DIRECTIONS IN URBAN DEVELOPMENT 59440 JUNE 2010 Tokyo's Emissions Trading System: A Case Study The Tokyo Metropolitan Government (TMG) has developed the world's first cap and trade program at the city level targeting energy-related CO2. Called the Emissions Trading System (ETS), the program took effect in April 2010 and covers 1,340 large facilities including industrial factories, public build- ings, educational institutions and commercial buildings. Targeting the city level for the reduction of greenhouse gas (GHG) emissions is of vital importance for climate change miti- gation goals. Although there are several ETSs targeting GHGs around the world, none have operated at the city level until Tokyo's. City-based ETS systems have been largely aimed at enhancing local air quality by targeting local pollutants that may also hap- Photo: Alexander Chechetkin pen to be GHGs. There are three particularly relevant cases of ETSs covering local pollutants at the city level (see Table 1). Tokyo's ETS is unique because it is the only one targeting GHGs, with the primary objective of mitigating climate change.1 Emissions Trading Systems Emissions trading is a market-based approach for addressing air pollution problems. If designed and implemented well, Laying the Groundwork emissions trading systems can be economically efficient, pro- viding incentives for participants to reduce their emissions of TMG began efforts to curtail Tokyo's CO2 emissions in 2000 specified pollutants. by developing a program called the "Tokyo CO2 Emissions Also known as "cap and trade", the basic principle of any emis- Reduction Program" under the "Tokyo Metropolitan sions trading scheme is to set a limit on the total quantity of Environmental Security Ordinance."2 This program included a pollutants for a given time period (the "cap"). Each participant voluntary emissions reduction plan with a mandatory report- in the scheme receives an individual cap or allowance. Within ing scheme for targeted facilities. the overall cap, individual allowances may be determined in a TMG prioritized CO2 emissions reductions from large-scale number of ways, for example from historical baselines, or by businesses and buildings in the industrial and commercial auctioning allowances to participants. sectors, which represent less than 1% of all businesses in Trading can then take place: for the specified time period for Tokyo, but account for 40% of all CO2 emissions. The ini- which allowances are set, a participant who emits less than tial target facilities ­ those using over 1,500 kL of crude oil their allowance may then sell the unused balance to another equivalent annually ­ were identified using surveys under participant who has exceeded their allowance. The price for the national Energy Efficiency Law for No. 2 Type Specified allowance units is determined by the market. Those who are Energy Conservation Facilities3 and through inquiries carried able to reduce emissions cheaply, for instance by investing in out independently by TMG. It has been estimated that one more efficient technology, have the incentive to do so, in order of these facilities emits the same amount of GHGs as 3,300 to benefit from selling their unused allowances. Likewise, households (Miyazawa, 2010). those who find it difficult or expensive to reduce emissions may find it cheaper to purchase allowances from others. This paper was prepared by Marcus Lee and Kimberly An ETS, when functioning well, results in overall emissions Colopinto of the World Bank's Urban Development and Local remaining within the cap, while individual participants have the Government Unit, which commissioned the original report flexibility of a market-based mechanism within which to operate. on this topic written by Kyle DuPont of PADECO Co., Ltd. THE WORLD BANK URBAN DEVELOPMENT AND LOCAL GOVERNMENT UNIT | JUNE DIRECTIONS IN URBAN DEVELOPMENT Table 1: Other ETSs in Operation Worldwide Governmental Unit Name of ETS Target Pollutant GHG Target Organization International ETSs European Union EU-ETS CO2, CH4 (methane), N2O (nitrous Yes Electricity generation and energy-intensive oxide), HFCs (hydrofluorocarbons), PFCs industries (perfluorocarbons), SF6 (sulfurhexafluoride) Country-Based ETSs United Kingdom CRC4 Energy Efficiency Scheme Energy-based CO 2 Yes Large organizations with high energy consumption (although exempts those covered by Climate Change Agreements or the EU-ETS) Sub-National ETSs Northeastern & Mid-Atlantic Regional Greenhouse Gas Initiative Energy-based CO 2 from power plants Yes Electricity generators region, United States (RGGI) New South Wales, Australia Greenhouse Gas Reduction Scheme GHGs from electricity production Yes Energy producers and highly