Emissions
Trading
Administrative
body and Emission Right
[14] First of all, let us think about emissions trading
among the Annex I countries. It is likely that emissions trading
which involves private firms will be more efficient in a number
of ways. For better understanding of emissions trading, however,
we will first examine emissions trading among countries, in line
with the provisions of the Protocol, and then extend the concept
to the case when private firms participate in emissions trading.
[15] The Conference of the Parties to the UNFCCC serving as the
meeting of the Parties to the Kyoto Protocol (COP/moP) is
expected to administer emissions trading. The COP/moP may
establish a subsidiary body to which parts of the tasks required
to administer emissions trading are delegated. The COP/moP or its
subsidiary body (hereinafter we call it as the administrative
body) will assign to Annex I countries transferable
emissions rights which are valid for the commitment period
from 2008 to 2012, based on their reduction commitments given in
the Kyoto Protocol. Serial numbers might just as well be given to
the assigned transferable emission rights to identify the country
of origin. The administrative body receives reports from the
countries concerning the serial number traded, the amount traded,
the destination traded and the remaining amount of assigned
emission rights. Moreover, it tracks the transferred emission
rights, and discloses such information as the occasion demands.
[16] The administrative body must confirm that each country
complies with her commitment. The total amount of GHGs emissions
during the commitment period must be less than or equal to the
amount of emission rights remaining at the government's
as well as
domestic firms' hands at the
end of the commitment period. In order to do so it suffices for
the administrative body to receive the above-mentioned report
only once at the end of the commitment period. However, since
emissions are required to be reported once a year, transfer of
emission rights might just as well be simultaneously reported
[17] If such reports were
publicized, they would serve as a
useful source of information for emissions trading. On the basis
of such information the administrative body will be able to
recommend a country whose emissions are likely to exceed her
holding emission rights at the end of the commitment period to
control emissions so that she can comply with her commitment.
How to
Trade
Emission Rights
[18] The emission rights are
traded through bilateral
transactions, listing in commodity exchanges or through
brokerage. The dominant form of trading may be left entirely to
market trends, but it should be noted that the market does not
necessarily choose an equitable system of trading. To avoid
possible inefficiency, unfairness and non-transparency associated
with bilateral transactions, it may be advisable to limit
emissions trading to some marketplaces authorized by the
administrative body or some other bodies. By limiting trading and
transactions to a few places, it is expected that principles of
fairness and openness are ensured, and that tracking can be
conducted comprehensively and in real time.
[19] Transactions via the
Internet may be recommendable; the
merits of which include immediate information disclosure to
market participants, and low costs for establishment as well as
operation of the market. In the United States, it is reported
that everything from airline tickets to Barbie dolls are
auctioned online, and that bidding on the Internet is becoming
more and more popular.
[20] After the commitment
period is over, each Annex I country
should report to the administrative body on how much emission
rights it possesses and how much GHGs it emitted during the
commitment period. If the occasion demands, each country must
accept the administrative body's
review.
Based on the report and the
review, the administrative body finally concludes whether or not
each country has complied with her commitment. What kind of
sanctions should be taken against noncompliance is a very
controversial problem. One simple solution is that noncompliance
should be compensated by purchasing emission rights to make up
for excess GHGs emissions. The payment may be regarded as a fine.
Sellers'
or
Buyers' Liability
[21] The liability of
emissions trading is also one of the
hottest controversial issues. It concerns whether the liability
lies in either sellers or buyers. As a possible compromise it
might be more reasonable to share the liability by both parties.
Suppose that the country A sells a part of assigned emission
rights to the country B and ends up with noncompliance. In case
of sellers' liability the country A has to fill the
deficit somehow or other, while the emission rights bought by the
country B is effective in spite of the country A's
noncompliance. In case of buyers'
liability the seller country is entitled to buy back the
emission rights sold to the buyer countries. That is to say, the
emissions trading is invalidated retroactively in backward order
from the most recent trading up to the point where the
accumulated amount of trading equals the country A's
deficit of emission rights. As a result
some buyer countries might be compelled to buy emissions rights
to make up a possible unintentional deficit.
