Tokyo Launches Asia’s First Cap & Trade Program

The Tokyo Metropolitan Government (TMG) on April 1 began a cap-and-trade program (PDF) that will cover approximately 1,400 industries, commercial buildings and large office buildings within the Tokyo Prefecture.  The emissions trading program is Asia’s first and was rolled out at the same time that the UK also is expanding cap-and-trade to non-industrial businesses and government buildings.

Introductory Phase

The first phase of the Tokyo program will run from April 1, 2010 to March 31, 2014 (fiscal years 2010-14).  The TMG set the baseline of CO2 emissions according to a facility’s average energy use between fiscal years 2002-07, with an introductory phase cap of six percent below the baseline (or eight percent for buildings that do not receive energy from district heating and cooling plans).

To comply with the cap, users can either implement energy savings to reduce their usage below the target or buy credits from small and medium-sized businesses that have earned credits from their own energy reduction, or from branch offices located outside Tokyo Prefecture, or buying renewable energy credits from power producers.

The first year of the program largely is a data collection period, so there will not be any actual trading of credits.  Trading is expected to start April 1, 2011.

Other features of the Tokyo program include:

  • A September 30, 2010, deadline for submitting applications to the TMG for base-year emissions.
  • Participating facilities must submit a Plan on Measures Against Global Warming by the end of November each year.
  • A point system to evaluate performance.  Installations that have made “outstanding progress” in the implementation of measuresa against global warming can be certified as “Top-level installations” and their compliance factor reduced by 1/2 percent.  Installations that have made “excellent progress” are certified as “Near-Top-Level Installations,” and receive a 3/4 percent reduction in their compliance factor.
  • Allowances that can be banked for future compliance years, but borrowing from future years is not allowed.
  • Violators are subject to requirement to reduce their emissions 1.3 times any shortage plus a monetary fine (~¥500,000 or ~$5,332 USD), public notice of the violation and payment to the TMG for the cost of buying any allowance credits for the shortage.

Second Phase

In the second phase of the program (fiscal years 2015-19) the emissions cuts will be deeper, requiring a 17% reduction below the 2002-07 baseline.

Through the combination of the eight percent reductions in the first phase and the 17 percent in the second, the Tokyo program expects to reach its 2020 target of 25% reduction from CO2 emission levels in 2000.

Tenant Obligations

One aspect of the Tokyo program that may raise some concern is the requirement for tenant participation:

  • All tenants are obligated to check their CO2 emissions and to implement emission deterrent measures;
  • All tenants have the obligation to cooperate with the emissions measures undertaken by building owners; and
  • Specified tenants (those who use more than 5000 sq. meters (53.8195 square feet) or more than 6 million kWh electricity per year) are required to submit their own emissions reduction plans to TMG through their landlords.

Based on the scope of the definition of specified tenants, it would appear that all but the smallest closet-sized commercial space would have an obligation to submit emissions reductions plans.  That represents a potentially significant cost for a small commercial tenant and it remains to be seen how that will be applied in practice.

Comparison to UK Program

The Tokyo program is similar to the UK CRC Emissions Reduction Scheme (PDF) that also started on April 1.  The two programs include non-industrial facilities within the scope of the cap-and-trade.  The UK program appears to be much broader, applying to about 20,000 public and private sector organizations throughout the country.  And, even though only about 5,000 will actually have to buy allowances in the UK, its still substantially larger than the Tokyo program.  Still, both programs appear to have a similar approach in addressing non-industrial buildings, which contribute a significant share of CO2 emissions.

The Tokyo program is particularly noteworthy because — unlike the UK and its participation in the European Union-Emissions Trading System — this program is occurring in a country and a region that has not adopted any other form of mandatory emissions caps.  Indeed, the Tokyo program is being touted as a potential model that could spread throughout Japan and other cities in Asia.