81058 DIRECTIONS IN URBAN DEVELOPMENT JUNE 2013 Tokyo's Emissions Trading System A Review of its Operation Since 2010 This note reviews the operations and experience of Tokyo’s emissions trading system since its launch in 2010 and follows on from an earlier issue of Directions in Urban Development that described the design and development process of the system. An Introduction to Tokyo's ETS System Tokyo’s emissions trading system (ETS) began operating in April 2010, and was the world’s first city-level cap- and-trade program targeting energy-related carbon dioxide (CO2). Among city-based ETSs, Tokyo’s was the first to target a greenhouse gas (GHG) with the primary objective of mitigating climate change. Of the several Tokyo, Japan Simone D. McCourtie / World Bank ETSs targeting GHGs around the world, such as the European Union’s, none operated at the city level before Tokyo’s. Table 1 summarizes the key features of Tokyo’s This surpassed the first year performance recorded ETS. in FY2010, where emissions were 13 percent below the base year, with 64 percent of facilities achieving Results from the First Two Years of ETS reductions in excess of obligations for the first Operation compliance period (TMG 2013a). In January 2013, the Tokyo Metropolitan Government TMG identified the main factor for this reduction as the (TMG) announced that FY2011 – the second full year of “significant electricity savings promoted by covered ETS operation from April 2011 to March 2012 – saw a 23 facilities after the power crisis” that followed the Great percent reduction in the emissions from participating East Japan Earthquake of March 2011 (TMG 2013a). With facilities covered by the ETS, compared with the base the shutdown of nuclear reactors and enforced power year. Total emissions from these facilities in FY2011 were cuts, Japan’s total energy supply in November 2011 was 7.22 million tons of CO2, which was some 2.16 million 9.8 percent lower than in November 2010, and total tons less than the base year. Notably, 93 percent of supply over the period April to November 2011 was these facilities achieved reductions in excess of their down 6.7 percent on the same period in 2010 (Caine and obligations for the first compliance period in FY2011. Jenkins 2012). A simple view of the earthquake’s impact, This note was prepared by Marcus Lee of the World Bank’s Urban Development and Resilience Unit, drawing extensively on a longer technical paper by a World Bank team consisting of Keisuke Iyadomi, Nozomi Tokiwa and Marcus Lee. Both the technical paper and the earlier Directions note are available at www.worldbank.org/urban. The authors would like to express their appre- ciation to the Tokyo Metropolitan Government. THE WORLD BANK URBAN DEVELOPMENT AND RESILIENCE UNIT | JUNE 2013 DIRECTIONS IN URBAN DEVELOPMENT Table 1: Key Features of Tokyo's ETS Over 1,300 large facilities that consume fuels, heat, and electricity totaling more than 1,500 kiloliters Coverage of crude oil-equivalent per year. Base year emissions Average annual emissions from any three consecutive fiscal years (FYs) between FY2002 and FY2007. 1st compliance period: FY2010 – FY2014 Compliance periods 2nd compliance period: FY2015 – FY2019 6 to 8 percent reductions for the 1st compliance period:  Category I-A: 8 percent for office buildings, public institutions, commercial buildings, lodging, educational and medical institutions; Targets / reduction  Category I-B: 6 percent for buildings where air conditioning/heating from district cooling/heating obligations1 plants accounts for more than 20 percent of energy consumption;  Category II: 6 percent for factories that do not fall under Category I. 17 percent for the 2nd compliance period (planned). Grandfathered based on historical emissions, and calculated by compliance period: Allocation of allowances [Base year emissions – Reduction obligation (6 or 8%)] x Compliance period (5 years)  From the second year of each compliance period, reductions in excess of annual obligations may be traded as credits, subject to a limit of one-half of base year emissions. Trading  Banking of accumulated credits is allowed, including across compliance periods, but borrowing is not.  Credits from small and medium-sized (SME) facilities within Tokyo.  Credits from large facilities outside Tokyo (for up to one-third of reduction obligations). Offsets  Renewable energy credits.  