Policy Update 103 – Special Interview

EBPM Also for Climate Change Countermeasures

Faculty Fellow, RIETI

The process of trial and error for new polices as well as validation of any improvements, or what might also be called the perspective of Evidence-Based Policy Making (EBPM), is essential for making use of never-before-attempted climate change countermeasures and green innovation to restructure industry. The question of whether different environmental measures are really effective is one that we posed to Toshi H. Arimura, Professor in the Faculty of Political Science and Economics at Waseda University. Professor Arimura has conducted groundbreaking EBPM research in the field of environmental economics and we talked with him about results produced in research and policy implementation.
(Interviewed by RIETI Highlight Editorial Team)

Professor Arimura, you are a leading authority in the field of environmental economics and the recipient of many awards. Could you please tell us about your research?

I wrote my Ph.D. dissertation on trading of sulfur dioxide (SO2) emission allowances as it relates to acid rain countermeasures and have always pursued research in which I attempt to use markets to solve environmental problems. In 2000, I returned to Japan. Japan does not have any mechanisms where markets are used for environmental measures, so I conducted research to verify whether the ISO14001 certification, which was popular at the time and a system whereby companies voluntarily adopted environmental measures, was really effective. My research papers on this subject have also been cited by highly reputable academic journals.

Also, during a sabbatical leave that I took from 2006 to 2008, I went to Resources for the Future (RFF), a research institution in Washington DC, where I did research on carbon pricing (CP), emissions trading, carbon border adjustment mechanisms, and other devices that may serve as measures to address climate change. About that time in Japan as well, the Ministry of Finance's Customs and Tariff Bureau started considering such measures together with the Ministry of Economy, Trade and Industry, Ministry of Foreign Affairs, Ministry of the Environment, and competent experts, taking into account that carbon tariffs could be introduced with border measures. So, with my collaborators, I conducted an input-output analysis to determine which industries would be burdened if CP was introduced and to what extent. Further, we used an applied general equilibrium analysis to research the effects of border carbon adjustment. We found that, because Japan exports steel and is competitive overseas, placing tariffs on imported products to protect the industry would have no effect at all. If export rebates were applied, then the measures would be somewhat useful for industry protection, but export rebates pose quite a problem in the eyes of the WTO. They are not a part of the EU proposal, either. From an economic perspective, the best thing was actually output-based allocation. It's an idea that says that when the amount produced is increased, a more generous emissions allowance is allocated. In fact, this is also the most effective measure for energy-intensive industries. Japanese industry at the time was opposed to CP in the first place and their straightforward reaction was that carbon border adjustment mechanisms, in particular, would likely block trade, so they did not support the idea of carbon tariffs.

The EU is already starting to institute carbon border adjustment mechanisms. A RIETI project, which began in 2021, has been verifying what sort of impact that will have on Japan.

Specifically, what sort of things have you learned?

If we want to introduce CP while continuing to protect Japan's industrial competitiveness, instead of carbon border adjustments, it would be better to have an output-based allocation that takes into account how to allocate emissions quotas. I proposed this about 10 years ago, but the official in charge at the time said, "The system is too complex, and it won't get through the Diet." Incidentally, this system was adopted in Australia, but abolished when a new political administration came to power.

In Japan, Tokyo and Saitama Prefecture have already introduced emissions trading schemes. Saitama Prefecture's system was launched right when the Great East Japan Earthquake struck, so it did not get much media coverage.

What is interesting about Tokyo's emissions trading scheme is that Tokyo doesn't have many factories, so it is the first system in the world that focuses on office buildings. The interesting thing about Saitama's system is that it also focuses on factories, of which the prefecture has quite a heavy concentration, but the system levies no penalties. So, it is merely a scheme in which companies voluntarily participate in tacit agreement between the Saitama Prefecture business community and the prefectural office.

You have also served as a member of the Tokyo committee on emissions trading, haven't you?