energy-intensive (GGAS) users City-Based ETSs Los Angeles, United States Regional Clean Air Incentives Market nitrogen oxides (NOx), sulfur oxides No Facilities emitting more than 4 tons a year of (RECLAIM) (SOx) either gas. Chicago, United States Emissions Reduction Market System Volatile organic materials (VOMs) No5 Stationary sources emitting more than 10/tons (ERMS) (particularly tropospheric ozone) per season (2 seasons per year) Santiago, Chile Emission Offset Program of Supreme Total suspended particles (TSP) No Stationary combustion sources with a rated Decree No. 4 exhaust gas flow rate greater than 1,000 m3/hour Source: Environment Canada (2010), Kamal-Chaoui, L. and Robert, A. (eds.) (2009), Illinois EPA (2010), Schreifels (2010), SCAQMD (2010), GGAS (2010), RGGI (2010), UK Department of Energy and Climate Change (2010), and EUR-Lex (2010) Facilities participating in the voluntary program were required to set a target based on average emissions in a consecutive three-year period, and to devise a plan to implement the basic Governance and Operative Context reduction measures set by TMG. TMG provided guidance at The National Government of Japan has taken important both planning and implementation stages to help participants steps to implement policies to reduce GHG emissions, but set and achieve reasonable targets, assess their achieve- takes a relatively hands-off approach and expects--instead ments, and publicize the results. of directs--lower tiers of government to work to achieve Starting in 2005, plans received a rating based on a five-tier scale: general emissions reductions (Sugiyama and Takeuchi, 2008). The exact targets for reductions are left up to the AA (more than 5% reduction planned through additional mea- lower tiers of government, although the national guide- sures); lines give suggestions for sectoral targets and the exact A+ (more than 2% reduction planned through additional mea- GHGs to cover. sures); The Bureau of Environment (BOE) of the Tokyo A (basic measures planned); Metropolitan Government (TMG), in coordination with B (only no-cost operational improvements planned); other bureaus, is responsible for the planning and admin- istration of environmental issues in Tokyo. This includes C (no basic measures or no-cost operational improvements the development of climate change strategies, plans, and planned). programs as well as preparation of emissions inventories. The average target levels remained around 3% to 4% among par- The BOE is also the focal point for Tokyo's membership in ticipating facilities; only about a quarter achieved emissions reduc- the International Carbon Action Partnership (ICAP), which tions greater than 5%. TMG ascribes this to the fact that the emis- aims to increase the number of cap and trade carbon mar- sions reductions were not mandatory (Miyazawa, 2010). kets worldwide. Large emitters identified for the mandatory reporting scheme were required to submit a five-year GHG emissions reduction strategy (ERS) that was made public in an effort to incentivize TMG first developed the outline for the ETS through an expert them to perform in-depth analyses of their emissions profiles panel and next consulted with other stakeholders to gain (Tokyo Metropolitan Government, 2010; Miyazawa, 2010). their acceptance. TMG collected opinions from communities, industries, municipalities, NGOs, scholars, research institutes The Process of Developing the ETS and energy suppliers through public opinion surveys, internet- based monitoring questionnaires, and stakeholder meet- It took many years and a considerable amount of work to ings. A series of internet workshops were held to discuss (i) establish Tokyo's ETS. The idea originated with the plan- methods of calculating emissions, (ii) methods of categorizing ning division of the Department of General Affairs, Bureau emissions, and (iii) trading methodologies. of Environment (BOE) of TMG in 2002, when TMG launched a project titled "Creating an Emission Trading Market" Despite this participatory approach, it was still not easy to and began discussing possible emissions trading designs build consensus with stakeholders. Many objections were (Sakamoto, 2009). raised by stakeholders, such as the Keidanren (Japan's larg- 2 JUNE 2010 made up almost exclusively of distributed electricity. Most of "Tokyo aims to reduce emissions by 25% these emissions are therefore easy to report and audit. below 2000 levels by 2020." 