Tokyo carbon market for office buildings is all “cap” and not much “trade”

Japan’s capital has slashed greenhouse gas emissions from office buildings using the world's first city-level carbon-trading system. It's worked — but not for reasons that have much to do with emissions trading. (Sean Pavone/ Shutterstock)

TOKYO, Japan — If you want to cut greenhouse-gas emissions in Tokyo, it makes a lot of sense to look at office buildings.

The city’s skyline is filled with hundreds of glass-covered skyscrapers that devour electricity to keep lights and computers on and to run heating and cooling systems. There isn’t much heavy industry in Tokyo. So the city’s commercial sector alone accounts for almost 40 percent of the city’s overall carbon dioxide output.

Four years ago, Tokyo implemented a cutting-edge policy focused primarily on emissions from 1,400 of the most energy-hungry of those office buildings. By and large, it’s worked: Building owners targeted by the program have slashed power consumption and reduced their emissions by 23 percent below a baseline level.

Some of that outcome is due to the March 2011 Fukushima nuclear crisis, which damaged utilities’ power supplies and triggered legal curbs on electricity consumption.

But it’s also the result of some inventiveness by building owners such as Mitsubishi Estate Co. and Mori Building Co. Both have prodded their tenants to introduce lights-out time when workers aren’t on the job. They’ve also replaced fluorescent lights with energy-saving LED bulbs and encouraged tenants to switch from power-hungry desktop computers to notebooks.

A new market

Tokyo’s strategy is what’s known as a “cap and trade” system for carbon emissions. While such systems have been used in Europe, the United States, Canada and a few other countries, Tokyo was the world’s first city to try such a scheme at the municipal level.

The Shin-Marunouchi Building has taken numerous steps to cut CO2 emissions, including installing solar panels. (Mitsubishi Estate Co.)

The idea is to create a market mechanism for reducing CO2. Tokyo’s government set an emissions limit for commercial buildings —  that’s the “cap.” Building owners who slash emissions more than the required amount earn credits. They can sell those credits to building owners who for whatever reason have a harder time reducing emissions —  that’s the “trade.”

City officials are declaring the system a success —  but not for reasons that have much to do with carbon trading. According to city records, only 22 such transactions had taken place as of December. Yuki Arata, director of the Tokyo metropolitan government’s emissions cap-and-trade section, says the lack of trading is not a problem.

“Emissions credit transactions have so far been inactive as many businesses have managed to sharply slash emissions on their own,” says Arata. “Those who want to sell the credits to secure funding for future energy-saving investments are still monitoring the situation.”

Asian leader

When Tokyo’s metro government launched this system, it wasn’t just the first city-level attempt at creating a carbon-trading regime. It also was the first such scheme in Asia. Tokyo has since been joined by pilot cap-and-trade systems in such Chinese cities as Beijing, Shanghai and Shenzhen. Officials from Taiwan, South Korea and Thailand have all expressed interest in learning from Tokyo’s experience.

Tokyo’s cap-and-trade system was originally considered to be a precursor to a nationwide emissions trading scheme in Japan. But since the Fukushima disaster, work by the central government to introduce such a system has stalled. Tokyo, however, continues to push an ambitious climate agenda. Governor Yoichi Masuzoe, elected February 9, has pledged to establish a fund worth 4 billion yen ($39 million) to invest in renewable energy sources in and outside of Tokyo.

Mitsbushi Estate Co. gives its office tenants an Internet-based service to monitor their power usage. 

With a population of 13 million people, Tokyo consumes about as much energy as the entire country of Norway. To do its part to mitigate the impacts of global warming, Tokyo set a goal of slashing CO2 and other heat-trapping gas emissions by 25 percent compared with 2000 levels by 2020. The carbon-trading scheme was devised to satisfy a part of that goal.

The focus on commercial office buildings is typical among the world’s most carbon-conscious cities. That’s because the buildings sector is the single-largest contributor of most cities’ greenhouse-gas emissions. It’s also because big gains can still be had through relatively minor interventions in lighting, air conditioning and other systems. When the C40 Cities Climate Leadership Group recently surveyed its members about their climate policies, the single largest category of actions had to do with reducing emissions from buildings.

