Executive Fellow, Economic Research Center
The Copenhagen summit ended without significant achievement. The next step is for the Kyoto Protocol Annex I countries (generally developed countries) to report 2020 reduction targets, and for developing countries to report specific reduction efforts by the end of January 2010. Individual reduction targets and specific commitments, however, are inconsistent; renegotiation will become necessary later this year. Japan has already committed to 25% reduction from 1990 levels, and is left to watch how other countries play their hands. Though domestic opposition continues to smolder, Japan must aggressively move towards a fair system design that is also palatable to other countries. A global cap and trade framework is essential to accomplish this. First we look at the current situation in Japan.
1979 Tokyo Summit
Domestic discussion on the global warming issue always reminds me of the Tokyo Summit 30 years ago. As many will remember, Tokyo hosted the fifth summit of leading industrialized nations in summer 1979. This was during the second oil shock when oil prices surged from $12 to $30 a barrel. Based on talks between the US and European countries ahead of the summit, it was suddenly proposed that each country would cap oil imports at then current levels. Japan had just established the “seven-year economic and social plan,” and expected that the while the rate of increase would fall, oil imports would expand from the 1978 level of 5.28 million barrels a day. Japanese Prime Minister Ohira, also serving as chairman of the summit, was caught completely off guard and pushed into a corner. With the summit on the verge of collapse, Japan finally agreed to an upper limit of 6.3 million imported barrels a day by 1985. This put the “seven-year economic and social plan,” which predicated its 5.7% growth projection on 7 million imported barrels a day, in a precarious position. I was at the Industrial Structure Division of the Ministry of International Trade and Industry (MITI) at the time, and recall reporting to my superior that 6.3 million barrels a day would drag Japan’s economic growth down to about 4%.
In reality, the economy soon began to move in an unexpected direction. Economic growth dropped below the assumed level, and oil consumption began to decrease. By 1985, oil imports had fallen nearly 30% from 1979 levels. In light of the Tokyo Summit agreement, Japan began to make earnest efforts towards energy-saving and alternative energies as top national goals. Regarding the industrial structure, some energy-intensive industries such as steel ceased growing while others such as aluminum refining disappeared altogether. Power generation began to shift to nonpetroleum resources such as nuclear, coal, and natural gas, while improved gas mileage in cars also contributed greatly to energy-saving. As a result, Japan’s oil imports dropped below 3.4 million barrels a day in 1985 after peaking at 5 million in 1978. The private and public sectors’ desperate efforts to adhere to the summit agreement actually bolstered the economy and helped usher in the “Japan as Number One” golden economic age the following decade. This experience supports the notion that the current global warming problem represents an opportunity for new development, and that the Japanese economy can be revived by adjusting the industrial structure. The government and industry’s way of thinking is antiquated.
Industrial structure is already shifting
Energy-intensive industries such as electricity, steel, cement, and paper pulp represent the fiercest opposition to emission reduction. Steel production began to fall after peaking in 1974, and hovered around 100 million tons after 1990. But production began to pick up again in 2003, rising to 120 million tons in 2008. This increase was a result of the US consumption bubble driving up Japan’s exports including automobiles and household appliances, and was further fueled by the weak yen and manufacturing bubble in Japan. When thinking about the future of the US economy, it is clear that Japan’s exports to the US cannot return to previous levels. China, India, Indonesia and so on are developing their steel industries, so while Asia is rising as a new market, Japan’s exports to Asia are unlikely to expand. Demand for high quality steel, Japan’s specialty, is also limited. Meanwhile, public works and automobile sales, the primary domestic demand industries, are expected to stagnate in the future. Given this, the ceiling for steel production is the previous level of 100 million tons, and production will likely fall about 10% from 2005 levels. A similar rate of decrease in cement and paper pulp production is also unavoidable. Irrespective of global warming countermeasures, these industries are already shifting attention to business in emerging Asian countries. Production in the manufacturing industry as a whole is expected to fall 10% by 2020, and policy moves could drive it down about 15%.
Demand for electricity will continue to grow, but much can still be done towards emission reduction. The operating rate of Japanese nuclear power plants should first be raised from the current 65% to 90%, a level on par with other developed countries. Japanese power companies are cautious regarding solar and wind power, fearing a negative impact on existing power grids. Meanwhile, European countries plan to push renewable energies up to 20% of total electricity. Plans for smart grids are progressing under the Obama Administration in the US, but the response among Japanese electric power companies has been lukewarm. Harnessing information technology would facilitate rational use of electricity and harvest more unstable renewable energy. Moreover, carbon capture and storage and other technologies will soon be available for practical use; if successful, these technologies have the potential to drive the Japanese economy as a new industry. If all of the aforementioned points are realized, a 20% reduction is possible in power generation.
Behind Europe in civilian sector energy-saving
Japan must now focus energy-saving efforts on households, workplaces, and transportation, areas in which it lags behind European countries. Environmental parties such as the Green Party have participated in European government since 1980 by forming coalitions, and have exerted great influence in environmental policy. Energy tax per ton of CO2 emission for gasoline, light oil, heavy oil, and coal is nearly twice as much as in Japan. European countries are also significantly more aggressive in their use of wind, solar, and other renewable energies. Meanwhile, proposals to eliminate highway tolls and gasoline taxes are being seriously discussed in Japan, suggesting just how behind Japanese awareness is on the matter.
Many European countries have cold climates. Development of various insulation materials and technologies has been accompanied by measures to promote their utilization such as standardization and insulation efficiency display. The EU has recently decided to prohibit the production of incandescent bulbs and replace them with LED light bulbs after 2012. On a business trip to Paris in mid-December, I found that lighting along the famous Champs Elysees had been changed to light blue LED bulbs.
Japan should also focus on spreading electric and hybrid cars in the transportation sector. Subsidies for purchasing eco-cars will end in September 2010. In addition to higher national awareness, if environmental tax and cap and trade raise gas prices more people will shift to eco-cars over the long-term. On that note, moves to eliminate highway tolls should be stopped.
Profitable investment in household energy-saving
In this way, there is much room for reducing domestic emission. The increased burden on households will not be wasteful spending, but rather investment in the future. The argument that the burden on citizens is too high, a basis for opposition to 25% reduction, is therefore greatly misleading. For example, my home has roof solar panels to generate solar power, an investment that reduces the monthly electricity bill by 10,000 yen for a yield of 5%. Excluding high risk investments such as stocks and exchange rates, this is the highest yield to be found in Japan today. In other words, shifting money from savings and governments bonds into solar power generation will generate a higher return.
What is the global framework?
Global warming is an international problem, and so the answer must also be global in nature. Individual efforts by Japan, emitter of just 4% of global emissions, hold little meaning. Japan’s industrial community rightly deems it unfair to demand the same reductions from countries who have already shouldered a heavy cost improving energy efficiency as countries with no such record. Domestic efforts should be accompanied by proposals for a global framework. For Japan, it is important to push forward an international cap and trade scheme. This would put all countries on equal footing in terms of marginal abatement costs, and allow Japan to realize its 25% reduction target at a lower cost than generally expected. The reasons for this are explained in the next two columns.