Credits from Saitama prefecture’s ETS. Penalties for non-  Surcharge on reduction obligation of 1.3 times the shortfall. compliance  Fines of up to JPY500,000 (~USD5,500). Source: Adapted from TMG 2010 therefore, is that it provided an additional, unexpected A further analysis of emissions reductions from FY2010 exogenous factor that reduced electricity consumption reveals that the level of reductions varied across facility and the corresponding CO2 emissions. types. Factories and waste management facilities achieved the highest reductions in FY2010, of over At the same time, Tokyo’s ETS can be seen to have 20 percent (compared to the average of 13 percent contributed to increasing the resilience of participating across all facilities that year). Switching to alternative facilities in coping with the impact of the earthquake. fuels, and energy efficiency measures, were common Such facilities were better able to cope with reduced factors. It should also be noted, however, that ‘leakage’ electricity consumption precisely because they occurred from some factories that shifted production had already been planning to undertake energy activities (and thus emissions) to locations outside conservation measures in response to the ETS. For Tokyo. On the other hand, facilities in the information- example, a survey conducted by TMG found that communication and education categories registered owners and tenants of a leased building already had more limited reductions of 1 percent and 5 percent, a system to work cooperatively on electricity savings, respectively. These facilities cited increasing business from twice-yearly tenant meetings that had started two activities as the main challenge they faced in reducing years before the earthquake (TMG 2013a). emissions In order to reduce their emissions, facilities covered by Tokyo’s ETS pursued a wide range of measures. Special Post-Earthquake Provisions The most common measures were related to the management of air-conditioning and lighting. Some 50 To ensure that no facility was unduly penalized as a percent of facilities reduced office illumination from result of the earthquake, TMG also introduced special around 750 lux to 500 lux, in FY2011 (TMG 2013a). Table provisions applicable to situations where facilities used 2 summarizes the types and numbers of measures off-grid or co-generation power systems, or otherwise taken, and provides selected examples of these. switched from electricity to other energy sources. Under these provisions, facilities that had at least partly 2 JUNE 2013 Table 2: Summary of Measures Taken by Participating Facilities Number of Category Measures Examples of Measures Taken Taken  Upgrade of air conditioning equipment Management of air-conditioning and  Review of adequate temperature-humidity 1,602 ventilation  Review of air-conditioner operating hours  Review of operation schedule of fans in parking lot  Introduction of LED or high luminance guide lights Management of lighting, incoming  Introduction of control devices such as motion sensors 1,436 and transformer equipment  Lights-off when not using rooms during lunchtime  Upgrade to high-efficiency transformer devices  Upgrade of freezers  Temperature management of hot and cold water at return points Management of heat sources 897  Introduction of inverter to hot and cold water pump/cooling water pump  Strengthening of insulation at vapor bulb  Stop supply of hot water to washroom except in winter Management of hot water supply,  Upgrade to water-saving toilets or automatic shut-off faucets water supply and drainage, freezing 302  Stop heating supply to toilet seats and cooling equipment  Upgrade to energy-saving vending machines  Development of a framework for energy saving General management 275  Offer of energy consumption data to tenants  Energy-saving education for employees Source: Adapted from TMG 2012a switched from electricity to direct fuels were allowed to der of credits. TMG manages and maintains this registry, calculate their emissions based on the more favorable including all data input. The registry system includes ratio of fuel to electricity that they had registered in any three types of accounts with different functions: one year out of FY2009, 2010 or the base year. (Further 1. Designated holding account (for compliance): Each information on these special provisions is given in the facility must open this account, which records trans- longer technical paper.) actions at the facility level. Excess emissions reduc- Trading Under Tokyo's ETS tions approved by TMG will be recorded in this account, but credits as a tradable property right are recognized only when transferred to the general Under Tokyo’s ETS, facilities that reduce emissions holding account. below the target may sell the excess reductions as cred- its. Conversely, if actual emissions