3. Precision ­ Electricity meters are already installed in all com- mercial, residential and industrial buildings on a subdivided basis. Total emissions can be calculated by multiplying the est business lobby), during the planning process, including billed monthly electricity consumption by a crude oil CO2 emis- after the launch of Tokyo's Climate Change Strategy in 2007. sions factor. The same precision is achieved in using fuel bills Some constituencies argued that the ETS has the potential to for other energy-based CO2 emissions. restrict economic activities in Tokyo, and some facilities con- 4. Minimal burden ­ Reporting on only one gas is less bur- sidered the proposed caps to be excessive. densome for a company from a technical standpoint. TMG Discussions concerning the emissions cap revolved around requires companies that use fuels other than CO2 to simply whether to make the cap mandatory or voluntary. In the end, calculate their usage. the TMG-supported absolute cap on emissions prevailed. 5. Confidence ­ Since the ETS is fundamentally a market-based The "Tokyo Metropolitan Environmental Security Ordinance" system, it relies on confidence in the traded good among was amended by the Tokyo Metropolitan Assembly in July market participants. As CO2 emissions are relatively easy to 2008 to include clauses for the establishment of emissions calculate and audit, participants trading in the ETS would have caps on large emitters, with effect from April 1, 2010. This greater confidence that CO2 credits traded are correctly mea- amendment formed the legal basis for implementation of sured and certified. the ETS, and ETS implementation became a regulatory design issue. Categories of Facilities At present, 1,340 facilities fall under the ETS provisions. These Key Features of Tokyo's ETS facilities are categorized as large-scale facilities, or small and medium-sized facilities. Energy-based CO2 Large facilities: Although companies are encouraged to report their total GHG Single buildings or facilities that consume more than emissions profiles, energy-based CO2 is the only gas included 1,500 kL crude oil-equivalent. in the ETS. CO2 was singled out for five main reasons. If no individual tenant in a given building exceeds 1. Breadth ­ 95% of Tokyo's emissions are from energy-based CO2. the energy consumption limits, while the building does 2. Simplicity ­ Tokyo's emissions are dominated by commercial as a whole, the tenants are required by law to cooperate buildings, which in turn have an energy consumption profile with the building owner to report emissions; the final Figure 1: History of National Policy and City Level Action on Climate Change Mitigation in Japan National Level Tokyo ETS Development 1990: Action Plan to Arrest Global Warming 1990's 1998: Adoption of Kyoto Protocol in Japan -Promotion of Nuclear Power -Energy Conservation Law -Law Concerning the Promotion of Measures to Cope with Global Warming 2000: Ordinance amendment for mandatory emissions reporting 2002: Ratification of Kyoto Protocol and revision of Article 20 of ETS Planning 2002-2004: Phase 1 of Global Warming Law Voluntary Scheme 2000 - 2005 Ædecentralized climate change planning under "Target 2002: Deliberations begin Achievement Plan" -Emissions reporting -Voluntary emissions reduction setting 2005: Enforcement of Kyoto Protocol -Three-year emissions Ælower levels of government draw up plans reduction plan 2005-2009: Phase 2 of Voluntary Scheme June 2007: Launch of Tokyo 2008: Complete revision of Target Achievement Plan Climate Change Strategy Public announcements and 2005- 2010 Æfocus on Kyoto Mechanisms (60-80% cuts in emissions from evaluations of reduction 2008 levels by 2050 and 14% by 2020) June 2008: Ordinance plans begin Amendment for ETS 2009: Prime Minister Yukio Hatoyama announces cuts of 25% Implementation from 1990 levels 2010: April 1st, start of ETS 3 DIRECTIONS IN URBAN DEVELOPMENT Figure 2: Obligations Under the Tokyo Metropolitan Environmental Security Ordinance LARGE FACILITIES SMALL AND MEDIUM-SIZED FACILITIES Tokyo Cap-and-Trade Program CO2 Reduction Reporting Program for Small and Medium-sized Facilities Each facility using over 1,500 Each facility using less than 1,500 kL crude oil equivalent/year kL crude oil equivalent/year Combined consumption of over 3,000 kL crude oil equivalent by a company Cap on emission Mandatory report submission Mandatory report submissions Voluntary report submission Note: A company may have multiple obligations since emissions are measured on a facility basis. Source: Adapted from Tokyo Metropolitan Government, 2010. report for the whole building is then submitted by the period of three consecutive years to use. In some cases, the building owner. average of two consecutive years was allowed (e.g. shut down These facilities must set a reduction target and sub- of a factory in one year that significantly altered emissions). mit a five-year reduction plan and an annual emissions Three categories of emissions