1. Greetings

(President Kuroda)

• The issue of global warming is at a crucial stage. The first commitment period of the Kyoto Protocol (2008-2012) is about to begin and how to deal with the subsequent second commitment period or a post-Kyoto Protocol framework has become a major issue. It is said that it is difficult for Japan to achieve its greenhouse gas emission reduction target (a reduction of 6 percent in the level of emissions with respect to 1990), but how can Japan not keep the international commitment made in Kyoto? It is a matter of international responsibility as well.
          The environmental and economic condition surrounding Japan, such as the remarkable growth of Asian countries including China, is changing significantly and the emission level of greenhouse gases will continue to increase in the future. How will Japan and the human race coexist with the environment? This is an extremely important matter concerning what kind of Earth we want to leave for the next generation.

2. First Session: The Current Situation and Perspectives of the CO2 Reduction Target

[Presentations]
(Richard D. Morgenstern)  (Reference material: PDF-format 173KB)

• The United States is changing at great speed. For example, a picture of global warming made the front page of the latest issue of a big-circulation sports magazine under the title, "As global warming changes the planet, it is changing the sports." The sports world not used to actively address climate change, so this is proof that there is big change in the US.
• I studied voluntary programs with William Pizer and we reached the conclusion that the impact of voluntary programs is limited and they alone are insufficient to achieve reduction targets.
• In California, based on a new act signed last autumn by the governor, restricts not only emissions of motor vehicles but also of fixed facilities. Further and specific regulations are currently being examined.
• Not only California but several other states on the west coast are studying participation in a regional emissions trading system. This can be said to be the west-coast version of the RGGI trading system established in the east, and its goal is to allow emission allowance trading not only between states, but also between and within regions.
• The Regional Greenhouse Gas Initiative on the east coast which is planned to start in 2009 applies to facilities of 25 megawatts and larger in a number of states and at least 25 percent of allowances should be auctioned or sold publicly.
• Presently, 5 bills are being submitted to the US Senate and they mainly concern cap and trade. Of the 5 bills, 4 apply to the economy as a whole and 1 applies only to the electrical power sector. The reduction target varies among the bills. All the bills incorporate banking, 1 incorporates lending/borrowing, and 1 has a safety valve. Auctioning requirements are incorporated in all of the bills.
          Moreover, all of the bills incorporate coupling of emissions management with some sort of advanced technology; this is an expression of resolution that it is not simply a matter of emissions reduction, but that large-scale investments must be established. This is proof that the US has changed over the past five years.
          With regard to our experience with NOx emissions trading, there were violent price fluctuations. Safety valves were designed to prevent such violent price fluctuations. Considering a rise in the long-term concentration, a short-term increase in allowances may not be so important.
• There is also change in the position of the business sector. Many companies, including leading companies, are calling on the government for strong efforts at legislation and drastic greenhouse gas reductions. In the US, besides voluntary efforts, a number of activities are being planned or being carried out. The principle and policies of states are also turning active toward emissions reduction or drafting of RGGI programs. Federal policy isnot only focusing on emissions reduction; it is also encouraging technology.

(Christian Egenhofer)  (Reference material: PDF-format 299KB)