[22] In accordance with
ordinary commercial customs, the sellers'
liability principle may be more acceptable, but the buyers'
liability principle is favorable due to the following reason. The
buyers' liability principle is likely to discourage emissions
trading and hence encourage self-help rather than reliance upon
others, since emissions trading imposes risk to some extent on
buyers. Buyers' liability will cause more or less dispersion of
the price of emission rights. The higher the price is, the more
confident the seller is, and vice versa. In case of
buyers' liability, however, the trading system becomes extremely
complicated and buyers' compliance may be likely to be
jeopardized due to sellers' noncompliance.
Economics
of
Emissions Trading
[23] Given the market price of
one carbon ton emission
right of CO2, each country is supposed to reduce GHGs emissions
domestically as far as the marginal reduction cost is less than
the market price of emission rights. To put it differently, each
country reduces domestically up to the point where the marginal
reduction cost equals the market price of emission rights. If the
amount of the domestic reduction thus determined is less than the
assigned target, then purchasing emission rights may fill the
shortage. If the converse is true, then the surplus may be sold
at the market price.
[24] It is often said that
some countries such as Russia and
Ukraine may be able to attain their commitments without any
further efforts to reduce GHGs emissions, while some other
counties such as Japan and the US are difficult to attain their
commitments. To put it differently, the former countries'
marginal cost curves are far lower than the latter countries'
The former countries will certainly
have incentive to participate the market of emissions trading as
sellers, while the latter countries will have incentive to
participate as buyers.
[25] One severe criticism
against emissions trading stems from
the fact that Russia's
CO2
emissions in 1995 was by 30 % less than that in 1990. Certainly,
without any significant efforts Russia will be able to attain her
target, i.e., stabilize GHGs emissions at the level less than or
equal to the 1990 level. To put it differently Russia's
marginal reduction cost to attain the
target is zero, and hence Russia will be in a position to sell
huge amount of emission rights at a bargain. As a result
countries with relatively high marginal reduction cost will enjoy
the extremely cheap price of emission rights, and hence will be
apt to neglect duties of reducing GHGs emissions domestically.
GHGs
Other
Than Carbon Dioxide and Sinks
[26] The emission unit is one
ton of carbon dioxide
(CO2) equivalent. Other GHGs are converted into CO2 equivalent
values, based on the global warming potentials (GWP) calculated
by IPCC. With regards to the emissions of GHGs other than CO2, it
is often pointed out that the amount of emissions of these gases
is difficult to estimate accurately in most cases. For example,
how precisely can nitrous oxide (NO2) or methane (CH4) emitted
from agricultural or forest soils be calculated? This question
cannot easily be answered. It is often said that GHGs with
inaccuracy in their emissions estimation should be excluded from
trading, i.e., emissions trading should be limited only to CO2.
[27] The sources of emissions,
however, do not matter in
emissions trading between countries, since trading is conducted
on CO2 equivalent tons. Therefore, if trading is limited to among
countries, the present provisions of the Protocol cannot justify
excluding greenhouse gases with low estimation accuracy from
emissions trading. However, if private firms participate in the
emissions trading, sources of emission rights to be traded may
include GHGs other than CO2. In this case, the aforementioned
points pertaining to the accuracy of estimation is quite likely
to cause disputes.
[28] The Protocol provides
that net changes of CO2 removal, due
to afforestation, reforestation and deforestation within the
country since 1990, shall be used for calculating domestic
emissions. Deforestation means CO2 emissions. Afforestation and
reforestation means reduction of CO2 emissions. This will
contribute to forest conservation in addition to prevention of
global warming. Attention should be paid, however, to the fact
that CO2 removal by forest is nothing more than borrowing
emission rights from the future in the sense that eventually in
the future due to deforestation or forest fires CO2 absorbed by
forest will be emitted into the air.
