Global Environment Forum-KANSAI Symposium

Issued in July,1999
BeSeTo Moves Towards 21st Century CDM Goals
　　The tri-nation symposium, composed of Japan, China, and South Korea, entitled "How to Operate the Clean Development Mechanism" (subtitle: "Opening the Doors to International Environmental Business in the 21 st Century") was held on July 8, 1999, at the Rihga Royal NCB in Osaka under the sponsorship of Global Environment Forum- KANSAI and Global Environment Centre Foundation.
　　The Kyoto Protocol was adopted at the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP3) held in 1997, with Japan pledging to reduce carbon dioxide and other greenhouse-gas (GHG) emissions by six percent from the 1990 levels between 2008 and 2012. To meet this target, however, there is a need for various domestic policies to be adopted and their effective coordination with the international measures which have been agreed upon as forming the "Kyoto Mechanism." They include trading of emission rights among industrial countries, joint implementation of energy and emission-reduction projects, the right to share reduction requirements and the Clean Development Mechanism (CDM). Although the particulars of the Kyoto Mechanism are slated to be decided at the COP6 to be held in 2000, CDM is targeted at the joint projects to be undertaken by the developed and developing countries in the years following 2000. Since emission targets will be shared by the two, it is believed to be an advantageous endeavor for developed countries as well. At the symposium, CDM-related issues were discussed along with ways in which it could relate to or generate new businesses.
　　The symposium opened with Takamitsu Sawa, Professor at the Graduate School of Energy Science and Institute of Economic Research, Kyoto University,giving a keynote address entitled "Preventing Global Warming Measures after the Kyoto Conference; How to Coordinate Domestic Policies with the Kyoto Mechanism." This was followed by the four panelists, Jong-Soo Lim, Assistant Professor, Department of International Trade, Kwangwoon University, Korea; Zou Ji, Associate Professor and Deputy Director, Institute of Environmental Economics, Renmin University, China; Jintaek Whang, Senior Economist, Samsung Global Environment Research Center, Korea; and Shigemoto Kajihara, Director, Office of International Strategy on Climate Change, Global Environment Department, Environment Agency, speaking on how their respective countries perceive CDM, ways to implement it and the outlook. Later, animated panel discussion ensued and the symposium came to a close with a summarization by acting moderator Prof. Sawa.

Coordinating Domestic Environmental Policies with Kyoto Mechanism
Prof. Takamitsu Sawa
　　Prof. Takamitsu Sawa of Kyoto University opened the symposium with a keynote speech in which he presented possible methods for implementing the CO2 reduction targets agreed upon in the "Kyoto Mechanism." In order to achieve the target goals, both domestic and international measures will need to be coordinated. Prof. Sawa explained that, while differing interpretations of the operation of the Kyoto Mechanism exist among developed nations, the 38 Annex I countries have targeted greenhouse-gas emissions for an overall 5 percent reduction compared to 1990 emission levels. The period during which this reduction is to be maintained runs from 2008 - 2012. However, the reductions are differentiated. Under the current agreement, Japan must reduce CO2 emissions by 6 percent from 1990 levels; the United States of America by 7 percent and the European Union by 8 percent. Meanwhile, Russia and Ukraine are to hold emissions at 0 percent, and Australia is being allowed an 8 percent increase. In addition to residential, commercial and industrial sources of emissions, the Kyoto Protocol will also take into account the net changes of CO2 removal from afforestation, reforestation and deforestation.
　　Prof. Sawa mentioned that Kyoto Protocol was only the second time in which science directly influenced world politics and economics. He stated that the first time was the Montreal Protocol of 1987 which ended in an agreement to phase out chlorofluorocarbons (CFCs). He then focused on the domestic measures that Japan is taking to implement the Kyoto Protocol, including the creation of the Headquarters to Prevent Global Warming and regulatory measures such as the automobile tax system. Prof. Sawa informed the gathering that between 1990 - 1995, commercial and residential emissions of CO2 in Japan rose 16 percent. This increase is attributed to household appliances and the related increase in electric use. The transportation sector also caused a 16 percent rise CO2 emissions. At the same time, Japanese industry was able to hold CO2 emissions to the 1990 level. Prof. Sawa is optimistic about future domestic emission levels as household appliance consumption seems to have reached saturation point. He further sees the automobile market trend moving towards smaller, more energy-efficient cars. At the international level, Prof. Sawa discussed the Emission Trading System, Joint Implementation (JI), and the CDM. The Emission Trading System allows a nation that has not exceeded its limits to sell the remaining emission rights to a second country. Under this system it is then possible for developing countries to reduce emissions while making financial gains. Prof. Sawa points out that the losses of CO2-producing "loser industries" can be mitigated by their respective governments, and that the oil industry will be forced to compete more fiercely via research and development projects. He claimed that the automobile industry will be able to diminish CO2 production without sacrificing driver comfort. He also proposes tax breaks for the individual who purchases more energy-efficient cars and refers to the German system of individuals selling electrical energy collected by solar cells to local governments.
　　Prof. Sawa concluded his speech by discussing the possible role of Japanese firms in JI operations in which they would transfer advanced energy-conservation technologies to other developed countries. The CDM will involve similar projects with developing, non-Annex I nations. In this way, the CO2 emission targets can be achieved with minor or no government regulatory mandates.