• The EU heads of state adopted a new integrated energy and climate change package on March 8 and 9. This set binding targets for 2020: cutting 20 percent of EU's greenhouse gas emissions, or 30 percent cut if other countries also cooperate. On the other hand, as to the combination of energy sources, it includes raising the share of renewable energy to 20 percent and improving energy efficiency by 20 percent as well. This preparatory document is titled "Europe's Energy Policy," and not "Climate Change Policy." As stated in the package document, the order of priority is energy, securing EU's competitiveness, sustaining the environment and adapting to climate change. This shows that the EU is also keeping linkage with technological progress in mind with the background of technology and innovation.
          The EU also faces difficulty in achieving targets of the Kyoto Protocol, but maintaining the perception that emissions must be reduced, this energy package takes into account the environment and emissions reduction. Postponing emissions reduction only makes it more costly. Here lies the challenge for energy. The EU has a high reliance on energy imports. It relies particularly on Russia and there is much risk involved in relying on one country. By implementing the energy package, it can reduce emissions, control consumption and, most of all, lower its degree of energy reliance on other countries.
• Conventional oil resources are already approaching its peak, but new conventional and non-conventional energy sources exist outside OPEC. In addition, a rise in carbon and energy prices leads to the entry of new energy sources into the market, encouragement of the development of alternative sources and development of renewable energy. Cost-benefit calculations show that a 20 percent improvement in energy efficiency will annually save 50 billion euros in cost until 2012 and that achieving the reduction target of 20 percent in greenhouse gas emissions may become possible.
• Since the EU faces a high degree of reliance on imported energy as well as the issue of climate change, it considered addressing both energy and climate change issues in one package. If a powerful global climate change policy is adopted, diverse alternatives such as new conventional fossil fuel resources, non-conventional resources and renewable energy will be developed, while at the same time, leading to a lower degree of reliance on imported energy for the EU. In addition, the demands or influence of supplier countries can be controlled. Generally speaking, if technological innovation advances and the EU can take the lead in technology through this package, this will also be an advance in its position in the global market.

[Free Discussion]
(Teruaki Masumoto)

• Mr. Egenhofer pointed out that saving energy would have a large impact on the EU and also lead to cutting expenses for electrical power and fuel. The EU leadership plays an important role in setting targets to cope with global warming and in pursuing an energy policy as well.
• With regard to saving energy, Japan has already achieved a high-efficiency society, and internationally, through the Asia Pacific Partnership (APP) initiated by the US, Japan, Australia, South Korea, China and India, we are beginning to expand this horizontally in a bottom-up fashion. Studying Japan's energy-saving technology has made both India and China aware that enhancing energy-saving efficiency will lead to cost cuts, and here lies the hidden potential for the global warming issue to materialize altogether.
• As Professor Morgenstern mentioned, I think that where there is a split in opinion is whether to go with voluntary measures or regulatory measures. In Japan, measures are mainly voluntary actions. There is opinion that they are insufficient, but I think that regulatory and compulsory measures are a last resort. For example, in the case of companies, what is important is the assessment by stakeholders such as consumers, shareholders and employees, and by raising the evaluation of companies making efforts to save energy or to take measures against global warming, companies will be led in that direction by market forces.
• There are only three ways to reduce CO2: (1) cut down on energy consumption, (2) change the combination of energy sources, or (3) absorb carbon dioxide emissions and bury it deep underground or beneath the ocean. Cutting down on energy consumption is difficult, and rushing regulatory or compulsory measures will force companies to reduce production or cut down car travel. Whether or not we seek this kind of society is where opinion differs.
          However, it is possible to improve energy utilization efficiency or alter the combination of energy sources. It is important for companies to shift from a mass energy consumption paradigm to a low-carbon or energy-saving society, and to do so the participation of all stakeholders in society is crucial.

(Kazuhiro Ueta)

• For a paradigm shift toward a highly energy-efficient, low-carbon society, Japan, the US and the EU should play a leading role.
• Mr. Morgenstern indicated that in the US, there seems to be a change in mood to one that may introduce measures as policy. A change in the political environment may play a big part, but I think that the situation, in which concrete initiatives to reduce emissions at the state level are advancing over voluntary programs, is valuable. Also, federal policy is focused on new technologies and I think that there is a possibility that this will lead to the effective use of funds.
• Mr. Egenhofer's presentation clarifies the position that industrial competitiveness and prevention of global warming are compatible. It's extremely interesting that it contains a scenario that would work in favor in terms of energy-related security as well, since enhancing the efficiency of new energy or developing technology concerned with new energy sources and energy would increase the options for the supply side of energy.
• One feature of the Kyoto Protocol is that it contains market-based mechanisms by adopting flexibility. So I would like to ask both presenters how Europe and the US see the current situation and the future of the carbon market, and also, how they think the EU and the US will commit themselves to creating and expanding this market.

