Design of Japanese Emissions Trading System: Issues and Options

2004-001
Discussion Paper

In mitigating climate change, the Kyoto Protocol requires Annex I countries to reduce greenhouse gas (GHG) emissions. In achieving their targets, the Kyoto Protocol allows the countries to use the Kyoto Mechanisms (KM), including emissions trading (ET), which is recognized as one of the most cost-effective ways. Prior to the official start of International ET System (IETS) under the Kyoto Protocol (KP), several Annex I countries, such as the UK and EU, have designed and implemented domestic ETsystems (DETSs) through either the concept of policy-mix (climate change tax and ET) or active private sector initiatives. Based on the review of strengths and weaknesses of each system and with due consideration of socio-economic conditions in Japan, this paper proposes ways to design Japanese domestic ETS (JETS), based on more proactive private sector involvement, including a) policy-mix, b) market-initiated system, and c) use of the special oil account as a source of the incentives for participation. However, the implementability of these ideas remains to be tested.

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