[29] In Japan, as well as on
the global scale, forests are
certainly on a decreasing trend. The Kyoto Protocol, which
regards CO2 removal by afforestation as negative emissions, could
bring about the potential benefit of preventing further
deforestation. The present inventory methodology, however,
contains numerous problems that should be reexamined, including
whether or not emissions should be identified at the point of
deforestation.
[30] If the total amount of
GHGs emissions by a certain country
within the commitment period being certified by the COP/moP
turned out to be less than the amount of emission rights
remaining at hands, the country could transfer the excess
emission rights to the next period. That is to say, what we call banking
is permitted by the Protocol.
[31] Banking means excess
reduction within the commitment period.
As incentive to utilize every existing opportunity for emission
reduction, banking may be desirable. The banked amount, however,
may be carried over to the next commitment period. Since this
implies that the sum of emissions in the first and the second
commitment periods are invariant, banking does necessarily
increase emissions in the second period. Taking it into account
that global warming is caused by the accumulation of emissions
over a long period, banking in the first commitment period will
scarcely contribute to prevention of global warming.
[32] Total emissions within
the first commitment period should
not exceed the emission rights at hands. To put it differently, borrowing
from the next period is not permitted. If the administrative body
confirms that a country has not fulfilled its commitment, but
judges that this has been caused by unavoidable reasons such as
extraordinary climate, natural disasters or accidents, the
government of the country involved should be permitted to apply
for special carrying-over to the administrative body.
[33] The administrative body
permits special carrying-over
only when it confirms that the noncompliance has been caused by
some unavoidable reasons. The shortage in the balance of emission
rights for the current commitment period and the penalty premium
should be deducted from the initially assigned emission rights
for the next period. If noncompliance has been caused by some
avoidable reasons, the country is obliged to purchase additional
emission rights from countries with surplus emission rights, or
from the administrative body in case when no country has surplus
emission rights. Some maintain the view that the administrative
body should set a penalty price higher than the market price in
such cases. The administrative body, if it sells additional
emission rights to countries that have failed to meet their
commitments, should be required to purchase the same amount in
the market within the next commitment period.
[34] As a matter of fact, it
should be noted that the above
measure in case of noncompliance is nothing more than borrowing
deputized by the administrative body. More punitive measures
against noncompliance may be conceived, but most of them would be
internationally unacceptable. Naturally, there should be some
possibility left to introduce more powerful measures in the
future against repeated noncompliance.
Participation
by the Private Sector
[35] Emissions trading among
countries are likely to be
conducted as bilateral transactions at least at the beginning. In
order to encourage the formation of the marketplace, the
participation in emissions trading by private firms would be
indispensable. It is entirely left to the government of each
country whether or not private sectors such as firms, brokers,
and NGO are permitted to participate in emissions trading. In
either case, it goes without saying that responsibility of
compliance lies with the government.
[36] There exist two different
ways for private sectors to
participate in emissions trading. First, the government
distributes a part of emission rights assigned by the
administrative body to private firms according to a certain rule.
As the occasion demands, firms can sell or buy assigned emission
rights in the market or through bilateral transactions. Second,
even in case when private firms are not assigned emission rights,
firms may keenly want to have an opportunity to sell emission
rights generated by JI or CDM. In order to motivate JI and CDM by
private firms the early creation of the open marketplace is
really necessary.
[37] In view of
cost-effectiveness, it is more desirable for
private sectors to participate in emissions trading somehow or
other due to the following reasons. First, the government is not
necessarily in a position to make correct judgements on the
marginal reduction cost of GHGs emissions, i.e., the cost
required to reduce one additional unit of GHGs emissions. To put
it differently, private firms are in better position to estimate
how much marginal cost is needed to reduce their own GHGs
emissions. Second, the government does not necessarily have the
know-how for commodity trading. It should be recollected that in
1992 when a poor harvest attacked Japan the emergency import of
rice was entrusted to trading firms. Third, if emissions trading
were limited only to the government, cost-effectiveness would be
more or less damaged since bilateral transactions are likely to
be dominant.
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