(Frank Convery)

• The technological linkage in trading schemes that Mr. Morgenstern mentioned is attractive since it is a new aspect.
• According to Mr. Egenhofer, the EU target is a 20 percent reduction by 2020 with respect to 1990, wherein the average figure will be distributed among the 27 member states in different proportions. I would like to hear Mr. Egenhofer's assessment of its viability.

(Morgenstern)

• Voluntary efforts and voluntary programs have become popular throughout the world. For example, over 100 voluntary programs are being implemented in the US and several of them are related to climate change. 1.5 percent of the EPA's budget is being allocated to the administration of voluntary programs. It is becoming popular in Japan and Europe as well; in Japan, it is mainstream measure.
          Voluntary programs are an important element of the issue of climate change, but if we are to set a large reduction margin as a target, it would require something greater than voluntary programs.
          The definition of "voluntary" differs according to country and time. For example, "voluntary" in the US means that there is no incentive for the company participating. On the other hand, in the UK or Denmark, financial incentives are provided in voluntary programs. The character of voluntary programs in Japan differs from that of other countries in the sense that there is close cooperation between the public and private sector. Therefore, the character of voluntary commitment differs.
• Mr. Ueta commented on the possibility of US participation in the carbon market. I think the US is highly interested. I think it's a matter of whether the US will be concerned with each country becoming a buyer, but interregional trade is under discussion. A new directive in the EU mentions opening up trade to parties outside the region in the future.
• Mr. Convery commented on the relationship between the bills on emission management currently under consideration and technological incentives, and I would like to mention that all of the five bills currently under review in the Senate incorporate technological support in one way or another. A Committee Report compiled by a group consisting of the National Commission on Energy Policy (NCEP), business sector, bipartisan congressmen and people working in the field of environment caused a big shift in America's way of thinking.

(Egenhofer)

• The EU package deals with an extremely strategic issue of energy security. The key here is that it was submitted by the Energy Office and if it had merely been for public relations or popularity purposes, it would not have been well received by the sectors concerned.
• The EU decided on a high-level target of reducing greenhouse gases by 20 percent throughout the EU. However, because disparities exist among member states, it is impossible for all countries to have a homogenous target. Rich countries must bear a larger burden. On the other hand, detailed discussion with scientific and economic analysis is required for renewable energy targets. However, once the heads of states of EU members make a commitment, they would stick to the target of 20 percent reduction even if it is difficult; it wouldn't be reduced to 15 percent. EU's mechanism is different from America's. In the US, details are decided only after legislation passes.
• Mr. Ueta asked about the creation of a global carbon market. The EU will review its emissions trading scheme (ETS). A new bill will be submitted in 2007 to change the trading scheme in 2009-10. The European Committee has already published the communication policy paper "Build in the Global Carbon Market" and moves to change the directive have begun. As the title indicates, the EU is ready to form a link with all allowance schemes and binding ETS throughout the world. The key here is that emission permits must be legally binding.
          The EU and California are consulting each other about forming a link between their respective schemes. The EU is ready to form a link with California's scheme even if it does not link up with the US federal government. The EU and Australia wish to form a link with California.
• It is believed that many elements will coexist in ETS, and the way to link different ETS is to allow offsetting with all CDM and JI. Prices will converge if there is sufficient offset volume, JI and CDM. Linking will become possible if the price of electricity converges. If there is volume and all CDM and JI can be offset, global prices of electricity will converge. If a global carbon market appears, even if Japan does not have an ETS, ultimately the price will converge. This may change Japan's position on ETS.

(Moderator)

• In the First Session, we heard the message that the US is changing. Another point is that the EU has presented a bold target, and I think that the consciousness that it is doing so for its own sake was made clear; it is not seeking the impossible.

