Climate Change and Japan’s Post-Copenhagen Challenge

Newly elected Prime Minister of Japan Yukio Hatoyama made headlines at the UN General Assembly in September 2009, pledging his country to a 25 percent cut in greenhouse gas (GHG) emissions from 1990 levels by 2020. In doing so, he placed Japan’s negotiating position ahead of other developed countries’ at the 15th United Nations Climate Change Conference (COP15). The conference opened in Copenhagen on December 7.

The question is: why has Japan raced ahead of the United States and Europe? Most publics recognize climate change as an important problem requiring an active government response. But as a distributive problem it can be a political loser. For the public, the possibility of carbon taxes means higher energy bills. For industry, internalizing the costs of burning fossil fuels implies increased costs and a potential loss of market share to international competitors.

The emphasis on short-term political benefit inherent in all party political systems offers one plausible explanation why Japan’s new government is so ambitious. The Japanese public supports implementing measures to curb climate change, and despite the dominant performance of Hatoyama’s Democratic Party of Japan (DPJ) in the August 30 election for the lower house of Japan’s Diet, (the DPJ beat the long-ruling Liberal Democratic Party (LDP) in a landslide, winning 308 out of 480 seats), no one can predict whether they will still be in power in 2020. Being bold in such circumstances is easy: talk is cheap when the DPJ may not have to pay any electoral costs for failing to meet its promise. And Mr. Hatoyama will certainly no longer be leader by then.

But such a view underestimates the DPJ’s commitment to intervene in energy and other markets in response to climate change. In fact, its position is an extension of policies long pursued in Japan to manage environmental and security externalities associated with the consumption of fossil fuels, and which represent a consensus across a broad range of domestic political actors—including the Ministry of Economy, Trade and Industry (METI) and the industrial sector.

Japan is therefore likely to remain a global frontrunner on climate change policy regardless of the outcome at Copenhagen. The question for the DPJ in the post-Copenhagen environment, though, is how it manages the distributive battles as its ambition threatens to unravel a long-standing consensus among government, industry, and society on how to go about reducing the country’s GHG emissions.

Establishing Goals – Japan’s National Energy Strategy

Japan has always adopted a highly interventionist strategy to shape its energy supply and demand in line with public policy goals. A paucity of domestic reserves of crude oil relative to consumption have driven policies promoting fuel diversification, demand management, and the provision of subsidies for domestic firms upstream under the rubric of ensuring security of oil—and more recently natural gas—supplies. Japan is almost wholly reliant on imports via its sea lines of communication (SLOCs) to meet demand, and crude continues to constitute around 50 percent of Japan’s primary energy supply.

The rise of climate change as a public policy issue only increases this commitment to activism in energy and other markets. Further, while a few initiatives remain designed to pursue the security of energy supplies without consideration of other factors—the best example is the continued attempt to enhance national control over the upstream reserves of oil and gas—Japan eschews policies that enhance energy security to the detriment of the environment. (Japan does not subsidize domestic coal, for example, because to do so would increase GHG emissions even as it improves energy security.) Instead, a domestic consensus exists in balancing environmental and energy security objectives by focusing on fuel diversification and energy efficiency/demand management.

Japan has supercharged policies related to climate change and energy security over the last ten years (almost all that time under the rule of the LDP). Underpinning this push is the national energy strategy (NES), mandated since 2003. The NES requires the government to draw together a comprehensive plan for energy production and consumption and review it every three years in response to changing market conditions.

This arrangement has the hallmarks of indicative planning that characterized postwar industrial policy: for example the most recent version establishes a set of numerical targets for 2030, including improving energy efficiency by 30 percent, reducing the share of oil to 40 percent of Japan’s primary energy supply, reducing the role of oil products in transport to 80 percent of aggregate demand, maintaining or increasing the share of nuclear power in Japan’s electricity generation mix, and increasing national-flag firms’ crude production internationally as a ratio of total crude consumed in Japan. These targets then serve as the basis for negotiating the package of policy instruments used to achieve them.

Negotiating Means – Government, Business and the Climate

This choice of instruments is negotiated between government and industry. Much of the consultation between the government, firms and other interests plays out in deliberative councils within the ministries and agencies. Indeed, this process forms the backbone of the government’s national innovation system.

In practice this means the policy equilibrium thus far, both for climate change and energy security, lies in subsidizing research, development, demonstration and deployment (ER3D) into energy efficiency technologies, and promoting nuclear and renewable energies. The government has also negotiated an agreement with industry establishing voluntary targets for GHG emissions which has shown some success. Emissions for sectors representing 83 percent of total industry emissions fell 13.6 percent per unit of output between 1990 and 2008, according to industry statistics, against a 4.1 percent increase in total production.

This climate change consensus also reflects the interests of important domestic political actors. For the Ministry of Economy, Trade and Industry (METI), for example, climate change in general—and energy policy specifically—is an increasingly central component of its organizational mission as it sheds its role actively supporting other sectors of the economy. For Japan’s manufacturing firms, on the other hand, the voluntaristic character of current emissions targeting, coupled with subsidies to offset research costs for environmental technologies and to encourage deployment, has helped innovation. Recent research using patent data to measure innovation shows that Japanese firms are world leaders across a range of environmental technologies. Japan recently recognized this by proposing to include a range of energy-efficient products in the definition of “environmental goods” currently being considered for large-scale tariff reductions as part of the Doha trade round.

