Japan’s Joint Crediting Mechanism is inching forward by registering a handful of new projects, but progress is slow with no firm demand and as regulators take a firm line in tackling issues not previously faced in international carbon markets.

Shinzo Abe’s administration hopes the JCM will contribute some 50-100 million tonnes of CO2e cuts by 2030 and has signed bilateral agreements with 16 countries, including big emitters such as Indonesia, Mexico, and Saudi Arabia.

But the offset mechanism, which has been developing since 2010, has so far not managed to attract much investment from domestic companies.

Two energy efficiency projects in Indonesia were registered last week, taking the total amount of approved JCM projects to 10. But the total emission cuts expected from those projects amount to less than 2,000 tonnes of CO2e per year.

Another 60 or so projects are in the pipeline and may push the mechanism’s total supply to over 1 million tonnes of CO2e, still not enough to make a visible dent in Japan’s greenhouse gas output, which exceeds 1.2 billion tonnes per year.

NO DEMAND

“There is no clear demand for JCM credits,” said Takashi Hongo, a carbon market veteran with the Mitsui Global Strategic Studies Institute.

Japan has committed to cutting its GHG emissions 26% below 2013 levels by 2030, a goal analysts say is among the weakest set by any developed nation under the Paris Agreement and unlikely to drive much private sector investment in low-carbon technology.

A draft plan for how to achieve the target released earlier this month placed no obligations on business to reduce emissions other than encouraging voluntary action.

The Ministry of Economy, Trade and Industry (METI) and Keidanren, Japan’s most powerful industry lobby, have opposed a domestic price on carbon since before the 2011 Fukushima disaster that forced a rethink on the country’s use of nuclear energy, effectively blocking the most likely source of JCM demand.

According to Hongo, some JCM demand may emerge from Japan’s 10 biggest electricity generators and a group of 19 suppliers, which last year set a target of reducing the emissions intensity of each kilowatt of electricity they sell to 0.37kg of CO2, compared to 0.57kg in 2013.

Companies that fail to meet that target have the option to buy offset credits to make up for the shortfall, but there is some uncertainty over whether this would happen as the target is voluntary without penalties for breaching it.

During the first commitment period of the UN Kyoto Protocol, Japanese firms bought several hundred million CERs and ERUs despite only having voluntary targets.

BREAKING NEW GROUND

Hongo said the JCM’s “super conservative” methodologies underpinning how projects are credited for emission reductions were another reason the mechanism has yet to drive any serious emission cuts.

“Sooner or later, demand from utilities to offset excess emissions will appear, but the way they think about methodology needs to change. Originally the JCM intended to adopt benchmarking and energy efficiency standards as baselines. This would have been simple for both investors and owners, and it is necessary to amend [the rules],” he told Carbon Pulse.

The JCM was set up to be an easier and more predictable offset scheme than the Kyoto Protocol’s CDM, but regulators have taken a conservative approach to methodologies, partly in an effort to cut the administrative red tape for developers – for instance by using benchmarks rather than requiring each project to measure its own outputs.

It is also partly in response to international concern that the JCM would produce carbon credits with dubious environmental integrity and because JCM administrators have taken an approach that projects should lead to a net reduction in global emissions, similar to the market mechanism text in the Paris Agreement.

Under the CDM, carbon credits have been awarded to projects that cause emissions growth, as long as that growth was projected to be slower than if the project used BAU technology.

“I feel we are much more advanced than the UNFCCC negotiations on the markets. We are already facing in reality issues that [UN negotiators] are going to discuss in the future,” said Yuji Mizuno, an international market mechanisms expert at the Japanese Ministry of Environment.

Officials are still working out how credits from JCM projects should be split between Japan and the host country, an issue that is becoming more important as all nations take on emission-curbing goals under the Paris Agreement rather than only a handful of richer nations under the Kyoto Protocol.

Japan has also sought to introduce certain new elements into the JCM compared to existing markets that keep regulators busy in the early stages, such as a sustainable development monitoring scheme in the JCM agreement with Indonesia.

This requires project participants to report on the sustainable development implementation when they request credit issuance.

The lack of a precedent for many of the elements of the JCM is part of the reason why little has emerged so far in terms of actual projects, but that is likely to change as participants gain more experience, observers said.

By Stian Reklev – stian@carbon-pulse.com

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