Policies to Reduce Greenhouse Gas Emissions in Industry Successful Approaches and Lessons Learned Policies and Measures Workshop, 2-3 December 2002 in Berlin Organized by the OECD and the IEA on behalf of the Annex I Expert Group on the UNFCCC

Takao AIBA Deputy Director Economic & Industrial Research Department Development Bank of Japan

Outline of this presentation ❋ ❋ ❋

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DBJ at a glance General arguments over “competitiveness” Climate change policies and competitiveness Concluding remarks

AIBA, Takao of the Development Bank of Japan

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DBJ at a glance RZQHGE\WKH -DSDQHVH*RYHUQPHQW1R UHODWLRQZLWK2'$EXGJHW &DUU\LQJRXWHIIHFWLYH SROLF\EDVHGILQDQFLQJIRU \HDUV 6XSSO\LQJORQJWHUPORDQV IRUSULYDWHFDSLWDO LQYHVWPHQWFRQGXFWHGLQ -DSDQ Total assets: US$132 billion in March ’02 (¥17,536 billion) Net income: US$ 335 million (April ’01 to March ’02) AIBA, Takao of the Development Bank of Japan

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General Arguments over Competitiveness of Industry in Japan Wide spread consensus: Japan has been losing its competitive edge since early 90’s. (E.g..) IMD & WEF ✿ Hollowing out of Industry is inevitable now and in the future. We have to adopt this trend expanding service sector. Overseas production has been rising. ✿

AIBA, Takao of the Development Bank of Japan

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Japan’s Competitiveness: Declining Trends Concerns over China have been rising.

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AIBA, Takao of the Development Bank of Japan

Overseas production has been going up, while the trade surplus has been going down. Dev elo p men t o f Ov ers eas Pro d u ctio n an d Tren d in th eTrad e Balan ce

Co m p iled by D BJ

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The ratio of overseas production varies industry by industry. R a tio o f O ve rs e a s P ro du c tio n , In du s try by In du s try P ap er an d P u lp

C h em icals

I ro n & St eel

E lect ric E q u ip m en t T ran s p o rt at io n E q u ip m en t P et ro leu m & C o al

M an u f act u rin g in t o t al

C o m p iled b y D B J D at a s o u rces : M in is t r y o f F in an ce, St at is t ical Su rv ey o f In co rp o rat ed E n t erp ris es .

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In order to regain Japan’s competitive edge, Some argue that infrastructure costs, such as for electricity and natural gas, have to be reduced. ✔ Electricity and gas market liberalization are now under consideration. ✔ Although energy costs are higher in Japan than in other countries, they are not a major source of the declining competitive edge in general. ✔ But energy costs do matter in some industries. ✔

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The New Climate Change Policy Programme (Former Guidelines of Measures to Prevent Global Warming ) “

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4 Key Points ✦ Contribute to both the environment & the economy ✦ Step-by-step approach (taxes/ETs may be introduced from 2005 after reviews in 2004) ✦ Shared responsibilities ✦ International co-operation in climate change policy 8

AIBA, Takao of the Development Bank of Japan

Japan’s New Programme: Voluntary Action Plans are Key. The New Climate Change Policy Program CO2 Emissions from energy use (targets: 0% compared to the 1990 level) Domestic Sector Industry Sector (Commercial & Residential)

Transport Sector

Solid implementation and follow-ups of Energy Conservation: 57million kl Voluntary Action Plans by industries New Energy: 19.1million kl Fuel Switching: 18million t-CO2 Nuclear Promotion Anticipated emission amount and Approx 462 mt-CO2 Approx 260 mtreduction compared to base year CO2 ( 2 ( 7 1990 of each sector

Approx 250 mtCO2 (+17

Actual emissions in FY2000 compared to base year 1990 Compiled by author. Sources: Ministry of Environment, Government of Japan. AIBA, Takao of the Development Bank of Japan

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So far, we have no concrete plan for contributing to both the environment & the economy. ✳

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Coping with both the environment and the economy sounds splendid and is an extremely popular idea in Japan. But nobody knows how we can materialize such a noble idea. Nobody considers adjustment costs. But somebody has to shoulder the costs. AIBA, Takao of the Development Bank of Japan

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Major Sources of Competitiveness Concerns

CO2 emission reduction targets as per the Kyoto Protocol

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Seriousness of “Leakage” differs by parties. Share of Export Destination by Countries

Exporting countries EU

7.6%

of which Germany of which U.K. Japan USA

to to the USA. Developing to the EU Countries 20.3%

62.9%

to Japan

to Others

Total

1.9%

7.2%

100.0%

8.3%

23.5%

58.2%

2.4%

13.2%

20.3%

55.3%

2.2%

29.5%

48.0%

17.3%

42.2%

22.4%

10.0%

7.6%

100.0%

9.0%

100.0%

5.2%

100.0%

25.5%

100.0%

Compiled by author. Data source: IMF "Direction of Trade Statistics" Note: Figures are averages between 1990 and 2001. 12

AIBA, Takao of the Development Bank of Japan

Most of the iron & steel exports are to nonAnnex I countries and North America. Trends in Japan’s Iron & Steel Exports, by Destination Others

North America Asia, excl. China China

Compiled by DBJ. Data source: The Japan Iron and Steel Federation.

