June 2009


The Japanese Prime Minister Taro Aso has announced it’s 2020 greenhouse gas emissions target — “I have decided to aim at a 15 percent reduction from 2005,” Aso told a news conference. This is a reduction of 8 percent compared to the international baseline year of 1990. Japan’s Kyoto target is a reduction of 6 percent compared to 1990 levels over the commitment period 2008-12. Japan’s 2020 target therefore translates to a 2 percent reduction compared to it’s Kyoto target.

When asked about Aso’s target, Yvo do Boer, executive secretary of the UNFCCC said “I think for the first time in two and a half years on this job, I don’t know what to say”. Activists unveiled a giant photo of “George W. Aso” and honoured Japan as “special fossil of the day”.

How should other countries respond to this proposed target? They certainly should not accept it. This suggests that any proposed agreement needs a higher target for Japan, whether it signs on or not. In order for an international environmental agreement to stop climate change from being a prisoner’s dilemma, there needs to be credible punishments for non-compliance or non-participation with an agreement. Japan imports large amounts of coal, both for steel making and electricity generation. Japan is Australia’s largest coal customer; Australia is Japan’s largest coal supplier. In 2007-08, 46 percent of Australian coal exports went to Japan. In 2005, 57 percent of Japanese coal imports were from Australia. The emissions from a years worth of Australian coal exports to Japan would be equal to roughly 290 million tons of carbon dioxide.

If Australia wants to do something constructive about Japan’s weak target, Australia should either levy a carbon tax on coal exports to Japan, or stop exporting coal to Japan. The other main exporters of coal to Japan are Indonesia and China. If Australia could get these countries to do the same thing, that would be a powerful incentive for Japan to get its act together. Australia may not have to actually do this, the threat to do so, if it is credible, could be enough.

Coal and Safety, no. 28, March 2006

Coal and Safety, no. 28, March 2006

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The American Clean Energy and Security Act, also known as the Waxman-Markey bill, has a reserve price for permits that are auctioned. This functions as a type of price floor. It is not a strict price floor, because there is nothing preventing the market price for permits from getting lower than than the auction reserve price. Also, only something like 15% of permits will initially be auctioned [Actually significantly more than 15% of permits are likely to be auctioned, because entities that are allocated permits for free have the option of having them auctioned by the Administrator. However, firms may buy international permits from other qualifying cap and trade schemes, which could drive the US market price to less than the reserve price.]

This is what the bill has to say:

Section 791 (d) RESERVE AUCTION PRICE.—The minimum reserve auction price shall be $10 for auctions occurring in 2012. The minimum reserve price for auctions occurring in years after 2012 shall be the minimum reserve auction price for the previous year increased by 5 percent plus the rate of inflation (as measured by the Consumer Price Index for all urban consumers).

The fact that the reserve price increases by 5% above the CPI is very important. This sends a strong long term signal to investors. People will think twice about investing in new coal plants when they know that the carbon price will be at least $39 in 2040, $63 in 2050, and $100 in 2060. If the initial price was higher (say $20 or $50), there would be an even stronger signal. A higher floor price would also send a stronger signal to developing countries that the US is prepared to play its fair share in reducing global emissions.