Tokyo Emissions Trading System (TETS)

In 1990, the level of CO₂ emissions in Tokyo was at 53 MtCO₂ experiencing a 15%-increase by 2005 (BoE 2010). Since then, Tokyo has succeeded in lowering emissions to 56 MtCO₂, of which 95% (or 53,2 MtCO₂) are energy-related (Miyazawa 2010; Rudolph & Kawakatsu 2012a; 2012b). Economic activities are responsible for more than 25 MtCO₂ of energy-related CO₂-emissions, of which 80% and 20% result from the commercial and industrial sector, respectively.
Particularly, large facilities of these sectors emit around 40% of sectoral C02-emissions and 20% of Tokyo’s overall C02 emissions (Rudolph & Kawakatsu 2012a; EDF & IETA 2013). Therefore, these large facilities have been chosen to fall under the scope of TETS.
In 2000, the Tokyo Metropolitan Government (TMG) announced the “Tokyo Metropolitan Environmental Security Ordinance” which led to the establishment of the “Tokyo Carbon Reduction Reporting Program”. While facilities had to report emissions as well as submit emission reduction plan, TMG offered advice to facilities. From 2005 onwards, on-site visits by TMG as well as a rating scheme for facilities were included in the programme. The ratings scaled from C (TMG proposals not implemented) to A (TMG proposals for basic measures implemented) and TMG even awarded A+ and AA grades for reduction targets of more than 2% or more than 5%, respectively. Grades were made public, a process which is considered to have resulted in an increase of A-ratings from 48% to 98% (Rudolph & Kawakatsu 2012b). In 2007, discussion about a mandatory ETS for Tokyo-based large facilities started.

In Tokyo, a cross-sectoral 25% CO₂ reduction target is envisaged by 2020 against the 2000 baseline. The industrial and commercial sectors are to reduce emissions by 17% or from 25.7 MtCO₂ in 2000 to 21.5 MtCO₂ in 2020, while the residential and transport sector have to reduce emissions by 19% and 42% (BoE 2010, p. 14).
For the compliance period I (2010-2014) mandatory compliance targets of 6% and 8% have been set for the industrial and commercial sector, respectively. From 2015 to 2019, both sectors must presumably achieve a 17% reduction. Before an individual company can trade allowances, it must first overachieve its respective target of phase one (EDF & IETA 2013, p. 3).

It is a local policy. Admittedly, though, population size (> 36 million in the greater metropolitan area) and economic power (EUR 1.1 trillion, Brooking Institution 2012) of the metropolitan area of Tokyo are higher than those of many countries.

Relevant sectors

• Services: 80% of the buildings targeted are from the commercial/ service sector (universities, businesses, hospitals, etc.).
• Industrial: 20% of the buildings targeted are from the industrial sector. As of 2014, a total of almost 1,400 buildings must comply with TETS.

Energy-efficient building options and measures are considered to be “the best way” (Miyazawa 2010) to reduce energy-related GHG emissions. Switching to more efficient light bulbs but also reducing lighting to sufficient levels has become a very popular option to reduce energy consumption: “Around 750 lux was the most common illumination level before the earthquake, but 50% of facilities reduced it to around 500 lux in 2011” (BoE 2012).

Building Concepts

• Low-Energy Buildings
• Ultra-Low-Energy Buildings
• nearly-Zero-Energy / Plus-Energy Buildings

Options

Passive options

• Thermal comfort
• Building envelope
• Shading
• Colour
• Passive cooling techniques
• Passive solar heating

Active options

• Mechanical ventilation
• Cooling
• Heating
• Domestic Hot Water
• Lighting
• Building transportation
• Building integrated renewable energy systems

Behaviour and Management

• User Behaviour
• Building Energy Management
• Design Optimisation

Energy-efficient appliances (e.g. office equipment) can contribute to energy savings, as well.

Appliances covered:

• Monitors
• Computer
• Office equipment (Copiers, Fax machines, Printer, Server etc.)

Emission trading schemes intend to rationalise the use of energy and thus create demand for more energy-efficient technologies and/or building designs, and incentivise optimisation of user behaviour as well as building energy management.
The TMG has not introduced any specific energy efficiency requirements. The decision on how to achieve the required GHG emission reductions is up to facility owners.

