Bega, Kalie M. 1994. 1994 Budidaya Rambutan Varietas Unggul. D'Silva, Emmanuel, and S. Appanah. 1993. Forestry Management for Sustainable Development. EDI Policy Seminar Report, 32. Washington, D.C.: World Bank. FAO (Food and Agriculture Organization of the United Nations). 1992. Forest Resource Assessment, 1990. Rome. . 1998. State of the World's Forests, 1997. Rome. Gregersen, Hans, Sydney Draper, and Dieter Elz, eds. 1989. People and Trees: The Roles of Social Forestry in Sustainable Development. EDI Seminar Series. Washington, D.C.: World Bank. Japan International Cooperation Agency. 1991. Domestic Committee on Forestry Sector Projects. Tokyo. Mahisworo, Kusuno Susanto, and Agustinus Anung. 1994. Bertanam Rambutan. Ministry of Forestry of the Republic of Indonesia, P.T. Kutai Timber Indonesia, Sumitomo Forestry Co., Ltd., and the University of Tokyo (shortened to Ministry of Forestry in the text). 1993. Research Report on the Sebulu Experimental Forest 1992. 1994. Research Report on the Sebulu Experimental Forest 1993. 1995. Research Report on the Sebulu Experimental Forest 1994. 1996. Research Report on the Sebulu Experimental Forest 1995. 1997. Research Report on the Sebulu Experimental Forest 1996. 1998. Research Report on the Sebulu Experimental Forest 1997. Mitsuhashi, Tadahiro. 1997. Mori to CO2 no Keizaigaku (Economics of Forests and Carbon Dioxide). Tokyo. Onny, Untung. 1996. 1996 Durian Untuk Kebun Komersial dan Hobi. Rahamat, Rukmana. 1995. 1995 Papaya Budidaya dan Pasca Panen. . 1997. Mongga Budidaya dan Pasca IPanen. Sasaki, Satohiko. 1997. Nettairin Saisei Gijutsu Kenkyu Seika Hokokusyo (Report on Research Concerning the Reforestation of Tropical Forests). Sota, Akira. 1995. "The Development of Nursery Methods for Dipterocarps Trees Using Ectomycorrhiza." Research Report of the Research Association for Reforestation of Tropical Forests. Tokyo: RETROF. Suhardiman. 1997. 1997 Budidaya Pisang Cavendish. Sumitomo Forestry Co., Ltd. 1998. Sumitomo Forestry Annual Report 1998. Tokyo. Westoby, Jack. 1989. Introduction to World Forestry: People and Their Trees. World Bank. 1994. Review of Implementation of Forest Sector Policy. Washington, D.C. World Resources Institute, the United Nations Environmental Programme, the United Nations Develop- ment Programme, and the World Bank. 1997. World Resources 1996-1997. Continued fiomn inside fronit cover Other Titles from the World Bank Institute (In orler of puhlic.ltion) Povertvy in Russia. Plit/lic Polic i and Privacte Responises Eclitec bv jeni Kilugman Enteiprise Restrutcturing and ElconooinIc Polic)' in Rwusla Eclitecl y Sii mon Comma incler, Qimiiao Fa.n, aind Mark E. Schaffei- Inf-asruct /it re Delivery : Private In i/ttlclie andi t/he Pu1)/lic Goocl Edited by Ashloka,i imody TradIC/e, Techno01oLy' and Ilteriial ional Comnpeft iliveness Irfn Lil 1-kIILque Cowporale Goveirnciice in TranSitionlal LE(on10n eS vinsider Control and th1e) Role of/Banks Editecd by Mlasahiko Aoki and Hyung-Ki Kimin illIonitc)rl nq and Iualliating Social Progqramns in Deve/opi iig Con nries A HIandc/o(of(i /or Polic yinakers, Alan agers, andl ResectrcherS Jo.eph \'aladez and Michael 13lmbel-igei- Agroinidustrial lnvestnment andIC Operations James G. Brcxvn witi Deloatte & Touc11e Does Privalization Deliver2 Hi/glqg.b/s fron0 Ca lVorld BankI,' Co nfc'relnce Edited by Ahlimecd Ga.ila I ind i\'IaIy Shil-ley Financictl Regla/tion Chaitpging the Rutles of/bte Gane Eclitecd by Dimitri Vittas To order World Bank Institute (WBI) publications by phone or fd.x: Phone: 1-800-645-7247 or (703) 661-1580 Fax: (703) 661-1501 by mail: The World Bank, P.O. Box 960, Herndon, VA 20172-0960, lJ.S.A. by e-mnail: books@worldbank.org through the World Wide Web at: http:/./publications.worldbank.org/ecomnmnerce/ THE WORLD BANK WBI Learning Resources are 1818 H Street, N.W. designed for use in WBI courses Washington, D.C. 20433 USA and seminars. They discuss issues Telephone: 202-473-1000 in economic development policy Facsimile: 202-477-6391 and lessonsfrom experience in a Internet: www.worldbank.org way that can be understood by E-mail: feedback@worldbank.org persons without extensive background knowledge or technical expertise. They will be of particular interest to readers concerned with public policy. B.nk o1 1-9-1 Otemachi Chiyoda-ku Tokyo 100-0004 JAPAN Telephone: 03-3244-1986 Facsimile: 03-3270-4099 E-mail: dbjintld@gol.com This study was carried out under the program on Integrationi of Global Enivirotnientt Conicernis hi Natioinal Sustaiinable Developmtienlt which was funded by the Government of Japan. J~~~~~~~~~~~~~~~~~ 2 Internzal DoCutI Lm NMC C3)-ThlI pi( 9 780821 35122 1~~~. fl~~~Il92MM