3. Second Session: Key Issues Surrounding the Post-Kyoto Protocol Framework

[Presentations]
(Convery)  (Reference material: [1]PDF-format 93KB,[2]PDF-format 69KB)

• I imagine that after 2012, with regard to emission permits, in the Atlantic there will be a European trading market and an American federal trading scheme. If these can be extended to form an Atlantic-Pacific trading market that includes Japan, this would serve as a foundation and facilitate the participation of other players as well.
          As Mr. Masumoto pointed out, if not voluntary, it would have to be regulatory, but I think that trading is better than regulations. Trading on the market is a third option and I would like to advocate this option. For example, let's say that the six of us here on stage are the entire economy. If each produces 200 tons of greenhouse gas, this would total 1,200 tons. The government decides to order us to cut down on emissions by 50 percent, down to 600 tons, and distributes an allowance of 100 tons to each. In a trading scheme, it is important that each player be able to trade allowances with each other, and so, if Mr. Ueta can cut emissions at a low cost and in a short period of time, he will do so and I would buy this allowance from him. The key here is that it is the player that can reduce emissions at the lowest cost is the one that does so. Such a scheme should be introduced and expanded in the EU, and if we can create an arch from the EU to the US, and to Japan, this would be a great step forward.
          Negotiating with all 186 countries is difficult, but the problem will be easier to solve if the key 12 countries form a club and become members of the caps club or the trading club. This is the policy objective of the main arch, and the arch should be created over the Pacific and Atlantic Oceans founded on the EU experience.
          When price signals appear and a price is put on CO2 allowances, and if there is profit to be made by reducing greenhouse gas emissions, technological innovation will be encouraged. We will have a low-carbon society with the appearance of a greenhouse gas industry service. It all depends on whether this can be enlarged globally so that all countries and companies have access to it. If Japan acquires allowance in its domestic market, it should be made so that this can be traded in the US or Europe.
          If a trading scheme is created over the Atlantic Ocean, Japan should participate in it strategically. If Japan has access to means of low-cost reduction and is successful at technological innovation, it can apply this globally.
• After 2017, I think China and India will begin capping. Countries other than the 12 will eventually participate, for strategic reasons or other. If China becomes the largest emitter, China and India will become part of the cause, and we would no longer be able to say, let those creating the problem solve it.
          I think that in the next 10 years, there will be more discussion on a method to impose tariffs at the border according to carbon concentration or carbon price on countries that are not members of the club, or on sanctions against countries without caps. I don't think it would turn into an argument of not having to take part in solving the problem because 50 percent of the problem occurs at home.
• There was mention of price turbulence in the US NOx market, but this was caused by inadequate banking and borrowing in the market. In addition, setting a ceiling on price will restrict the speed of innovation. Another thing is that emission volume responds immediately. In the first year of the pilot phase, emission volumes were reduced by 3-5 percent from business-as-usual, but this was because there was immediate change in the electrical power supply after the first price emerged. The current time framework in Europe ends in 2012, but this should be extended until 2020 because it is too short a time to respond to new capital investment. In addition, the integrity of the system must be ensured, and in order to do so, a link between the Japanese, American and European schemes is necessary. By linking the schemes, the system, administration of justice, the law and monitoring can be reinforced. Furthermore, in order to include China and India, it is necessary to build a system and I think it is important that these countries participate, even if they do not agree to setting caps.
• Within the electrical power sector, in markets where electrical power was fully liberalized, a large part of the carbon price was transferred to electricity price. In countries where economists claimed this to be rent capture, regulatory authorities were allowing the transference only of marginal costs. This is extremely important because it is a matter of equilibrium of disparities. That is why the US is arguing to designate a considerable proportion of allowances to auctioning.
• If there is a time framework of 20 years, an Atlantic trading system can be built, Japan can participate in it and serve as the anchor for the Pacific for around 10 years, while a trading scheme is arranged in the US sometime before 2011. If this happens, we would have the 12 key players involved in the essential strategy.