The TETS covers large commercial and industrial facilities consuming more than 1,500 kl of crude oil equivalent annually.

Relevant target groups

• Investor Generally, building owners are responsible for achieving GHG emission reduction targets (TMG 2012a, p. 55).
• User Apart from the facility owner, TMG requires tenants to cooperate with the building owner to achieve energy-related CO₂ savings (TMG 2012a, p. 55).

Direct beneficiaries

• Investor

  If an investor is also the user of a building and invests in energy-efficient technologies he/she benefits from this policy by long-term energy cost savings.

• Tenant

  Tenants can benefit from energy efficiency investments due to savings, as well. Another possible benefit for tenants is increased worker productivity due to healthier indoor climate.

• User

  Depending on which measures are implemented to achieve the required emission reductions, building users, e.g. employees, may benefit from different co-benefits such as e.g. increased comfort or health due to improved indoor climate or lighting.

Indirect beneficiaries

The following actors may benefit indirectly due to an increased demand for energy-efficient technologies and services.

• Installation contractor

• Manufacturer

• Retail company

• System supplier

• Energy consultant

• Energy Service Company

• Engineering consultant

Relevant barriers

• Lack of interest and motivation in energy efficiency-improvement: The TETS obliges companies subject to the scheme to fulfil their CO₂-reduction targets. If companies do not want to be penalised for non-compliance, they must engage in energy-saving measures.
• Economic and financial barriers: If companies overachieve their individual CO₂-reduction targets, they can start selling CO₂-allowances to other companies.

Relevant incentives

• Saved energy costs: Energy efficiency measures are a cost-effective method to comply with CO₂ reduction targets. In addition, they reduce operating costs of the respective building.
• Directly increasing earnings or profits for actors on the supply side: Energy efficiency consultants as well as manufacturers and retailers that supply energy efficient solutions within the equipment and appliances market may experience increasing turnover and profits due to higher demand for their products.

Tokyo has announced an overall GHG savings target of 25% and 50% in 2020 and 2050, respectively, showing the commitment of local government to act against climate change.
On the national level, the Criteria for Clients on the Rationalization of Energy-Use in Buildings (CCREUB) is Japan’s energy code for commercial buildings. It combines prescriptive and performance-based elements with regard to heat loss through the building envelope, HVAC, mechanical ventilation, etc (Pacific Northwest National Laboratory 2009, p. 8). Moreover, the Top-Runner programme, formally applicable for energy-consuming equipment and machinery, has been amended to also include building technologies that lower energy use such as windows and insulation (Ministry of Economy, Trade and Industry 2013). The Top-Runner programme aims at dynamically achieving more energy-efficient product standards and, thus, will be beneficial to the TETS.
In order to extend the scope of energy savings in the buildings sector, the TMG has also introduced measures for new buildings. If new buildings consume 1,500 kl of crude oil equivalent or more, they will be integrated into the TETS.