Finally, climate change policy can pay political dividends for the government even as it creates winners and losers in the domestic economy. First, it is an area in which the DPJ can claim to be helping stimulate firm innovation, economic growth and therefore employment. This is a useful argument to make as it goes about attempting to restructure the Japanese economy and stimulate new areas of innovation. Second, climate change offers an alternative strategy for Japan to play a leading role in international relations, which is valuable given constitutional constraints on the use of military force. Third, energy and environment represents a wonderful opportunity for a positive-sum outcome between Japan and China, given China’s pollution problems and Japan’s long experience in this area. This dynamic is reflected in the bilateral agreements for cooperation in energy and environment that the two nations already signed, and stands in sharp contrast to misplaced fears about a zero-sum dynamic emerging from China’s growing energy needs.

How Will the New Government Change Things?

The problem for this picture is that the DPJ’s GHG emissions target goes far beyond that of the former governing LDP, which committed Japan to reducing emissions by 8 percent from 1990 levels by 2020. (It should also be noted that Japan was failing to meet its commitments under the Kyoto Protocol through the existing policy regime.)

This step undoubtedly represents a much stronger commitment to climate change and environmental politics within the DPJ; current Minister for Foreign Affairs and senior DPJ MP Katsuya Okada, for example, was a scathing critic of the LDP’s target when it was announced, and he is committed to dealing with climate change.

Yet despite the momentum generated by the its electoral victory, and the international focus on the COP15 conference, the DPJ faces two big questions in the post-Copenhagen environment. First, in the short-term it is not clear how quickly it can remove regulatory uncertainty in the energy and environmental sectors while also meeting its public commitment to fundamentally reform Japan’s decision-making institutions. Failing to effectively coordinate its twin goals of leading in climate change and reforming governance could delay the implementation and effectiveness of some policies—particularly those designed to stimulate climate-friendly investment. Second, in the longer-term, it remains to be seen how the DPJ will go about reaching its ambitious target if the consensus between government and industry on the means for achieving GHG emissions reductions is undermined.

The DPJ has been admirably clear about its intentions, at least. In 2008 the party tabled a climate change bill while still in opposition, and the environment was an important component of its 2009 electoral manifesto. Its agenda includes putting a cap-and-trade system in place, introducing a carbon tax as one component of a broad reorganization of energy-related taxes, expanding the use of feed-in-tariffs for renewable energies, and increasing ER3D subsidies.

Nevertheless, the DPJ will need to dispel regulatory uncertainty as it pursues its climate change policy, while also seeking to fundamentally change the way decisions are reached in Japan. In fact, the defining characteristic of the new government—more than any new approach to climate change or foreign policy—lies in its commitment to transform the institutions of decision-making to increase transparency and reduce the role of Japan’s ministries and agencies.

The potential for uncertainty as the DPJ sets about pursuing these twin goals is already evident. In late November, project teams rewriting the 2010 budget voted to cut subsidies for promoting the uptake of solar by households, although the decision is yet to be ratified at the ministerial level. They also voted to significantly reduce other programs funding the deployment of renewable energies.

This does not mean that the party is divided on the merits of market intervention: each project team noted that the existing set of subsidies should be recalibrated, rather than abolished, in order to better meet the DPJ’s long-term target and to reduce waste. But if the new government plays a stronger role in policymaking but does not move quickly to establish a new regulatory framework, then uncertainty is bound to slow investment.

The possibility of uncertainty extends to how the DPJ plans to reorganize taxes which provide a significant share of the revenues used for public investment in energy research, development, demonstration and deployment (ER3D). Japan has a number of special taxes earmarked for use in promoting fuel diversification and demand management. In its electoral manifesto the DPJ committed to review these in line with its commitment to increase transparency, and it has further promised to reorganize energy-related taxes in order to better utilize them to meet climate change goals. But the details of how the taxation system will be restructured and what projects they will be used to fund remain a subject for future debate.

In the longer-term there is a more significant obstacle to be overcome. The previous government’s approach to setting climate change policy was largely consensus-based. But given the inevitably serious distributional effects associated with the DPJ’s new GHG emissions target a consensus on policy can no longer be assumed. There are already clear signals from industry, for example, it intends oppose legislation that harms competitiveness—including the introduction of the proposed carbon tax if it adds to the overall tax burden. It is not clear what the DPJ’s strategy is for dealing with such resistance.

Ultimately, the DPJ’s willingness to tear up the rulebook on how decisions are made in Japan’s political economy holds great promise for reducing waste and focusing spending on legitimate public policy goals in general. It could also enable the government pursue its climate target more effectively, thereby helping to maintain Japanese leadership in climate change and energy issues in the post-Copenhagen environment. But the uncertainty introduced as the DPJ goes about doing this, as well as inevitable opposition to climate policies with serious distributional effects, means the new emissions target is not the only ambitious challenge Mr. Hatoyama has set himself.