News Article
February 29, 2012

CO2 Cap-and-Trade for Buildings and Factories: A Comparison of United Kingdom and Tokyo Programs

Carbon cap-and-trade programs generally regulate greenhouse gas emissions upstream, where the electricity is produced. The United Kingdom’s Carbon Reduction Commitment (CRC) Energy Efficiency Scheme and the city of Tokyo, Japan, have taken a different approach by introducing programs that focus on reducing emissions downstream, in buildings and industrial facilities. 



The UK and Tokyo require their largest buildings, facilities and organizations to track, report and reduce CO2 emissions by imposing a declining cap. Both programs specify which entities will be regulated, establish baselines for their emissions, and establish rules governing how the cap-and-trade system will work. Each program has just begun the sale, distribution and trading (where allowed) of emission allowances. 



Buildings use over 80 percent of electricity and 40 percent of energy globally and are responsible for the resulting carbon emissions. Energy efficient buildings can help meet both economic and climate goals. McKinsey’s abatement cost curve shows that many energy efficiency measures actually have a negative cost of abatement for CO2e.  This suggests that over the life of the building, the energy savings outweigh the up-front cost increases of designing and constructing a more energy efficient building. Investments in energy efficiency can help organizations save money by reducing their energy bills. Yet, many energy efficiency investments with seemingly attractive returns are not made today because of various barriers in the market.  The 2011 Energy Efficiency Indicator survey shows that barriers to building efficiency include lack of awareness about opportunities, lack of technical expertise to evaluate or execute projects, and financial barriers that limit investment. The UK and Tokyo cap-and-trade systems appear to target these barriers. 



The UK and Tokyo cap-and-trade programs require participants to submit their emissions data and emission reduction actions each year. In addition, the Tokyo program requires an action plan for how participants plan to reduce their emissions in the future. These activities are key to overcoming awareness and technical barriers to energy efficiency. The UK and Tokyo cap-and-trade schemes also put a price on carbon and calculate carbon emissions based on energy consumption, making investments in energy efficiency more financially attractive under the programs.



Energy efficiency measures could deliver two-thirds of the reductions of the energy-related CO2 emissions needed to move from business-as-usual to a 450 ppm trajectory by 2030, according to a global study by the International Energy Agency. The UK and the Tokyo downstream cap-and-trade systems may provide an interesting model for how other governments might encourage greater energy efficiency in the built environment, along with the resulting greenhouse gas emission reductions. 



The following chart compares the two programs:



 

 
United Kingdom
Tokyo, Japan
Administrator
UK Environment Agency in England and Wales, The Scottish Environment Protection Agency (SEPA), and the Northern Ireland Environment Agency (NIEA).
Tokyo Metropolitan Government
Who Participates?
 
 
Definition
Organizations with commercial and residential buildings that consumed more than 6,000 megawatt-hours (MWh) per year of half-hourly metered electricity during 2008 are regulated. Some smaller electricity consumers must make annual information disclosures, but are not regulated by the scheme.
Facilities that use over 1,500 kiloliters crude oil equivalent (coe) annually are regulated. (Using the current emission factors of Tokyo, 1,500 kiloliters coe equal about 6,000 MWh1).
Number
About 5,000 organizations
About 1,300 facilities
Emissions
About 60 million tons CO2 annually
About 10% of UK emissions.
About 13 million tons CO2 annually
About 20% of Tokyo emissions
Goals and Targets
- CRC’s goal is to save at least 4 million tonnes of CO2 a year by 2020. 
- Each year the government will set the price for emission allowances at a level appropriate to meet the emission reduction goal.
- The CRC is part achieving the UK’s goal of reducing emissions 34% below 1990 levels by 2020, and 80% below 1990 levels by 2050.
-Between 2010 and 2014 the program requires a 6% reduction below base-year CO2 emissions, and between 2015 and 2019 the program requires a 17% reduction below base-year emissions. 
- In each of these phases, the number of emission allowances issued and distributed will be limited in order to meet the emission reduction goal.
- The Tokyo cap-and-trade program is part of achieving Tokyo’s goal to reduce emissions 25% below 2000 levels by 2020, and Japan’s goal of reducing emissions 25% below 1990 levels by 2020.
Mechanics
 
 
Reporting
- Participants must report their emission reduction actions and absolute emissions. They also have the option to report emissions based on an annual growth metric.
- An annual performance league table is published, ranking participants on energy efficiency gains. Participants will be ranked based a combination of early action, absolute emissions, and a growth metric in the first three years, after which the ranking will be based on absolute emissions and growth metrics only.
- Annual reporting of greenhouse gas emissions is required by regulated entities. 
- In addition, every year regulated entities must submit a plan on their reduction goal and measures, as well as a report on their implementation status. Verification is required.
- Reports are open on the Tokyo Metropolitan Government website
Baseline for emissions
Average of 5 prior years.
Average of 3 consecutive years before the start of a compliance period.
Amount of Allowances Needed
Participating organizations will have to monitor their emissions and purchase allowances annually for each ton of
CO2 they emit. CRC Energy Efficiency Scheme emissions must include all of the energy from ‘core sources’ unless they are covered by the European Union Emissions Trading System (EU ETS) or Climate Change Agreements (CCAs). Participants will be required to ensure that at least 90% of their total footprint emissions are regulated by either the CRC, EU ETS or CCA. 
Participants will have to submit an allowance for each ton of CO2 they emit during a compliance period at the end of each 5-year compliance period.
Allowance Price
During the introductory phase, allowances will be sold at a fixed price of £12 per ton of CO2.
Allowances are distributed by the government for free, but they will be priced by the market when they are sold or traded among participants.
Allowance Distribution
Allowances are sold to participants by the government.
Allowances are allocated for the entire 5-year compliance period based on emissions during the 3 years before the start of each compliance period.
Allowance Trading
After the initial sale period, participant organizations can buy or sell allowances by trading on the secondary market. This enables organizations that have reduced their energy supplies more than they expected to sell some allowances, while those that have higher emissions than anticipated can purchase extra allowances.
Trading of excess reductions is allowed after the second year if actual emission reductions can be demonstrated for any allowances that are being sold.
Use of Proceeds
Proceeds from the sale of allowances will be retained by the government.
There are no government proceeds because allowances are distributed for free to participants.

February 2012

 



References:

“The CRC Energy Efficiency Scheme User Guide.” UK Department of Energy and Climate Change, April 2010. http://www.decc.gov.uk/assets/decc/What-we-do/A-low-carbon-UK/crc/1_20100406154137_e_@@_21934CRCPDFAWv9.pdf



IEA, World Energy Outlook. 2009.

http://www.iea.org/textbase/nppdf/free/2009/weo2009.pdf



“Managing the Carbon Reduction Commitment (CRC) as a business opportunity.” The Carbon Trust, currently being updated October 2011. http://www.carbontrust.co.uk/publications/pages/publicationdetail.aspx?id=CTL081



McKinsey & Co. (2009) “Pathways to a low-carbon economy. Version 2”



“Tokyo Cap and Trade Program.” Environment Tokyo. 2010. http://www.kankyo.metro.tokyo.jp/en/attachement/Tokyo-cap_and_trade_program-march_2010_TMG.pdf

http://www.kankyo.metro.tokyo.jp/en/climate/index.html

http://www.kankyo.metro.tokyo.jp/en/A4_brochure_A4_0829.pdf



UK Environment Agency. http://www.environment-agency.gov.uk



UK Department of Energy and Climate Change. http://www.decc.gov.uk

 

 


1 Bureau of Environment, Tokyo Metropolitan Government. E-mail correspondence. January 2012.

 

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