The policy includes several innovative elements and is part of an innovative package.
The most innovative features of the TETS are a) that it is a local scheme and b) that it focuses on building-related energy consumption. As mentioned above, the majority of emission trading schemes focus on large industrial installations, which are outside of the jurisdiction of the TMG.
A Top-30 list of energy-efficient TETS-targeted facilities is published in the booklet “Low Emission Buildings Top 30 in Tokyo”, which is good publicity to the building user (TMG 2011).
While large facilities with an energy consumption of 1,500 kl crude oil equivalent annually are required to a) submit CO₂ reduction reports and b) decrease energy-related CO₂ emissions, authorities in Tokyo also introduced the CO₂ Reduction Reporting Program for small and medium-sized facilities (SMFs), of which there are 700,000. Under the umbrella of this programme, CO₂ emissions of smaller facilities with an energy consumption of less than 1,500 kl crude oil equivalent per year are targeted.
For companies with several SMFs consuming in total more than 3,000 kl of crude oil equivalent per year, the submission of annual CO₂ emission reports and plans for reductions is mandatory (Nishida 2013, p. 18). However, energy savings are voluntary. As both of these plans are disclosed on TMG’s website, there is an incentive for energy efficiency in order to show to the public the company’s goodwill.
For other companies (consisting of one or more SMFs, which consume in total less than 3,000 kl of oil equivalent per year) both, CO₂ reporting and emissions reductions are voluntary.
With the help of the CO₂ Reduction Reporting Program, TMG wants to support smaller facilities in understanding their energy consumption and methods for CO₂ emission reductions (World Bank 2010, p. 2-5).
In addition to that, there are four possible types of carbon credits:
- Excess credits are bought from other large companies.
- Small and medium sized facilities (SMFs) emit SMF credits. SMFs can participate in the TETS, but monitoring, reporting and verification procedures are simplified.
- Renewable energy credits are offset credits generated from renewable energy measures
- Outside Tokyo credits are only from large facilities outside the TMG area
- TETS also cooperates with the Saitama Prefecture, located north of Tokyo. Tokyo-based facilities can trade some credits with this area.
Moreover, the compliance phase for reaching individual company targets is not one but five years. Although an annual review takes place, penalties become effective only after the end of 2014. This gives facility owners more time to implement comprehensive energy efficiency measures.
TMG plays an active role in supporting facilities in reducing CO₂ emissions. For example, TMG recommends several energy-saving measures, such as energy-saving measure staff meetings, inclusion of energy consumption figures in the invoice and other awareness raising measures for employees (TMG 2012a, p. 56).
Verification of annual emission reductions is mandatory and auditors need to be licensed by the TMG. Besides fulfilling various requirements, auditors must also participate in a TMG training course (TMG 2012a, p. 52).

It seems advisable that:
(1) Caps should become more ambitious. Most of the facilities have already after the first year (over)achieved their targets for the complete first compliance period .
(2) Instead of “grandfathering” (allocating emission permits free of charge based on past emissions), facilities should pay for allowances from the start in order to cover the social and environmental costs of their emissions.
(3) The TETS should be mandatorily extended to more small and medium sized facilities to increase the scope of CO₂ emission reductions.
(4) The authorities in charge of the TETS should evaluate economic costs and benefits, as well as other benefits of the scheme.

With regard to optimising the policy package, additional soft loans may help incentivise energy-efficient investments.

The following pre-conditions were necessary to implement TETS:

Agencies or other actors responsible for implementation
TMG’s Bureau of the Environment (BoE) is in the driver’s seat when it comes to planning and administrating environment-related issues in Tokyo. It closely co-operates with other departments as well.

Funding
Some basic funding is needed for the administration of the scheme (allocating allowances, monitoring compliance, reporting, publicising results/TOP 30 list, training and accrediting auditors, etc).

Test procedures
The individual amount of allowances allocated to facilities depends a) on previous CO₂-emissions (or the “base year emissions”) and b) on the sector of the facility, determining its compliance factor, which is the share of emission reductions compared to base year emissions. In order to calculate the amount of allowances the grandfathering method is used:

(Base Year Emissions) * (Compliance Factor 6% or 8%) * 5 (years) = Allowances (tCO₂)

Companies can estimate their base year emissions by calculating the average of CO₂-emissions of any three consecutive years between 2002 and 2007 (EDF & IETA 2013, p. 8).

For example, company A with base year emissions of 20,000 tCO₂ and a compliance factor of 8% received in 2010 allowances for 92,000 tCO₂ for the compliance period 2010 to 2014 based on the previous equation:

20,000 tC02 * (1-8%) * 5 years = 92,000 tCO₂

This, in turn, means, that company A, which would normally emit 100,000 tCO₂ within five years, has to reduce CO₂-emissions by 8,000 tCO₂ during the five compliance period or annually by 1,600 tCO₂ (World Bank 2010, p.2-7).

Other pre-conditions
The management capacity of both, the public and the private sector are very high, which resulted in a neatly planned ETS design and implementation. TMG was also receptive to business concerns (World Bank 2010, p. 4-1).
Furthermore, TMG was able to show to other stakeholders evidence-based energy efficiency gains as well as opportunities for improvement in Tokyo-based facilities. This was possible because large businesses had been obliged to report energy consumption data under the CO₂ Emission Reduction Program, introduced in 2000 (World Bank 2010, p. 4-2).
From a more practical perspective, it proved useful that electricity meters were installed in all targeted buildings, simplifying emission calculations “by multiplying the monthly electricity consumption on the bill received by a crude oil CO₂ emissions factor to arrive at a final number for reporting” (World Bank 2010, p. 2-3).