reductions targets were set for reduction progress report. the first compliance period (2010-2015): Small/Medium Facilities: (i) Category 1-A: an 8% reduction for office buildings, public For companies with multiple buildings, factories, institutions, commercial buildings, lodging, educational facili- etc. located throughout Tokyo: if the combined crude ties, medical facilities, etc. that do not fall under Category 1-B; oil-equivalent consumption is over 3,000 kL per annum (ii) Category 1-B: a 6% reduction for buildings in which air con- but no single building or facility is over 1,500 kL per ditioning/heating from district cooling/heating plants make up annum, the headquarters of the company must submit more than 20% of energy consumption; and an annual energy efficiency plan report, which is made (iii) Category 2: a 6% reduction for factories that do not come publicly available. under Category 1. Although these facilities are not required to cap Fines are imposed on those who do not meet their targets and their emissions, TMG aims to help them understand fail to purchase credits through the ETS to cover the shortfall. both their energy consumption profiles and available The amount of each fine is JPY500,000 (about USD5,500), methods to reduce emissions. coupled with an additional emissions reduction obligation If the consumption of any one facility is less than beyond the shortfall itself. The names of offenders are made 30 kL per annum, there is no obligation to report the public in a "name and shame" scheme to further incentivize emissions from that facility. reductions.6 CO2 reduction obligations apply only to individual facilities in the large-scale segment. So for example, a company Calculation of Allowances7 may have one large factory in the large-scale segment, and Allowances are grandfathered8 based on historical emissions several smaller factories. In this case, the large factory itself and are calculated by compliance period. The total emissions has a CO2 reduction obligation, which does not apply to the allowance for the compliance period is calculated as follows: rest of the company. Setting Reduction Targets [Base Year Emissions - Required Reduction (6% or 8%)] x Compliance Period (5 years) TMG aims to reduce CO2 emissions by 25% below 2000 levels by 2020. A 6% to 8% reduction is targeted during the first To provide an incentive to participants, "top-level" facilities compliance period (2010-2014), with a further 17% reduction ­ those assessed as having achieved outstanding progress by the end of the second compliance period (2015-2019). in reducing emissions ­ may have their compliance factor The baseline for emissions reductions is the average emis- reduced by half. "Quasi top-level" facilities may have their sions from any three consecutive years in the period 2002­ compliance factor reduced by one-quarter. This reduction is 2007. Some facilities have pre-existing data from the manda- implemented for a three-year period and performance of each tory reporting program. Facilities were free to choose any facility is regularly monitored.9 4 JUNE 2010 Emissions Auditing TMG requires audits to verify emissions under the ETS. The "Interacting with stakeholders was cost of auditing is borne by the respective facility. Currently, repeatedly identified as the most important lesson there are several dozen private audit firms within Tokyo that are licensed to undertake this verification. These audit firms learned in Tokyo. " must be registered with TMG for a particular segment.10 Arrangements for Trading and Offsets If a facility exceeds its emissions reduction requirements Beginning in April 2011, one year after implementation of the under the ETS' cap, it is allowed to sell the excess reductions ETS, TMG will offer an online platform for companies to trade as credits. Banking of accumulated credits is permitted, but emissions reduction credits. The platform will match buyers borrowing is not. This is illustrated in Figure 3 based on the with sellers and facilitate the transfer of credits between partici- assumptions provided in the previous allowance calculation.11 pants' accounts. Actual transfers of cash will take place directly between transacting parties without involving TMG. To ensure While TMG asks that participants in the ETS principally trade greater transparency in the prices of credits, a private joint emissions credits with one another, the ETS also provides for venture between CoalinQ.com and Smart Energy broker carbon three other methods for acquiring credits: credit trades; the joint venture will charge a 5% fee on the trans- Credits from small/medium facilities: credits may be action value of each transaction. purchased from those facilities