(Ueta)  (Reference material: PDF-format 81KB)

• Until today, we have continued discussions on climate change and the international society has also continued discussions and negotiations. There are several starting points; for example, the IPCC was founded in 1988, the Kyoto Protocol was agreed upon in 1997, entering into force in 2005. This is one epoch and since the period of Kyoto Protocol is 2008-2012, the period after that will now be an issue.
          The international framework created by the Kyoto Protocol can be valued. For one thing, it clearly sets forth multilateral cooperation. Another important point that can be observed in this international framework from an economist's perspective is that it contains elements of market-based mechanism. They are known as the Kyoto mechanism, that is to say, CDM, JI, emissions trading and so on.
          These characteristics should be highly evaluated, but there are problems in the process of implementing the Kyoto Protocol; for example, the issue of whether the framework of the Kyoto Protocol alone is sufficiently effective, the fact that the US has defected although major emitters should naturally take part in the effort to prevent global warming, or the fact that major developing countries are not participating in this framework to reduce emissions.
• It has already been 10 years since COP3 was held and because the situation has changed from the time of agreement, there is need to identify those changes. First, is that a carbon market was actually created; this is a big change. There were concerns as to whether the Kyoto mechanism would actually work, but CDM has been improved and it is up and going, although problems in its system have been pointed out. In addition, although with some problems in the system design, EU ETS has been created. There are also moves at the state level in the US; this is a big change. There is an atmosphere among many people, particularly in the business world that now take it for granted that prices be put on carbon. An aspect of carbon credit is that it is a kind of financial product, and whereas conventionally people considered environmental problems to be an issue of industries producing carbon, it's actually a financial matter as well. The emergence of this sort of financial market is also a phenomenon that should be taken notice of.
• A big change in the past 10 years has been in China. I think that discussions in China are changing toward being conscious of the international society and toward clearly positioning the necessity of deliberate action to cope with resource energy problems or environmental problems that are caused by high economic growth.
• Because Japan has long suffered from the post-bubble recession and has been concentrating on its domestic economic problems, its leadership has been weak after it played an important role in wrapping up the Kyoto Conference.
          It is undoubted that global warming cannot be prevented unless China does not aim for an energy-saving or low-carbon society. One of the important roles of Japan is to take the initiative in incorporating the Chinese economy and creating low-carbon societies in Asia. While this is an initiative in Asia, it must be positioned globally and internationally at the same time. Such a framework must be effective in the environmental aspect, be able to stand up to impartiality and have efficiency. Furthermore, because it carries an aspect of having to be built under current and past circumstances, this future regime must be thought out taking into account what will be accepted.
• There are some factors that must be taken notice of when considering this regime. I cannot be sure of all factors, but one of them is the issue of how the carbon market will evolve, develop and what kind of future can be envisioned for it. Another thing is the issue of how technology will evolve, i.e., how much progress there will be in innovation. For example, it's possible to think of a completely new type of energy like bio-fuel, or on the other hand, how carbon capture and storage (CCS) will be positioned, whether nuclear energy will be accepted, and so on. Besides technological innovation, I believe that how it is evaluated in society will also enter as a big factor.
          There is also the question of what kind of rules to materialize, as there are various factors involved. One idea is rules that clarify principles. One of the reasons for being able to agree on the Framework Convention on Climate Change is the idea of "common but differential responsibility." I think that we can say that behind an agreement lies some sort of principle.
• Many proposals are being made considering principle. Discussion should be held to evaluate the numerous proposals for an international regime on climate change and global warming prevention and to overcome the shortcomings of such proposals. Japan should declare that it would carry the regional approach and commit itself to sustainable development in Asia, and at the same time, seek possibilities for agreement on the floor of discussion concerning an international regime.
          This would reflect the realities of the Japanese economy and it also contains the possibility of making best use of Japan's technologies. The experience of Europe will be a guide for considering what sort of mechanism will actually be created in Asia, but because there are difficulties unique to Asia, this matter needs to be discussed in depth hereafter.