The establishment of the ETS in Tokyo was a gradual process, in which stakeholder involvement and consultations played a key role. The Keidanrein, the biggest business lobby group in Japan, voiced objections against the ETS, particularly regarding ETS’ financial burden, which would put Tokyo-based businesses in an uncompetitive situation.
Stakeholders including representatives from TMG, from the public sector (e.g. education and health) and the business world as well as building owners met three times between July 2007 and January 2008. Based on the outcomes of these meetings, TMG designed a conceptually straightforward, transparent scheme, which is easy to implement and flexible from an operational point of view. One further issue of concern was, whether to establish a voluntary or mandatory cap. Again, stakeholder consultation proved useful in order to overcome objections (World Bank 2010, p. 2-3).

Quantified target
The policy has various quantified targets. The overall target is a 25% and 50% GHG reduction by 2025 and 2050, respectively, based on 2000-levels (Rudolph & Kawakatsu 2012b). Within the first compliance period (2010-2014) targeted facilities must reduce emissions by 6% or 8%. After the second compliance period (2015-2019) all targeted facilities must (presumably) achieve 17% GHG emission reductions.

International co-operations
While Tokyo is member of various international initiatives (C40 Cities, ICLEI, ANMC21), it is unlikely that TETS will be linked with other emission trading systems. First, TETS focuses on buildings. Second, allowances prices of other systems are too low.
However, several large cities are interested in “replicating” TETS such as Sydney, Singapore, Bangkok, and Taiwanese cities. Tokyo supports these initiatives (EDF & IETA 2013, p. 3; Kaneko 2014).

Bureau of Environment (TMG department)

Monitoring
Each November, annual energy consumption data must be submitted to the TMG (World Bank 2010, p. 2-9; Niederhafner 2013, p. 8). However, an auditor must verify submitted data beforehand. For example, emission auditors, 30 of which are registered with the TMG, must check annual GHG emissions and reduction achievements compared to the base-year (World Bank 2010, p. 2-7; Niederhafner 2013, p. 9). Registration with TMG is mandatory for auditors (TMG 2012, p. 4).

Evaluation
In a press release announced in 2013, TMG published accomplishments briefly in the English language (TMG 2013). Note that, due to TETS’ focus, GHG emission reductions are not (re-) translated into energy savings.
We are not aware of any efforts to evaluate the economic costs and benefits, as well as other benefits of the scheme.

• Dynamic market transformation and/or innovation: Promotion of innovation in, and market penetration of, energy-efficient technologies is a key goal of emission trading schemes because innovative technologies are necessary to bring down GHG emissions. However, GHG emission targets must be ambitious and certificates expensive enough to overcome barriers and trigger purchases of BAT. In Tokyo, the price per tCO₂ was USD 142 (as in 2012), which is the highest price among all emission trading schemes implemented worldwide. In other regions, the price ranged from USD 2/tCO₂ (Northeast United States) to USD 43/tCO₂ (Switzerland) (The Climate Group 2013, p. 8). While the carbon price can be considered to be very high and able to incentivise energy efficiency investments, established targets are criticised because 60% of targeted facilities fulfilled their phase I objectives (6% or 8% by 2014) in 2009. 22% of the 1,340 facilities even achieved their phase II objectives (17% by 2020) before the implementation of the TETS (Rudolph & Kawakatsu 2012a).
• Avoiding lost opportunities: If GHG emissions reductions targets are ambitious enough and prices for allowances are high enough, it will push stakeholders towards implementing several energy efficiency measures in order to become able to sell highly priced allowances with other ETS market actors. Data on the kind of energy efficiency investments carried out is, to our knowledge, not available. BoE (2012) only mentions the exchange of light bulbs as a common method to reduce consumption.
• Minimising rebound effects: Rebound effects are minimised if reductions caps and allowance prices provide incentives to increase energy efficiency. However, several facilities have already overachieved their targets. This carries the risk that these companies may reduce their efforts to save energy and avoid GHG emissions, so that rebound effects may be possible.
• Minimising snap-back effects: Other policies and measures, particularly Minimum Efficiency Performance Standards (MEPS) for buildings will be needed to really prevent markets from falling back to energy-inefficient practices and products.
• Minimising free-rider effects: If the criticism voiced by some that caps are set too high is correct, free-rider effects are likely. In this case, obligated facilities may reach their targets with baseline activities. Facts pointing into this direction are: As stated above, 60% of all targeted facilities already achieved and exceeded phase I objectives in 2009. For them energy saving obligations are obsolete. Even worse is the fact, that facilities can sell their allowances, which were given to them for free. At the moment, however, facilities that achieved CO₂ reductions stockpile allowances; “Those who want to sell the credits to secure funding for future energy-saving investments are still monitoring the situation” (Kaneko 2014).
• Creating Spill-over effects: Spill-over effects of emission trading systems are difficult to trace. However, spill-overs in the form of increasing demand for energy-efficient technologies are likely. Furthermore, in large enterprises behavioural measures may also have an effect both for the company and within the residential sector, when employees start copying energy saving behaviour at home, e.g. switching off the lights when leaving the room.

