Introduction

The Copenhagen Accord called on Annex I countries to make their climate change pledges, and on Annex II countries to identify their nationally appropriate mitigation actions by 31 January 2010.

In this edition of the Asia Pacific climate change policy series we examine the Copenhagen Accord commitments made by Japan, an Annex I country to the Copenhagen Accord. We also examine the regulatory framework that Japan intends to implement to meet its Copenhagen Accord commitments, and the climate change investment opportunities that are available in Japan.

Key points on Japan:

  • has pledged to cut emissions by 25 per cent by 2020 with an 80 per cent reduction by 2050
  • is one of the world's leading nations in energy efficiency
  • has a number of existing voluntary trading schemes
  • provides fertile ground for investment opportunity

Japan's Copenhagen Accord commitments

Japan's proposed target under the Copenhagen Accord is to achieve a 25 percent reduction of CO2 from 1990 levels by 2020, subject to agreement of a "fair and effective" post-2012 international regime.

The proposed target was submitted by then Prime Minister Yukio Hatoyama of the Democratic Party of Japan and was significantly more onerous than the target proposed by Mr Hatoyama's predecessor.

Japan's regulatory framework

Japan will need a robust regulatory framework to deliver its ambitious Copenhagen Accord commitments. We examine Japan's climate change regulatory regime below.

New legislation

The "Basic Act on Global Warming Countermeasures" (the Bill) was drafted by the Japanese Government following Copenhagen to provide the legislative architecture for achieving Japan's 25 per cent emissions reduction target by 2020 and 80 per cent emissions reduction target by 2050. The Bill proposes a mandatory domestic emission trading scheme (ETS), a global warming tax, together with a range of measures to promote the use of renewable energy through a feed-in tariff system and energy efficiency.

Though the Bill was approved by cabinet on 12 March 2010, the resignation of Prime Minister Yukio Hatoyama on 2 June 2010, the results of the July 2010 Upper House Elections, and the continued political uncertainty in Japan has created uncertainty as to the progress of the Bill in its current form and the establishment of an ETS for Japan and the other basic measures proposed therein.

Existing voluntary trading schemes

Though the establishment of a compulsory ETS is currently in limbo, Japan does have a number of existing voluntary trading schemes in place.

The Japanese Voluntary Emissions Trading Scheme (JVETS) was introduced in September 2005 by the Ministry of Environment, Japan to support CO2 emissions reduction activities by Japanese business operators. JVETS provides for a voluntary cap and trade system and in its first phase (financial year 2006) JVETS involved 31 participants with targets and seven trading participants. JVETS is now in its fifth phase and involves over 80 target participants.

In October 2008, the Japanese Government sought to introduce a "Domestic Integrated Market". This included the establishment of a trial Voluntary Carbon Credit Trading Scheme (VCCTS) which incorporated JVETS and other participants into a voluntary cap and trade system. A domestic CDM scheme was also introduced as part of the VCCTS whereby major companies can assist small and medium sized companies to reduce their green house gas (GHG) emissions and in turn acquire the reduced emission rights. Kyoto Protocol credits can also be used in connection with the VCCTS participants' obligations. Presently VCCTS has over 700 participants from a wide range of industrial sectors including the utilities, automobile, steel and electronic industries.

Energy efficiency and renewable energy

For the last thirty years Japan has been one of the world's leading nations in energy efficiency. Japan's high level of energy efficiency is attributable to its lack of domestic fuel resources and, consequently, its technological innovation. Japan's energy efficiency has been assisted by government regulation through legislation requiring energy management in manufacturing and commercial sectors and setting out energy efficiency standards for houses, buildings, machinery and equipment and through government financial, tax and budgetary support.

Renewable energy also has the potential to play a central role in Japan's energy policy. For more information on renewable energy in Japan please refer to our comprehensive "Renewable Energy in Asia Pacific" publication.

Investment opportunities

If the proposed mandatory emissions trading scheme is introduced, it is likely to generate investment opportunities as a result of an increased number of Japanese companies being subject to binding emissions reduction targets and seeking to meet those targets either by adopting measures to reduce their own emissions or purchasing carbon credits from domestic or foreign projects. Even if the mandatory scheme is not adopted, the current voluntary scheme is likely to generate ongoing investment opportunities.

We also expect that there will be a growing number of investment opportunities relating to the domestic energy efficiency and renewable technology, given Japan's Copenhagen Accord commitments of a 25 percent decrease in CO2 by 2020. Japanese companies are also likely to seek increased investment opportunities in foreign renewable energy transactions.

Many of the opportunities for investors to generate emission reductions in the Asia Pacific region may be eligible for compliance in Japan. However as our ongoing series will demonstrate, these opportunities will have to interface with the domestic regulatory regime and it is unclear how this interface will work under the "bottom up" approach implicit in the Copenhagen Accord.

Experience:

A selection of our recent climate change related work in Japan includes:

  • Acting for a number of Japanese trading houses in connection with the purchase of greened Assigned Amount Units (AAU) from Central and Eastern European countries.
  • Acting on behalf of numerous Japanese trading houses, banks and compliance buyers in connection with the purchase of Certified Emission Reductions (CER) from Clean Development Mechanism (CDM) projects and Emission Reduction Units (ERU) from Joint Implementation projects in a wide variety of jurisdictions. Advice includes due diligence on the underlying projects, structuring advice, regulatory advice in respect of relevant local laws and regulations and drafting and negotiation of emissions reduction purchase agreements and other transaction documents. We have also advised both buyers and sellers in respect of a number of secondary market transactions involving Japanese companies.

  • Advising a variety of Japanese clients in respect of miscellaneous regulatory queries including, a detailed review of global emission trading schemes, review of local and international law in respect of sale and purchase of AAUs and in-depth analysis of the provisions of IETA and ISDA precedents.

  • Advising on several plantation projects in Australia, involving the generation of credits for use in Japan's voluntary emissions trading scheme.

Our Japanese clients include major trading houses (Mitsui & Co., Mitsubishi Corporation, Marubeni Corporation, Sumitomo Corporation and ORIX) and financial institutions (Nomura, Mizuho Corporate Bank, Mitsubishi UFJ Securities and Japan Carbon Finance). Norton Rose Group has also acted for non-Japanese clients selling carbon credits into the Japanese market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.