[Free Discussion]
The moderator asked Professor Carraro, a specialist from Italy who was present, for comments.
(Carraro)

• Questions for Professor Convery
          You mentioned that if a trading scheme between Japan, the US and the EU were established, this would become an institution for low-cost emission reduction, but if these countries set a more ambitious target, wouldn't the opportunity for low-cost reduction disappear? I believe that low-cost and efficient opportunity would disappear unless it is linked with massive CDM projects.
          Second, what kind of rules can be applied to developing countries to make major developing countries participate? I believe that the chances of such rules resulting from trade negotiations are low. Is there any other way?
          Is there effectiveness in trading schemes for reduction? Although, as you mentioned, 3-5 percent additional reductions were achieved in the first year of the EU ETS, I don't think that the answer is clear. What became clear is the difference between allowances and actual emissions. Because emissions were lower than allowances, the price approached zero. Was there too much allowance, did market efficiency improve due to reductions made, or was it a combination of the two? Without a defined trading scheme, we can't be sure of the degree of emissions unless there is factual proof. The conclusion on whether additional reductions were actually achieved through ETS cannot be made without the passage of a certain amount of time; one year is insufficient.
          On trading schemes, there is debate over the arrangement of multiple systems. I would like to hear your opinion on whether fewer or greater numbers of trading schemes should be created, whether there is any significance in covering medium and small-sized enterprises as well, whether the focus should be on large-sized enterprises so as to reduce the cost of ETS, or yet, whether a broader sector should be targeted, for example, to include the transportation sector or consumers to have them participate in emissions trading as well.
          Last, how much allowance should be subject to auctioning? It was zero in the first pilot phase, but auctioning was partially introduced in the second phase. I believe that the proposed proportion for 2008 and 2010 are small, but how much do you think is adequate, not as an economist's proposal, but in consideration of the balance between efficiency and the level that companies can accept or in which they can participate.
• Questions for Professor Ueta
          You mentioned that a major achievement is the creation of an ETS in Europe 10 years after the Kyoto Protocol agreement and the creation of ETS in other regions shortly. However, the European trading market is being criticized for not being a good market because the influence of political signals is too strong. Concerning future allowances, one government made an announcement that it would partially withdraw allowances in the electrical power sector. Following this, prices responded excessively. It is believed that governments are manipulating the price. What should be done to separate price from political signals and have fundamentals-dependent price formation?
          Second is innovation. Innovation should mark major policy packages. It should be included in greenhouse gas reduction packages in all countries and all countries should invest in technological innovation regardless of whether it is participating in the Convention or not. You mentioned that in the long run, innovation is required particularly in the energy sector. What instruments are adequate to encourage this?
          Last, with regard to the issue of equity, the European experience would serve as a guide. A conclusion from the first pilot phase in Europe is that the distribution of allowance allowed all sectors other than the electrical power sector to obtain business-as-usual or larger allowances, while the burden of emissions reduction was imposed entirely on power generation and the electrical power sector. When referring to equity, equality between industries or between consumers is the issue. Because it is an area of regulated monopoly and reduction costs can be transferred to consumer price, it is bound to influence the income distribution in each of the countries. What is your opinion on this European problem?