Panelists Perspective on Future CDM Implementation

　　Dr. Jong-Soo Lim
　　Dr. Jong-Soo Lim discussed the three options available to Annex B nations besides domestic reduction of CO2; Emissions Trading, JI, and CDM. Dr. Lim went on to say that the key issue of the forum was the CDM transactions, which are relatively high cost due to baseline and the certification process and proceeds. He also mentioned that JI and domestic reduction measures have a higher Marginal Abatement Costs than CDM. In answering the questions as to how profitable CDM will be, Dr. Lim suggests that it is better to engage in a cooperative effort with a non-Annex B nation, as Annex B CO2 reduction projects will be more costly. He believes the successful CO2 reducing company will be operating in a developing nation. He discussed the importance of Certified Emission Reduction (CER) in the verification and certification of project costs by operational entities. He concluded by pointing out that industry and the private sector will have the responsibility of initiating CO2 reduction.

　　　　　Dr. Zou Ji
　　Dr. Zou Ji emphasized the great potential for CDM projects in China. He pointed out the Marginal Abatement Costs are higher in developed countries and that CDM projects would be of mutual benefit. He stated the four overlapping domestic concerns which would be enhanced by CDM projects; economic development, improvement of local environmental quality, social development and improving foreign relations. He listed the huge potentials for the foreign company working in China in view of the large scale of China's economy, the huge GHG reduction potentials, the potential for technological and equipment development and the significant difference of carbon abatement costs. Dr. Zou also touched on the obstacles to attaining mutual benefits. The problem is how to divide the benefits of CDM. Due to institutional factors there is less access to information for officials and academia. Consequently there is lack of research and a poor understanding of climate disputes. In conclusion, he called for more research, communication and project development in China.

　Dr. Jintaek Whang
　　Dr. Jintaek Whang presented a strategic approach for regional cooperation under the Kyoto Mechanism. He mentioned that the first commitment period is less than ten years away. He noted that the CDM will open the "CO2-related economy" from the year 2000 and that both Annex I and non-Annex I nations will be affected. He called for a more proactive stance from Asian nations as most issues and the rationale for them come from the West. Dr. Whang discussed China's 6 consecutive years of boom Foreign Direct Investment flow. However, he noted that the trend is slowing. Considering the mixed economic situation in the region, he called for intra-regional cooperation to cope with economic and climate issues. He also called for governments not to intervene in the private sector. He concluded his presentation by discussing the motivations and objectives of BeSeTo (Beijing-Seoul-Tokyo) group and suggests that the three nations take a "learn by doing" approach to the CDM as a "laboratory" for the international community.

　Shigemoto Kajihara
　　Shigemoto Kajihara directed his remarks to the advantages of CDM and the progress of CDM international rule formation. He stated that developed countries need to achieve legally-binding targets. By ratifying CDM rules and emission-trading regulations and putting them into effect, the Annex I countries will be able to operate projects at cheap cost while getting the opportunity to successfully reduce CO2 emissions. The major advantages for the developing countries will be the technical transfer and the transfer of capital into these nations. As for the status of international negotiations regarding emission-trading, CDM, and the JI, the CDM has been the most detailed and has been given a clear framework. Many technical and business issues remain outstanding, however, and the thesis to be presented at COP5 in October, 1999 will be the basis for future negotiations. One point of dispute with regards to CDM is the scope of business. To what extent Sink business, including forestation, is to be allowed remains to be resolved.