What I found interesting about that was Evidence-Based Policy Making (EBPM), which was used by the committee, and which RIEIT is also promoting now. EBPM determines whether a policy is effective or not. For example, it has been said that emissions have decreased in Tokyo, but we make use of data to analyze what factors have contributed to that decrease. The Great East Japan Earthquake hit, after which the local government requested that people use less electricity. Also, because Tokyo is within the TEPCO service area, there was a sharp rise in electricity charges during the first few years. Was less power consumed because of the rise in electricity charges or was it an effect of emissions trading? We sought to shed light on that question.

There was a certain effect on office buildings with a little more than half due to emissions trading and a little less than half due to the higher electricity charges during the first four years (2011~2014). Mitsutsugu Hamamoto, Professor at Dokkyo University, conducted an analysis of Saitama Prefecture, which revealed a reduction in emissions due to the emissions trading scheme. These research results received recognition upon receiving the Commentary Award from the Society for Environmental Economics and Policy Studies (Arimura, Toshi H. and Shigeru Matsumoto (Eds.) (2020), Carbon Pricing in Japan, Springer). This publication is available through open access and has been downloaded some 39,000 times.

As we also proposed in the book, we believe economic growth is possible while reducing emissions if tax revenue from carbon taxes is used wisely. When a carbon tax is introduced in the future, it will probably be a tax on petroleum and coal and used for research and development or something related. However, it is important to also use it to reduce corporate or consumption taxes. This is referred to as the "double dividend of the carbon tax," which I have also presented at RIETI workshops and seminars. The economic analysis concluded that, if this is done, both the environmental countermeasures and economic growth will likely do well. Because the Japanese government has been faced with a budget deficit for decades, the carbon tax should also be wisely used.

I feel that we are beginning to see what sort of system we should have.

Environmental economics in Japan previously was not very quantitative in nature. It was more about discussing how systems should be constructed and function. Instead, I am attempting to generate quantitative results about costs and benefits. The book in which I compiled that research is An Evaluation of Japanese Environmental Regulations (2011, Sophia University Press (SUP)).

My hope is that EBPM will also be used for environmental measures and that academic knowledge will be reflected in policy. I think there have been times during the pandemic when scientific knowledge has not been reflected in policy.

I also think it is necessary for us to take an overall comprehensive view of policies. It is important that we do this not just for environmental measures, but also look comprehensively at the economy and public finance.

One more thing that I would like to talk about is related to the Global Intelligence Project (GIP: research on transformation of the international order and Japan's medium-to-long-term competitiveness) that RIETI is now engaged in. Southeast Asian nations have started to consider adopting emissions trading. The EU system stipulates that a border carbon tax be paid in the EU on products that the EU imports or countries are asked to create their own carbon pricing system. If the border carbon tax is paid in their own country, then it does not have to be paid in the EU. Since Japanese companies have created global supply chains, they have to be mindful of developments occurring overseas. Such initiatives will probably need to be put in place across the entire supply chain.

I am currently conducting research for a Ministry of the Environment project on what kind of an impact the Tokyo and Saitama Prefecture schemes have had. I think that the Tokyo and Saitama models could be role models for Asia. However, we are losing the international debate to China and Korea. China has launched emissions trading and Korea also introduced an emissions trading scheme for the country. These are influencing ASEAN nations, and we are losing ground in the competition among countries. Tokyo and Saitama have been properly conducting their schemes, so I hope that they will draw a little more attention internationally. Nevertheless, Korea has brought in EU officials as advisors and is creating a system that copies EU-ETS. China is conducting trials in seven or eight provinces. It appears that these are going well in some areas and not so well in others.

There is one more thing that we should pay attention to. On the very same day when the detailed design of the border carbon adjustment mechanism was announced in July 2021 by the EU, the Chinese government announced that it rolled out emissions trading of the electric power sector nationwide. Not surprisingly, China is closely watching what the EU is doing. When President Obama and President Xi Jinping met in 2015, China declared that it would engage in emissions trading. Even so, it has taken about six years. That's how difficult it is to implement such a scheme.

In the book I mentioned earlier, research results are presented showing that the Energy Conservation Act has had a certain positive effect. When I talk to different people around the country, they are surprised that this sort of intangible system without penalties, where industry does the best that it can, works.

*The interview was held online.

The original text in Japanese was posted on October 29, 2021.

March 28, 2022

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