(Morgenstern)

• Mr. Convery's opinion is that setting price ceilings or safety valves is unnecessary because high prices will encourage innovation. A stimulus for innovation is one of the objectives that all schemes wish to achieve, but when the expected technology is not realized, or in an unexpected bad climate or when GDP grows sharply exceeding expected figures, the price of allowances is bound to rocket. Such price movements are actually observed in the NOx market. In the case of NOx, because it is likely to lead to medical and public health problems in a short period of time, it may be reasonable to set quantitative ceilings and allow a rise in price.
          However, it is a different with CO2. CO2 is a stock pollutant-damage is caused once carbon accumulates in the atmosphere-, so even if CO2 emissions increased in a short-term period, it won't lead to problems of public health, personal health or problems concerned with the human body. Therefore, there is no problem in terms of environmental considerations.
          Nonetheless, the economic damage from a sharp rise in prices may be serious. In the European experience, sharp price oscillations cost billions of dollars. From an environmental perspective, we can say that it is unnecessary cost. The second point is that although the overall target for EU ETS in the first phase was not so ambitious, if a more drastic reduction target were to be set, there may be greater price turbulence. Even so, there wouldn't be any benefits for the environment; so again, I believe that safety valves and price ceilings should be set.

(Egenhofer)

• A question for Mr. Ueta. What is the reason behind the growing global interest for emissions trading? If Japan were to participate in an ETS, is Chinese participation a requirement, or are there other reasons?
          A question for Mr. Convery. Which sectors should be targeted? In your opinion, what are the criteria for deciding which sectors and which installations should be targeted?

(Masumoto)

• When thinking about post-Kyoto, it is indispensable to include developing countries like China and India, in addition to the US. However, as a responsibility of developed countries, a mechanism in which developed countries bear the burden proportional to the estimated degree of responsibility of past economic activity, fuel consumption and CO2 accumulation is required. I believe it would be cruel to developing countries if the request for new participation and demand for burden is not made based on this. CO2 concentration has increased compared with the time before industrial revolution. Developed countries became rich by using massive amounts of fossil fuel. There is agreement that efforts to cut carbon dioxide should be made since the problem arises from this affluence, but no analysis exists as to where this problem originates.
• Second, going back to before the Kyoto Protocol, I believe that it is necessary to change the idea of regulating total emission volume. Isn't it more realistic to deal with relative values in per units of population, GDP or production volume, and manage such targets internationally? Countries with large degrees of contribution should be given due praise and international recognition. If we keep going without discussion using the UNFCCC-based total volume control method, total volume will become more and more severe. We are bound to have a situation in which countries that inefficiently use large amounts of coal and can afford to make efforts will survive, while countries like Japan that are highly efficient and have made a great deal of effort will suffer.
          Last, Japan would enthusiastically support and assist the building of an Asian community to deal with the global environment. The Japanese government should learn from the EU, which is making joint efforts after expanding from 15 to 27 members, and implement similar efforts in Asia. I believe that the options are limited for one country alone.

(Convery)

• The European Commission has set up a committee to review revisions in the ETS and decide on a trading scheme for the post-2012 period. A potential for the future global market can be obtained from this.
• According to Mr. Carraro's comments, even if an Atlantic-Pacific trading scheme or one including Japan, the US and the EU existed, the cheapest option would be chosen. However, looking at other trading schemes, considerable innovation is obtained when price signals exist. Costs that had been calculated based on acid rain trading were exaggerated since they are trial estimations based on existing technologies. Innovation gives birth to ideas that did not exist before. If the three regions share a strong price signal, existing and low-cost technologies would be chosen, but I believe that innovation would occur in 10 years time. Nonetheless, the continuity of link with CDM is also important.
          Attention is centered on China and India, but Indonesia and South Korea are enormous as well. What come to mind now are sanctions through trade. With trade, strength born from the cooperation between main markets like Japan, the US and the EU can solve the problem.
• Including the transportation sector will become a problem in the EU, as well as in the US and Japan. This is because the carbon tax already excessively imposes 200 euros or more for each ton of fuel.
          The European Commission is considering introducing some sort of regulation that would, for example, impose a tax on carbon emission per kilometer traveled. It may become a sub-scheme for a trading scheme in the road transportation sector. For example, if a certain car manufacturer has high emissions, this manufacturer may have to buy from Fiat, which makes low-pollution vehicles. In the end, this may work in favor of the Japanese automobile industry.
          Regarding equity, this time there was shortage in the electrical power sector and it had no other choice but to buy allowances, but in other sectors the amount was sufficient. In the next round, the shortage in the electrical power sector will grow even more, meaning that the distribution of allowances will be even less and the portion for auction will increase. If the US can set the auctioning portion higher than that, even if there necessarily isn't a trans-Atlantic linkage in trading, say for auctions, an interesting situation for financial trading may occur.
• The reason why I have a strong opinion on price caps is because I believe that the ultimate solution to the problem is innovation. Electrical power or petroleum companies will not be the source of innovation; it will come from other groups. They are observing closely what is happening in the market. For example, if a ceiling price of 20 euros were to be set while it costs 22 euros to reduce 1 ton using technology that has been developed, there is no gain. Then, the market should be adequately designed to allow banking and borrowing.
          Regarding which sectors to target, I believe that many sectors should be included. The sectors not included will not have allowances and will have to pay a high price for electricity; so many companies will want to participate.

