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Meetings with Carbon Markets of Tokyo and California

As part of our advisory role to corporations relying on carbon markets to purchase and sell carbon units, Fabrice Mattei will visit two major carbon market places in November; The Bureau of Environment, Tokyo Metropolitan Government (“Tokyo carbon market”) and the California Air Resources Board (“California carbon market”).

Background information on California and Tokyo carbon markets

Both Tokyo and California carbon markets have attracted a lot of interests from corporations in their efforts to reduce gas emissions to comply with the Paris Agreement on Climate Change.

Initiated in 2012, the California carbon market began its compliance obligation on 1 January 2013. California has been part of the Western Climate Initiative (“WCI”) since 2007 and formally linked its system with Québec's on 1 January 2014. In July 2017, California passed legislation extending the cap-and-trade program to 2030. The cap-and-trade program (“CAT”) covers sources responsible for approximately 85% of California’s GHG emissions. In 2016, California passed legislation to reduce emissions by 40% compared to 1990 levels by 2030.

Launched in April 2010, the Tokyo Metropolitan Government’s CAT Program is Japan’s first mandatory Emission Trading Scheme (“ETS”). Under the Tokyo ETS, large offices and factories are required to reduce emissions by 6% or 8% in the first period (FY 2010-2014). Now in its second period, the target has increased to 15% or 17%. In FY2015, emissions were reduced by 26% compared to base-year emissions. The introduction of high efficiency heat sources and light fittings have been key activities in generating emission reductions.

IP & carbon markets

ETS and CAT programmes, and leakage between cities (e.g. California and Québec) are fast developing worldwide and usually seen as one of the world’s most prominent financial instrument to reduce carbon emissions. China is due to start its nationwide ETS in 2020 following its soft launch in 2017. Some countries like Japan have however decided not to upgrade their city based (e.g. Tokyo) ETS program to nationwide program due primarily to the lobby activities deployed by major Japanese companies. In companies’ view, ETS may negatively affect their development and capacity to innovate. Are those concerns well grounded?

Although there is available data on how active carbon markets are (e.g. trading activities, prices) there is almost no information on how participating companies to ETS and CAT develop new technologies, patented or not, to mitigate/adapt to Climate Change. One of the aims of my meetings in Tokyo and California is precisely to explore the relationship between Climate Change innovation and ETS and CAT programmes through empirical data drawn from the arbon markets of California and Tokyo, and how these two markets affect the rate and direction of innovations in Climate Change of participating companies.

Similar complexity arises from the environmental policy question. Suppose that a small set of developed countries agree to establish a sustainably higher carbon price through a negotiated ETS system with emissions allocations. One outcome would be a greater incentive to develop environmental sound technologies that would likely be deployed only in the higher-priced region where the market returns support it. This would, push older technologies to regions outside the system, possibly raising global emissions overall and carbon leakage. Policymakers in the developing world or countries without ETS mechanisms may attempt to counter this situation with measures to encourage acquisition of newer technologies, perhaps resorting to limitations on exclusive IPRs.