reductions fall short 2. General holding account (for trading): Credits can of the target, they may purchase credits to make up only be transferred to other parties through this the difference. Apart from excess emissions reductions, account. Each facility may have multiple general eligible credits include offsets from small and medium- holding accounts, where multiple participants exist. sized facilities, large facilities outside Tokyo, renewable 3. Governor’s holding account (for retirement/surren- energy credits, and credits from Saitama prefecture’s der of credits): Credits to be utilized for compliance ETS. (Further information on these offsets is given in must be transferred to this retirement account. the longer technical paper.) TMG has issued guidelines Once credits are transferred to this account, no fur- for the calculation of offset credits, as well as for the ther transfers will be allowed. verification of such credits by a third-party auditor. In all cases, credits will only be issued by TMG upon applica- As of the end of calendar year 2012, credits in the tion. amount of 82,909 tons of CO2 had been issued, with the bulk of this supply – 75,708 tons or 91 percent – originat- TMG has established an electronic registry and account- ing in renewable energy credits. Table 3 summarizes the ing system to record the issuance, transfer and surren- issuance of these credits. Over this same period, the 3 DIRECTIONS IN URBAN DEVELOPMENT volume of trades has been relatively modest. In FY2011, A degree of uncertainty persists with respect to the 29,341 tons of CO2 were traded in eight transactions, overall demand and supply of credits for the whole of with a further 36,190 tons traded in 28 transactions the first compliance period. The results reported for during FY2012 (through December 2012) (TMG2012b, FY2010 and 2011 indicate a potential situation of over- TMG2013b). supply: potential annual demand is estimated at less than 300,000 tons, while the potential annual supply of Information on market prices has been quite limited. credits could range from 400,000 to 900,000 tons (see The first trade was announced in August 2010, when 22 the technical paper for more details of this estimate). tons were traded at JPY12,000 per ton (approximately TMG’s own estimates for the whole of the first compli- USD142 at the time) (Reuters 2010). More recently, ance period, based on prior application as of September in October 2012, TMG sold 600 tons of offsets from 2012, are for a supply of offset credits (from SMEs, green electricity certificates, at JPY10,000 per ton. renewable energy, and outside Tokyo) of approximately More generally, TMG has estimated two reference 250,000 tons, coupled with other emissions reductions prices: JPY15,000 per ton based on the price of solar (for compliance, but not trading) of around 400,000 energy under the Renewable Portfolio Standard law, tons (TMG 2012d, Nishida 2013). and between JPY8,000 and 26,000 per ton based on the price of Green Energy Certificates as surveyed Expansion to Saitama Prefecture by Japan’s Ministry of the Environment (TMG 2011a, Nishida 2013). Saitama prefecture’s efforts to reduce GHG emissions The relatively limited trading activities under Tokyo’s began as early as 2002 with its Environmental Damage ETS should be understood in light of the fact that Reduction Program, under the prefecture’s Community TMG does not intend for trading to be a primary Environmental Preservation Ordinance. This program option. Instead, trading is intended as the last option included a voluntary emissions reduction plan with for facilities that are unable to meet their reduction mandatory reporting requirements, for targeted obligations by other means. Accordingly, the ex-post facilities. As in Tokyo, targeted facilities were those with issuance of credits only upon application hardly creates annual energy consumption of over 1,500 kiloliters of enough liquidity during the early stages of an emerging crude oil-equivalent, or with a size of over 10,000 square market like the Tokyo ETS. It also makes it difficult meters. Most of these facilities are in the commercial for facilities or other market players to gauge the and industrial sectors. potential demand and supply of credits. Moreover, the Saitama prefecture decided to adopt a city-based ETS facilities themselves do not seem to consider using in 2009. The reasons for doing so included the finding offset credits as a priority in achieving their reduction that emissions from commercial facilities had increased targets. Seventy-three percent of facilities surveyed by continuously since 