The Bargain Over Carbon: The Dawn of the Emissions Rights Market - June 2001

The Bargain Over Carbon: The Dawn of the Emissions Rights Market - June 2001

In 2001, Japan was entering a new phase in its environmental policy. As the response to global warming became an international responsibility, a new economic mechanism called "emissions trading" was rapidly gaining attention. Emission rights are "rights" that allow companies and nations to emit a certain amount of greenhouse gases, and the purpose of this "trading" is to maintain economic efficiency while curbing overall emissions. However, this system was still in the process of being designed at the time, and was wavering between theory and practice.

At the heart of this historical background is the 1997 Kyoto Protocol. The Kyoto Protocol imposed an obligation on developed countries to reduce greenhouse gas emissions, and proposed "flexibility mechanisms" such as emissions trading (cap-and-trade scheme), joint implementation (JI), and the Clean Development Mechanism (CDM) as means of implementation. However, the details of the key mechanisms were not fully worked out, and at the COP6 (The Hague Conference) in 2000, opinions of the countries were sharply divided, and the proposal broke down.

Despite these circumstances, Japanese companies moved quickly: In May 2001, Mitsubishi Shoji and 13 other companies established a new company, NatSource Japan, in Chuo-ku, Tokyo. The consortium included Cosmo Oil, Tokyo Gas, Sumitomo Corporation, Toyota Tsusho, Tokyo Electric Power Company, Osaka Gas, Mizuho Securities, and NatSource, the largest emissions trading broker in the United States. The company is capitalized at 332 million yen. The initial business of the company is consulting on emission reduction projects and brokering emission credits. The idea was for Japanese companies to install energy-saving equipment in developing countries, acquire "credits" for the amount of CO₂ emissions they reduced, and use the credits for their own projects or resell them on the market.

The establishment of this new company was a milestone in the creation of a full-fledged emissions credit market in Japan. In June of the same year, Cosmo Oil signed a contract with an Australian tree-planting company and concluded an "option contract" to purchase emission credits in advance for future absorption of CO The contract amount was approximately 62 million yen. The company was already betting not on actual emissions, but on "future emission absorption forecasts.

On the other hand, there was also a major risk of uncertainty in the system. The U.S. Bush administration announced its withdrawal from the Kyoto Protocol in March 2001, shaking the foundation of the international agreement. Despite this, Japanese and European companies were accelerating their entry into the emission rights business. It was as if they were saying, "Whoever moves first will take the market, even if the system has not been decided.

In the U.K., a government initiative to create a domestic emissions trading market was prepared and began operating in 2002. In the United States, 25 major companies had announced plans to open their own carbon markets under the name "Chicago Climate Exchange (CCX). What these moves had in common was that the companies were trying to create the market rules first, without waiting for the government to design the system. This was truly a "market moves before the system" phenomenon.

Emissions trading also included a method called the "baseline and credit method. Under this scheme, companies could earn "credits" based on how much they reduced their emissions compared to the existing amount. However, there was no guarantee that these credits would be recognized in the international market in the future, and companies were taking a risk and making an upfront investment.

What was driving this trend was a practical economic sense that went beyond institutional arrangements. In other words, it is inevitable that responsibility for carbon emissions will become increasingly heavy. The decision was made to secure the technology, create networks, and influence the design of rules while they still can. Global warming countermeasures were no longer just "for the environment," but had entered into the core of their "business strategy.

In 2001, emissions trading was still a shadow in Japan. But the shadow was becoming a reality, as multinational corporations and policy makers began to play a quiet game of sparks. An era in which air is priced and carbon is traded like currency. The opening chapter was quietly being written, not by bureaucrats and academics, but by forward-thinking trading company officials.