(Ueta)

• As Mr. Carraro pointed out, I do not think that the EU ETS is necessarily going well. However, in terms of providing a carbon market, the idea of remaking schemes so they function better points at the right direction.
          Regarding how to stimulate innovation, for one thing, giving off signals from the market is important. Another thing is to clarify the certainty and long-term perspective of policy. However, at the same time, although it slightly differs from innovation, I think that to some extent there can be a portion of public investment in the sense that drastic cuts can be made by investing in infrastructure, for example.
          In EU ETS, while almost all sectors were "grandfathered," the electrical power sector alone was made to carry out reductions, and in the end, the burden was shifted to the consumer. Environmental tax is also likely to have a similar problem in distribution. It should be taken notice that environmental policies have this aspect. It is connected with the issue of liberalization of the electrical power and energy-related sector, and so it is an important issue for Japan as well.
• In Japan, there are voluntary initiatives, but a clear institutional framework has not been made. For a global emission trading scheme or a carbon market, it is fundamental that a clear institutional framework and market be created in Japan.
• What Mr. Masumoto pointed out is an extremely important matter. The Pew Center in the US made calculations in 2005, and there are figures saying that, for example, the US alone would account for some 29.5 percent or 30 percent. However, we need to consider how to deal with emissions at the time when scientific knowledge did not exist.

[Conclusions]
(Moderator)

• First Session: CO2 Reduction and Perspectives
          We learned that the US, which is not part of Kyoto Protocol's reduction program, is also changing. On the other hand, there was explanation concerning the political background and reasons for the EU target, which is believed to be bold. An extremely important point is that there are basically 3 ways to respond to the reduction of greenhouse gases, i.e., (1) reducing energy consumption, (2) improving efficiency and reforming the combination of energy sources, and (3) capturing CO2, and I think it was made clear where the technological challenge that currently remains rests.
          Voluntary action programs for reducing greenhouse gas emissions in Japan, the US and the EU each differ in interpretation and framework regarding the degree of control; but nonetheless, they are approaches that are not mandatory reductions. We also learned that although the EU has created a strict framework in terms of efficiency, diversity among member states is recognized and that the EU emphasizes an approach to solve the problem as EU as a whole.
• Second Session: Post-Kyoto
          It was pointed out that in post-Kyoto, participating countries should be expanded, including developing countries; this, however, cannot be solved merely by the categorization of developed or developing countries. The shared opinion was that it would be impossible to carry out discussions on post-Kyoto without a framework in which the 12 key countries, in particular, are participating.
          Opinions on the method for reducing greenhouse gases are various, but for the present, the proposal of ETS was prominent. Naturally, the discussion also brought up that a solution through the spread of technology is a prominent method as well, and that it is important for them to complement each other.
          I believe that from now on, the issue of global environment will be taken up as an important political agenda, for example, in the upcoming summit in Germany and in Japan next year, and will continue to be discussed in the international community.

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Symposium, Forum

ESRI Economic Policy Forum