The Implementation of Clean Development Mechanism Projects in Asia

ABSTRACT

Ever since the impact of the double oil shocks in the 1970s, Japan's government and corporations have been promoting energy conservation in the industrial sector. As a result, Japan has achieved a level of energy efficiency in its economy that is unparalleled throughout the world. Nonetheless, as a result of the agreement established in the Third Conference of Parties to the Framework Convention on Climate Change (COP3), Japan is now required to reduce its greenhouse gas emissions to 6% below its 1990 level throughout the five years from 2008 to 2012. For a country with an already high energy efficiency, the goals for greenhouse gas reduction set forth in the Kyoto Protocol are exceedingly stringent, and achieving them would necessitate significant sacrifices of industry and economic health.

As one means by which to avoid these heavy social and economic costs, the Kyoto protocol has allowed for the use of clean development mechanism projects (CDM), a mechanism by which developed nations can work to fulfill their reduction quotas by funding reductions in developing nations. The utilization of CDM projects will not only enable Japan to meet its reduction goals while simultaneously maintaining stable economic growth, but the widespread implementation of CDM projects throughout the Asian region - including China, the country that is expected to become the leading host for CDM projects - will also have favorable effects upon pan-Asian environmental problems such as acid rain. In addition, the economic importance of energy security in Asian countries like China has made the promotion of energy reduction and energy recycling an inevitable trend. Thus businesses related to global warming solutions can be expected to expand, making such CDM projects for Japan an opportunity to become the pioneer of a large future market.

Considering the issues stated above, this paper evaluates, using a computational general equilibrium model, the most profitable and convenient ways to implement CDM projects with respect to Japan's labor market and economic activity. This paper also analyzes, with respect to the implementation of CDM projects in China, to what extent the facilities required to receive the projects are sufficiently in place, the type and nature of the projects themselves, and the risks involved in their implementation.

If Japan does not implement CDM projects in Asia, fulfilling the goals set down in the Kyoto Protocol would mean footing a reduction cost of $107.3 US per ton of carbon (which would incidentally cause a 200% rise in the cost of coal, a 6% rise in the cost of electric power, and an 8% rise in the cost of gasoline). High energy-consumption industries will lower their production as a result - the iron and steel industry by 2.5%, and the chemical, rubber and plastic industries by 2.4% - and GDP would consequently decrease by 1.1%. It is also possible that 1.3% of those currently employed will lose their jobs. In short, meeting the goals of the Kyoto Protocol will have serious effects upon economy and society. If, however, CDM projects are actively implemented in Asia, the cost of reduction would be a mere $4.1 US per ton of carbon, and the negative effects upon the economy would be slight.

China should be the primary focus of Japan's CDM projects. According to calculations, the amount of carbon gas reductions that China can achieve through CDM projects is larger than that of the rest of Asia combined. For this reason, it is expected to become the world's largest host for CDM projects.

But in order to gain approval from the Chinese government, the CDM project must accord with China's 10th 5-Year Plan (2001), under which the acceptable targets of CDM projects are considered to be 1) energy conversion, 2) biomass and methane gas, 3) chlorofluorocarbon, and 4) energy related technology in the industrial sector. But as action in these fields has generally been neglected in China, coming up with projects is relatively easy. With China already hosting a CDM project for the Netherlands set to build wind turbine generators in the Inner Mongol region, the systems for CDM project reception are already being put in place. However, the Chinese government still maintains that the investment returns for CDM projects will be limited to emissions credit. Because the market price for emissions credit is yet to be established, investors will bear the total burden of the cost risk. Moreover, the Kyoto Protocol itself has yet to be officially enacted, awaiting still its ratification in Russia. Thus there is the added risk that, should the Kyoto Protocol fail to come into effect, the credits themselves will become worthless.

To summarize, the implementation of CDM projects in Asia is indispensable to Japan for it will enable it to achieve its reduction goals while minimizing the social and economic damages caused by these reductions. With China already preparing itself to receive CDM projects, the environment for CDM project implementations is now coming into place. Finally, the business of greenhouse gas reduction in China shows the potential to develop into an extremely large industry. The cost risk of emissions credits and the potential failure of the Kyoto Protocol are potent risks, however, and as of now these risks must be completely shouldered by the investors. But the active procurement of emissions credits by Dutch CDM projects in China is a reminder that Japan too must work to promote CDM projects through the establishment of carbon funds and other methods of risk distribution.