Carbon Offsetting and Challenges in the Formation of a Japanese Carbon Market

ABSTRACT

Carbon offsetting, such as purchasing emission reduction credit from another party or implementing reduction projects in another location, is used by individuals and companies to compensate for greenhouse gas emissions. With more opportunities to help combat global warming, increased awareness, inexpensive reduction methods, and an understanding of the economic value of CO2, carbon offsetting is garnering attention as a part of voluntary efforts, and a variety of services are starting to be provided.

Driven by the EU-ETS, the international carbon market is seeing a rapid increase in trading. While trading in the voluntary market represents only 2.5% of total trading volume, it is growing more rapidly than in the regulatory market, and demand remains brisk despite the global economic crisis. The usable credit for offsetting in Japan, which has no regulatory market, is diverse including emissions allowances, credit, and certifications originating from both home and abroad. It is therefore necessary to procure the appropriate credit in line with the goal.

In the two years from April 2007 to March 2009, 144 carbon offset products were introduced in the Japanese market with an average of 3,000t-CO2 credit used per product. Voluntary Emission Reductions (VER) is the mainstream credit handled overseas—with over 250 offset providers in primarily Europe and the US—while 87% of the domestic carbon offset products use Certified Emission Reductions (CER) derived from the Clean Development Mechanism under the Kyoto Protocol. This creates problems such as relatively expensive offset measures, the outflow of domestic funds to overseas, and the transfer of credits to government retirement accounts.

Plans for introducing emission trading schemes are currently underway in major industrialized countries; considering this, the global market has potential grow to three times the current size. Given the goal of raising funds for the cultivation of the environmental industry, allocating emission allowances through a paid auction is the prevailing line of thinking. Japan’s carbon market is still developing and faces challenges such as improving the effectiveness of its current voluntary trading scheme; rectifying the proliferation of various different credits; and securing the resources for environmental investment. Japan should create a progress schedule for the introduction of a regulatory emission trading scheme based on emission allowance allocations, and establish a robust domestic carbon market that makes clear its complementary nature with a pioneering voluntary market.