Tokyo’s program is rolling out in two phases. In the first phase, from 2010 to 2014, large offices and a small number of factories are required to trim total CO2 emissions by 6 to 8 percent from base-year levels, calculated from average emissions over a past period of three consecutive years between 2002 and 2007. In the second phase, ending in March of 2020, those reductions are to reach 15 to 17 percent. Factories face less stringent targets than offices.

There are penalties for noncompliance. Any entity that fails to attain its phase one goal will be ordered in phase two to further cut emissions by 1.3 times the amount it failed to slash. Violators will have their names published as a means of shaming them and face fines of up to 500,000 yen (currently $4,860 U. S.).

That’s not likely to happen much. Already, more than 90 percent of facilities covered by the system have achieved the 6 to 8 percent targets, according to Arata. In fact, 70 percent of the facilities have already met the more ambitious phase two goal. In total, as of the year ended March 2012, offices and factories covered by the scheme had reduced CO2 emissions by 23 percent compared with their base-year levels. The government is expected to release updated figures on the program this week.

Quiet market

Meanwhile, trading in emissions credits has been limited to less than two dozen cases. At the request of the companies involved, the Tokyo government does not disclose the names of companies involved in these transactions or the prices of the deals.

Tokyo’s system wasn’t designed to be a particularly robust marketplace. There is no bourse for carbon trading, and emissions credits are basically exchanged on a negotiation basis, often through brokers. In an otherwise positive assessment of Tokyo’s system in Carbon & Climate Law Review, Sven Rudolph of Kassel University in Germany called the lack of an established marketplace one of the “major design flaws.”

Mori Building Co. aims to reach a 17-percent emissions cut in all of its buildings five years ahead of when the company is required to. (Mori Building Co.) 

Instead of trading their emissions credits, building owners are holding on to them. Unsold credits can be carried over to the second phase of the program, although they cannot be carried over beyond March 2020. With Tokyo set to host the summer Olympics that year, some building owners are bracing for possible difficulties in cutting emissions even more during the second phase.

“For now, we are expected to achieve the target in the second period,” says Osamu Nishio, deputy general manager of Mitsubishi Estate’s property management department. “But emissions could rise with the tenants’ economic activities stimulated toward the 2020 Tokyo Olympics.”

Shigeru Tomita, a senior manager at the building management department of Mori Building, shares the concern. Tomita says energy efficiency will be enhanced only slightly every year in the second phase.

“We aim to achieve the 17 percent cut by the end of fiscal 2014,” Tomita says. “But after that, we will face an uphill battle. We can greatly improve energy efficiency only when old buildings are renovated and measures such as LED bulb introduction are implemented.”

Both Mitsubishi and Mori have put substantial effort toward educating their tenants about energy efficiency. Tenants account for up to 80 percent of the total electricity use at their properties. Without cooperation from tenants, it would be difficult for the building owners to meet their carbon goals. One way Mitsubishi and Mori have done this is by launching Internet-based services to enable tenants to “visualize” their hourly power consumption.

“We can save energy even in old buildings,” Nishio says, “by exercising ingenuity in daily operations.”

MORE RESOURCES ON TOKYO’S CAP-AND-TRADE SYSTEM

Case study from the Environmental Defense Fund and International Emissions Trading Association 

World Bank case study on Tokyo system

Tokyo Metropolitan Government program overview

Summary and presentation from 2013 City Climate Leadership Awards

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Maya Kaneko is an editor and reporter for the English news service of the World Services Section of Kyodo News, a leading Japanese news agency.  Full bio

LEARNING FROM TOKYO

  • More than 90 percent of buildings covered by cap-and-trade comply with Tokyo’s cap on carbon emissions and the first deadline is still a year away.
  • Only 22 carbon transactions have taken place, a sign that most building owners have been able to achieve reductions on their own.
  • The cap-and-trade system applies to only 1,400 buildings that consume the most energy. Those buildings account for about 20 percent of all of Tokyo’s carbon emissions.

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