that have voluntarily reduced their emissions. Key Lessons Learned Credits from outside Tokyo: applying credits from large facilities outside Tokyo (purchase restricted to a Tokyo's success in implementing the ETS can be attributed to a maximum of one-third of base year emissions). generally cooperative environment and the high level of techni- cal and financial management capacity both within the govern- Renewable energy credits: ment and in the private sector. Some notable features from this ­ Green Electricity Certification: certificates for emis- experience include: sions reductions can be obtained (i) if a facility Mandatory Reporting: The critical first step by TMG to establish changes power source and uses green electricity (cer- a multi-year mandatory emissions reporting ordinance for the tified by TMG) or (ii) if the power company serving largest emitters in the city yielded a large database of informa- the target facility either installs increased renewable tion on GHG emissions by facility. The detailed breakdown of energy as a percentage of delivered end-user power sources for individual energy consumption including reports on or installs additional substations that bring in addi- specific machinery and infrastructure allowed TMG to calculate tional renewable energy from outside the Tokyo area. GHG emissions and identify best practices for energy efficiency. ­ City Solar Energy Bank: Run by Cool-Net Tokyo, this During stakeholder consultations, the mandatory reporting gave is a bank for residential renewable energy credits. TMG a data-based argument to assert that energy efficiency tar- When TMG gives out subsidies for facilities with gets were indeed possible. renewable energy in residences (solar power, solar Simplicity: Many companies complained that they did not water heating, etc.), the user--i.e. the household have the technical capacity to develop an emissions report purchasing renewable energy--is required to relin- each year. The development of a simple reporting system quish 10 year's worth of carbon credits to TMG. These that relied on existing data from electricity and fuel bills, and credits may then be purchased by businesses and indi- equipment inventory lists, was one of the most important ele- viduals on a voluntary basis to offset their emissions. ments for gaining acceptance for the ETS. That said, reporting (Tokyo Metropolitan Government, 2008). in this way limits the target gases to energy-based CO2. Figure 3: Calculating Reductions Exceeding Obligations 2nd year (end of 1st year) 3rd Year (end of 2nd year) Required Emissions (10,000 x 8%) x 1 year = 800 (10,000 x 8%) x 2 years = 1,600 Reductions Emissions Total reduction 2,000t: Reduction short of 8,500 Reduction 9,50 500 t 800t requirement; no 9,500 500 t 1,500 t Participant can sell 400t of credits from end of 2nd ETS credits granted year Actual 9,500 8,500 9,500 Emissions 1stYr. Cumulative 1st & 2nd Yr. Cumulative Emissions Emissions Source: Adapted from Tokyo Metropolitan Government, 2009. 5 DIRECTIONS IN URBAN DEVELOPMENT Incentive Development: While the voluntary emissions End Notes reduction program yielded only minimal success in 1From the climate change planning documents of London, United Kingdom; Paris, achieving actual reductions, it also afforded Tokyo the France; and Austin, Texas, United States; there are intentions to reduce GHGs opportunity to learn about creating incentives. TMG through carbon credit systems, but it is not clear the exact form such systems would take. introduced guidelines for target setting and reduc- 2Tomin no Kenkou to Anzen wo Kakuho suru Kankyou ni Kansuru Jourei tion measures, evaluation and public announcement of 3Shouenehou no dainishu enerugii shitei kanrikoujou 4CRC was formerly known as the Carbon Reduction Commitment, but is now simply results of mitigation efforts, and submission of prog- known as the CRC. ress reports. These elicited a more serious commitment 5While CC mitigation was not an objective of ERMS, tropospheric ozone is a GHG, so to the program, raising the average target level among to a limited extent there are co-benefits from this ETS for climate change mitigation. 6Tokyo Metropolitan Government (2010) the 1,255 participating facilities to 4.8%. 7Tokyo Metropolitan Government (2009) Stakeholder Consultation: Interacting with stakehold- 8There is currently consideration of a gradual transition to auctioning of allowances, ers was repeatedly identified as a very important les- but this is still at an inchoate stage (Tokyo Metropolitan Government 2010a). 