1990, and the realization that the TMG indicated that they would not need to purchase earlier program did not contribute to continuous GHG offset credits (TMG 2012c). The survey also found that reductions. Saitama prefecture’s ETS has the same basic facilities tend to prefer to bank excess reductions now, design as Tokyo’s, with the exception that no fines are in anticipation of deeper emissions reduction targets imposed for non-compliance in Saitama. Table 4 pro- during the second compliance period. vides a comparison of the two ETSs. Table 3: Issuance of Credits by TMG, as of December 2012 Renewable Energy Credits Renewable Energy Excess Reductions SME Credits Total (environmental Credits (others) FY value equivalent) Cases tCO2 Cases tCO2 Cases tCO2 Cases tCO2 tCO2 2011 0 0 3 117 1 7,285 22 39,244 46,646 2012 10 6,739 5 345 1 7,423 10 21,756 36,263 Total 10 6,739 8 462 2 14,708 32 61,000 82,909 Source: Nishida 2013 4 JUNE 2013 Table 4: Comparison of Tokyo and Saitama ETSs Tokyo Saitama Total GHG emissions, tons of 56.6 million 38.8 million CO2 (FY2009) Large facilities with annual energy consumption of Same as Tokyo (about 600 facilities – two-thirds Target Facilities over 1,500 kiloliters of crude oil-equivalent (about 1,300 industrial) facilities – mostly commercial) Compliance 1st compliance period: FY2010 – FY2014 1st compliance period: FY2011 – FY2014 Periods 2nd compliance period: FY2015 – FY2019 2nd compliance period: FY2015 – FY2019  8 percent reduction for office building, public institutions, commercial buildings, etc. Same as Tokyo Reduction Targets  6 percent reduction for factories, water supply and sewerage facilities, solid waste management facilities, etc.  Excess reductions as credits  Excess reductions as credits  Credits from small/medium facilities in Tokyo  Credits from small/medium facilities in Saitama Tradable Credits  Renewable energy credits  Renewable energy credits  Credits from outside Tokyo  Credits from outside Saitama  Forest absorption credits  Surcharge on reduction obligation of 1.3 times the Penalties for non- shortfall. None. compliance  Fines of up to JPY500,000 (~USD5,500). Source: TMG 2011b, Saitama Prefecture 2012 Cooperation between TMG and Saitama prefecture strong first-year performance of Saitama’s ETS is not on cap-and-trade is based on an agreement made in unexpected. September 2010. Under this agreement, participating facilities in each ETS can trade credits across the bound- Lessons Learned So Far ary between Tokyo and Saitama. Specifically, excess reductions from a large facility in either jurisdiction can The experience of Tokyo’s ETS since 2010 clearly be utilized by a facility in the other jurisdiction to fulfill demonstrates how it has been very effective as an reduction obligations, from the end of the first compli- instrument to promote reductions in GHG emissions ance period in 2015. Credits from small/medium-sized among the largest facilities in the city. Moreover, by facilities in either jurisdiction can also be utilized by a encouraging facilities to plan for energy savings and large facility in the other jurisdiction to fulfill reduction efficiency, the ETS catalyzed the important co-benefit obligations, from 2012. The agreement also simplified of increasing these facilities’ resilience in the face the registration process for audit firms that verify emis- of power shortages following the 2011 earthquake. sions under the ETS, if these firms work for both Tokyo The introduction of a very similar ETS in Saitama and Saitama. Both governments also agreed to organize prefecture also demonstrates the relevance and joint training for these auditors. attractiveness of ETS as an option for climate change In May 2013, Saitama prefecture announced that its mitigation at the city level. ETS achieved a 21.5 percent reduction in emissions A number of lessons can be drawn that would be of below base year emissions, from participating facilities relevance to any city considering an ETS of its own: for FY 2011 (Saitama Prefecture 2013). This percentage reduction is close to that registered by Tokyo’s ETS for • Data and reporting : The rich data available in the same fiscal year. A key difference is that the while Tokyo (and Saitama) began with the mandatory around 85 percent of facilities in Tokyo are commercial, reporting program in the years prior to the 70 percent of facilities in Saitama are industrial/facto- design and implementation of the ETS. Such data ries. Given the experience of Tokyo, where industrial is essential to designing an ETS, and to ensure facilities seemed better able to register large emis- robust monitoring, reporting and verification sions reductions compared to commercial facilities, this (MRV) throughout. 