Economic Factors in CDM Decision-Making
　　The informative second panel discussion of the afternoon began with Kajihara giving his opinion about the particular problems in introducing CDM projects into China. He stated that any host nation where CDM projects are targeted will, of course, have problems but the Chinese situation contains a number of unique obstacles. He pointed out that China is still in a transitional stage from a centralized to a market economy where vestiges of the old system remain. For example, at present, the entity responsible for CDM projects is the Foreign Ministry, somewhat in collusion with the Ministry for Development. It is his personal opinion that the coordination between these government agencies is not perfect. He also listed other problems such as the poor flow of information and the fact that there are still elements of the Chinese economy that are still closed to foreign access.
　　Afterwards the panel fielded a multi-faceted question from the audience dealing with the CDM priorities and effects on the host nation. Specifically, the questioner raised such concerns as, "What would be the most cost-effective and advantageous situation for the host country?", as well as, "What would be the effect of economic development on the non-Annex I nation?" The questioner also asked the panel to explain what type of organization and organizational priorities would the BeSeTo set up in order to satisfy both the host and investor nations.
　　Dr. Jong-Soo Lim responded that the CDM must be carried out by joint ventures between private companies, not government agencies. The host nation partner will need to determine the profitability of the project and this outcome will then be evaluated within the BeSeTo group. In this way the most cost-effective projects, or those projects with the lowest marginal abatements can be selected. Dr. Lim further pointed out that cost-effectiveness should be defined, not only in terms of economics (total cost divided by CER), but also in terms of administrative costs such as cost incurred from negotiations with the host government. He emphasized that thehost nation partner would be in the best position to determine administrative costs. With this information the Annex I partner then must decide how to make the project most efficient in terms of monetary cost and ease of operation. At this point, Prof. Takamitsu Sawa interjected a follow-up to Dr. Lim's comments. He stated that, although it may not be an exact framework from which to factor-in all the elements that go into decision-making, a priority system for project evaluation should be created. He suggested a 1 to 5 ranking system for project evaluation in terms of cost-effectiveness on which potential investors could base their decisions. After calculating cost divided by CER, the project with the smallest figure would receive the highest priority. Perhaps the top 20 most investment-attractive projects could fall into the priority one category.
　　Dr. Zou Ji of China then took the floor and disputed the possible ranking theory based on simple cost-effectiveness. He said that ranking in theory and ranking in the reality of the market may be two entirely different things. He pointed out that there may be different kinds of projects occurring at the same time. An energy efficiency improvement project has low abatement costs and therefore investors can expect to make a profit on this type of project. However, Dr. Zou noted that there are different markets and different investors, as well as different market regions. In addition, both investors and hosts at the enterprise level have different information and information conditions. He gave the example of a solar energy project which usually has higher abatement costs. But he surmised that becoming involved in such a project in the western regions of China would most likely lead to a successful investment. On the other hand, investing in projects to improve housing energy use efficiency is usually seen as a positive decision. But Dr. Zou pointed out that in the case where there is fierce competition due to numerous investors, one might have less information and higher transaction costs. In such a situation profitability becomes less clear-cut. He also mentioned his belief that projects which have the ability to reduce carbon emissions and earn credits will be the attractive choices. He then raised the hypothetical situation of the secondary market for credit. If the earned credits can be traded on the stock market in the manner of trading quities, this would be another intriguing possibility for profit.
　　Dr. Jintaek Whang emphasized that there are many aspects to consider during the decision-making process for investing. As an example, he mentioned the current difficulties that are occurring in the negotiation process of the Multilateral Agreement on Investment (MAI). He pointed out that today's symposium and panel discussion were focusing almost exclusively on the CER and CDM potential as the major factor in deciding where and when to put money into a project. He further mentioned that today's discussion was also mainly relevant to the situation of China as a host nation and Japan as a potential source of investment. He gave the example of the replacement of an old-style coal burning power plant with a modern natural gas plant. On simple CER calculation, he figured that an investor might consider that the reduction of one million tons of carbon would equal up to 40 million U. S. dollars in value. But Dr. Whang considered this calculation as too simplistic and went on to talk about the other factors which would influence the attraction, or lack of it, to investing in carbon-reducing projects. These include the infrastructure of a host nation, government environmental regulations, access to order, and labor costs. He said CER is not an exclusively independent factor and that it must be integrated into private sector investment decision-making. He concluded by claiming that ifall factors taken to make a determination are equal, the lower the cost of CER, the higher its priority in the decision-making process.

Obstacles to CDM Opportunities
　　Prof. Takamitsu Sawa brought the day's proceedings to a close with his final comments. He talked about the possibility of Japanese companies being involved in CDM projects but cautioned that there are many factors that need to be taken into consideration. In the case of CER, Prof. Sawa gave a power plant project as an example and pointed out that the amount of year upon year CO2 reduction must be calculated taking into account the year by year demand of electricity. In addition, he said transaction costs must be noted. Transaction cost refers to various costs incurred when a project is implemented, including administrative costs, transportation costs and peripheral infrastructure costs. For example, in the case where a power plant is to be constructed, the amount of time and money it will take to build roads to the sight and the environmental regulations of the host country must be taken into account. All of these things must be estimated in addition to CER. This evaluation process requires a lot of work, so that a company engaging in a CDM project will need to ask another company to perform the evaluation process. Prof. Sawa compared the situation in the U.S. to that of Japan. He said that in the U.S., consulting firms are employed by companies to provide knowledge and offer advice for the best way in which the company should proceed with its plans. Unfortunately, Japan does not have the proper number of "Think Tanks" or consulting companies. He concluded by calling on the BeSeTo group to seriously consider establishing consulting services. In this way the CDM opportunities available in China would become a concrete reality.

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