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The data is not sufficient, but export price elasticity is negative. Estimate of Export Volume Function Destination

Term of estimation

Income elasticity

Price elasticity

Worldwide

1992 1985 1980

1999 1992 IV 1986 IV

0.821 0.503 1.152

-0.506 -0.308 -0.563

US EU Asia

1992 1992 1992

1999 1999 1999

0.941 1.309 0.991

-0.576 -0.939 -0.197

Source: Economic Survey of Japan 1999-2000, Economic Planning Agency, Government of Japan.

Origin Worldwide

Asia

Es timate of Import Volume Function Term of estimation Income elasticity 1999 2.819 1992 1992 IV 1.890 1985 1986 IV 0.652 1980 1992

1999

3.280

AIBA, Takao of the Development Bank of Japan

Price elasticity -0.314 -0.110 -0.275 -0.427 14

6 industries account for about 80% of all industries’ emission.

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Petroleum industry is insisting that ❂

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The index of CO2 emission per unit output has been improved by 12%. Throughput has been increasing. Tightened environmental requirements for less sulfur and benzene increases additional scrubbers and equipment, the need for which consumes additional energy. To produce lighter products requires additional cracking, which increases energy consumption. AIBA, Takao of the Development Bank of Japan

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Japan’s Iron & Steel industry is the most efficient according to Japanese survey. Per unit energy usage when Japan’s is 100

International Energy Efficiency Comparison in Iron & Steel industry

Source: The Japan Iron & Steel Federation.

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Some micro data support their claims. Diffusion Rates of CDQ (Coke Dry Quenching), by Country

Source: T he Japan Iron & St eel Federat ion

Diffusion Rates of TRT (Top Pressure Recovery Trubine), by Country Japan Korea USA UK Germany France

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Strong measures may be critical for some energy intensive industries. ✴

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Many of Japan’s energy intensive industries are arguing that their energy efficiency is better than that of their counterparts in the EU, US, and ASIA. Probably true… but there is little data available. In the case of iron & steel industry, Japan’s was recognized as the world’s most energy efficient in the Dutch Energy Efficient Benchmarking Covenant. In order to reduce energy usage by 10%, Japan needs to adopt innovative new technologies. AIBA, Takao of the Development Bank of Japan

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The effect of carbon tax differs by industry. Expected Carbon Tax Burden, by In dustry

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Does Japan have to abandon iron & steel production within its borders to comply with the Kyoto Target, though it is the world’s most energy efficient? ✦

If Japan’s iron & steel factories are closed and production increases in China instead, the global GHG emission is likely to increase.

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Adamant opposition to taxes. (So far, insufficient arguments only) If carbon taxes will be introduced, Will there be tax adjustments at the border? Will that violate WTO principles? Will the operation of border adjustment be feasible? ✫ Will coal for blast furnaces be exempted of taxes? Will there be negotiations with industry over conditions? ✫ Will the burdens be shouldered only by the domestic sector? ✫

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In general, growing sectors are resisting absolute caps, whereas declining sectors prefer them. Which should be given advantageous treatment? Which will contribute more to necessary technology development? Cap & Trade with grandfathering favors the latter. AIBA, Takao of the Development Bank of Japan

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Difficulty in CO2 emission reduction varies, by business & product. Case of a computer & electric equipment company

emission and ratio to net sales, by sectors (FY2001)

CO2 emission CO2 emission to net sales

Data source: Environmental report of a Japanese company. Compiled by DBJ.

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Careful consideration of “Life Cycle Emission” is necessary. KP and the majority of policies just focus on either the production phase or the use phase. (E.g..) ✧ Liquid crystal monitors vs. Cathode-ray tubes ✧ Hybrid electric vehicles vs. Normal cars ✧ Hybrid electric vehicles vs. Fuel cell vehicles “Well to Wheel” AIBA, Takao of the Development Bank of Japan

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If carbon constraint is imposed only on the manufacturing stage, makers have no incentive to produce hybrid cars.

Source: Honda Environmental Annual Report 2002

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What is the most important? ✔ The

most important is real, global, sustainable, GHG emission reduction.

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Honest early movers should be rewarded. New entrants and growing sectors/companies should be treated fairly or favorably. Much more information on industry is necessary to accurately measure energy/GHG emission efficiency and improvement potential (like that of the EU burden sharing agreement). AIBA, Takao of the Development Bank of Japan

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Concluding Remarks ✓ ✓

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What is the ultimate objective? What kinds of business activities do we want to lead through policies and measures? KP is not perfect. Careful adjustments are required to minimize negative effects, especially on globalized industries. Customized policies suitable for each country’s specific circumstances are needed. Sophisticated voluntary agreement? International studies about energy efficiency of major energy intensive industries are necessary. AIBA, Takao of the Development Bank of Japan

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