5 DIRECTIONS IN URBAN DEVELOPMENT • Flexibility : Tokyo’s ETS provided participating Nishida, Y. 2013. Tokyo Cap-and-Trade: A Cap-and-Trade Program for Cities. Presentation at the Workshop on City-scale Climate Action facilities with some degree of flexibility, such as Planning in East and Southeast Asia, Singapore, April 10-12, 2013. with the selection of the base year for emissions. Reuters. 2010. First Tokyo Carbon Credits Trade for $142/tonne. Reuters, The special provisions for calculating emissions 24 August. Available at: http://www.reuters.com/article/idUS- following the earthquake also provided facilities TRE67N3M520100824 the opportunity to avoid being penalized by Saitama Prefecture. 2012. Saitama Cap and Trade Program. Paper pre- the consequences of that unexpected natural sented at the National Municipality Conference on Countermeasures disaster. Such flexibility is important for ensuring against Climate Change, Tokyo, February 1. stakeholder buy-in for continued smooth Saitama Prefecture. 2013. Press release on 21.5% reduction under the implementation of the ETS. cap-and-trade program. May 22, 2013. Tokyo Metropolitan Government (TMG). 2010. Tokyo Cap-and-Trade Predictability: Flexibility notwithstanding, Tokyo’s Program: Japan’s first mandatory emissions trading scheme. Tokyo: ETS operates within a clear and predictable rules- TMG. based framework. TMG has provided a framework TMG. 2011a. Overview of the Tokyo Cap-and-Trade Program. Tokyo: for long-term goal setting by indicating the estimated TMG. emissions reductions that would be required in the TMG. 2011b. The Greater Tokyo Metropolitan Area Cap and Trade second compliance period. This in turn enables partic- Initiative. Tokyo: TMG. Available at: http://www.kankyo.metro.tokyo. jp/climate/large_scale/attachement/cap_and_trade_saitama_pref_ ipating facilities to plan and execute their emissions news110428.pdf reduction activities well in advance, taking the long- TMG. 2012a. The Tokyo Cap-and-Trade Program: Results of the First term view and planning for investment as necessary. Fiscal Year of Operation (Provisional Results). Tokyo: TMG. Available at: http://www.kankyo.metro.tokyo.jp/en/climate/attachement/ Result%20of%20the%20First%20FY%20of%20the%20Tokyo%20CT%20 Program_final.pdf. TMG. 2012b. Information regarding trading activity under the Tokyo Cap and Trade Program in FY2011. Available at: http://www. End Notes kankyo.metro.tokyo.jp/climate/large_scale/attachement/torihiki_ kouhyou_201203%20.pdf. 1 For more information on the design features of Tokyo’s ETS, please TMG. 2012c. The main results of the survey regarding the obligation of refer to the earlier Directions in Urban Development note from 2010, GHGs emission reductions and the Tokyo Cap and Trade Program. (in “Tokyo’s Emissions Trading System: A Case Study”. Japanese) Tokyo: TMG. 2 “Top-level”facilities that are highly energy efficient may have their TMG. 2012d. Information regarding trading activity under the Tokyo compliance factor reduced by one-half or one-quarter. Further infor- cap-and-trade program as of June 2012. Tokyo: TMG. mation is available at: http://www.kankyo.metro.tokyo.jp/climate/ large_scale/cap_and_trade/toplevel.html (in Japanese). TMG. 2013. The Tokyo Cap-and-Trade Program achieved 23% reduction in the 2nd year. Tokyo: TMG. Available at: http://www.kankyo.metro. tokyo.jp/en/attachement/The%202nd%20Year%20Result%20of%20 References the%20Tokyo%20Cap-and-Trade%20Program.pdf. Caine, M. and J. Jenkins. 2012. New Data: Nuclear Down, Carbon TMG. 2013b. Information regarding trading activity under the Intensity Up in Japan. Breakthrough Institute. Available at http://the- Tokyo Cap and Trade Program in FY2012. Available at: http://www. breakthrough.org/blog/2012/02/new_data_japanese_fuel_imports. kankyo.metro.tokyo.jp/climate/large_scale/attachement/torihiki_ shtml. kouhyou_201303.pdf. The views expressed in this note are those of the authors and do not necessarily reflect the views of the World Bank or of the Tokyo Metropolitan Government. in Urban Development Copies of this Note are available at: Urban Development and Resilience Unit, The World Bank Telephone: 202-473-0409, Fax: 202-522-3232 DIRECTIONS http://www.worldbank.org/urban urbanhelp@worldbank.org If you are interested in submitting an article for consideration, please contact us at the email address above. The views expressed in DIRECTIONS in Urban Development are those of the authors and do not necessarily reflect those of the World Bank. 6