Design for sustainability aspects
The TETS primarily aims at reducing GHG emissions. This also improves the living standards due to pollution reductions.

Co-benefits
Depending on which measures are implemented to achieve the required emission reductions, there may be different co-benefits such as e.g. health or productivity benefits due to improved indoor climate or lighting.

The following barriers have been experienced during the implementation of the policy
When the idea emerged to establish a local emission trading system in 2000 for the first time, business players lobbied against mandatory implementation.

The following measures have been undertaken to overcome the barriers
The BOE started a voluntary reporting and GHG emissions reductions programme, the “Tokyo CO₂ Emission Reduction Programme”. Although results of this programme were hardly satisfying, it proved useful for BOE in engaging with business stakeholders: “BOE staff obtained information concerning private sector ways of thinking and decision making, institutional makeup, rules, and constraints” (World Bank 2010, p. 2-1). In the following, TMG established a simple reporting and (dis-)incentive system (World Bank 2010, p. 4-1; Miyazawa 2010).

The TETS focuses on GHG emission reductions for large facilities.
Between 2010 and 2014, commercial and industrial facilities are to save 8% and 6% of their base-year emissions. For compliance period II (2015-2019), a 17% emission reduction is envisaged.

According to TMG (2013) and as shown in the next figure, GHG emissions by targeted facilities were reduced by 13% and 23% in 2010 and 2011, respectively, compared to the base-year. This translated into 2.16 million tCO₂ reduction in the second year of TETS’ implementation.

In 2010, sectoral GHG reductions were as follows:

Source: Tokyo Metropolitan Government 2012

Niederhafner (2013, p. 7) argues that these energy-related emission reductions are “due to […] external factors driving down energy consumption.” First, it is likely that the effects of the global economic crisis of 2008 have lowered demand for high-tech products of the export-oriented Japanese economy, which is why the “factory sector” performed that well (22% emission reductions). “In contrast, the reductions were not as high in sectors that show genereally greater resilience to exogenous economic shocks” (Niederhafner 2013, p. 10). Second, the meltdown of the Fukushima Daiichi nuclear power plant has resulted in a) power outages and, in consequence, led to b) energy saving measures at the national and sub-national level from 2011 onwards (Niederhafner 2013, p. 10).

In 2010, 64% of targeted facilities already overachieved their obligations of 6% or 8% reductions for the end of 2014. For 2011, this figure increased to 93%. 70% of all facilities even overachieved the 2020-target.

However, as Niederhafner (2013, p. 12) notes, both figures are based only on reports submitted, which were 86% and 69% in 2010 and 2011, respectively. Therefore, for 2011 in particular, figures are likely to be corrected.

For compliance period I (2010-2014), emission reduction targets were set at 6% and 8% compared to the base-year. Already in 2011, a 23% reduction was achieved, which is more than the 17% demanded for the second compliance period (2015-2019).
As shown above, however, there is good reason to assume that savings are driven by external factors.

No information on the costs to the targeted facilities nor the administrative authority is available to us. There does not seem to be an evaluation of costs and benefits.

No information on the benefits to the targeted facilities nor to society is available to us. There does not seem to be an evaluation of costs and benefits.