9See also (in Japanese): http://www2.kankyo.metro.tokyo.jp/sgw/daikibo/ son learned in Tokyo. Including stakeholders from the data090629/shiryou2_3(16)_090629.pdf beginning afforded TMG the chance to tailor the ETS 10Tokyo Metropolitan Government (2009) to individual companies' needs, while meeting TMG's 11Ibid. ambitious reduction goals. The stakeholder meetings identified areas for improvement in the ETS design. References More importantly, these meetings helped TMG to build Environment Canada (2010). Accessed 23 March 2010. http://www.ec.gc.ca/ confidence among ETS participants. cleanair-airpur/Pollutants/Criteria_Air_Contaminants_and_Related_Pollutants- WS901AFF08-1_En.htm? Legal Framework: Tokyo's experience indicates that it EUR-Lex (2010). Access to European Law. Accessed 25 March 2010. http://eur-lex. is difficult to achieve ambitious reduction targets solely europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32003L0087:EN:NOT through voluntary efforts. Instead, voluntary efforts GGAS (Greenhouse Gas Reduction Scheme) (2010). Accessed 23 March 2010. http:// should be thought of as a proof-of-concept to gain greenhousegas.nsw.gov.au/ support within the government apparatus and among Illinois Environmental Protection Agency, EPA (2010). Accessed 23 March 2010. http://www.epa.state.il.us/air/erms/overview.html stakeholders for binding measures. From this perspec- Kamal-Chaoui, L. and Robert, A. (eds.) (2009). "Competitive Cities and Climate tive, it is very important to institutionalize relevant Change", OECD Regional Development Working Papers No. 2, 2009, OECD publish- instruments through legal mandates. ing. Miyazawa, K. (2010). Consultant Interview with Kouji Miyazawa, Head of Implementation Timing: Appropriately timing each step the Emissions Trading Scheme of the City Environment Division of the Tokyo in the development of the ETS increased both private Metropolitan Bureau of Environment. 30 March 2010 and public sector support. Through consultations with RGGI (Regional Greenhouse Gas Initiative) (2010). Accessed 23 March 2010. http:// global and local experts, TMG developed the core pro- www.rggi.org posal, with inputs from public discussions. In mid-2008, Sakamoto, J. (2009). Interview with staff of Tokyo Metropolitan Government, 17 April 2009. the proposal was submitted to the Tokyo Metropolitan Sakamoto, J. (2009a). Follow up Interview with Staff of Tokyo Metropolitan Assembly, which approved the implementation of the Government, 4 June 2009. ETS. Schreifels, J. (2010). Emissions Trading in Santiago, Chile: A Review of the Emission Offset Program of Supreme Decree No. 4. Appropriate ETS Design: Lastly, designing an ETS both SCAQMD (South Coast Air Quality Management District) (2010). Accessed 24 March appropriate to the conditions in Tokyo and respon- 2010. http://www.aqmd.gov/RECLAIM/reclaim.html sive to the goals of TMG was essential. First, while an Sugiyama, N. and Takeuchi, T. (2008). "Local Policies for Climate Change in Japan", intensity-based cap can lead to energy efficiency, an The Journal of Environment Development, 17, pp. 425-441. absolute cap was considered the only way to reach the Suzuki, K. (2010). Consultant Interview with Kenji Suzuki, Head of Coordination of the City Environment Division of the Tokyo Metropolitan Bureau of Environment. 26 goal of reducing total emissions. Second, TMG focused March 2010. on those facilities that would have the greatest impact Tokyo Metropolitan Government (2008). "Concrete Points for Implementation". on reducing total emissions. It thus avoided having to Stakeholder Consultation Meetings. manage thousands of facilities that would have had Tokyo Metropolitan Government (2009). Tokyo Cap-and-Trade Program: Tokyo ETS. only a marginal effect on emissions reductions. Tokyo Workshop 2009 on Urban Cap & Trade Towards a Low Carbon Metropolis. Tokyo Metropolitan Government (2010). Accessed 24 March 2010. http://www2. kankyo.metro.tokyo.jp/sgw/jorei-kaisei20080625.htm Tokyo Metropolitan Government (2010a). "Tokyo's Proposal on Nationwide The contents of this paper are the views of the authors and Introduction of Cap-and-Trade Program in Japan" do not necessarily reflect the views of the Tokyo Metropolitan UK Department of Energy and Climate Change (2010). Accessed 25 March 2010. http://www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/crc/crc.aspx Government. in Urban Development Contact the World Bank Urban Development Unit Copies of this Note are available at: Urban Development Unit, The World Bank Telephone: 202-473-0409, Fax: 202-522-3232 DIRECTIONS http://www.worldbank.org/urban urbanhelp@worldbank.org If you are interested in submitting an article for consideration, please contact us at the email address above. The views expressed in DIRECTIONS in Urban Development are those of the authors and do not necessarily reflect those of the World Bank. 6