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ASIA PACIFIC Edition

Welcome & Opening Address

ASIA PACIFIC Edition Regional Carbon Pricing & Markets Series

Part 1: Leaders Dialogue – Net Zero

ASIA PACIFIC Edition Regional Carbon Pricing & Markets Series

Government of

• f Japa

pan

Updates from Japan

Regional Carbon Pricing & Markets Virtual Series

• Asia Pacific Edition -

December 1, 2020

Office of Market Mechanisms Ministry of the Environment, Japan

5

Ministry of the Environment Government of Japan

Mid- and Long-term GHG Mitigation Targets of Japan

（Source）Developed based on 「Japan’s National Greenhouse Gas Emissions in Fiscal Year 2017（Final Figures)」 and 「Plan for Global Warming Countermeasures」

2 4 6 8 10 12 14 16 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Emissions （0.1 billion t-CO2）

Compared to FY2013 26% decrease in FY2030

（1.042 billion tCO2）

80% decrease by 2050

Absorption source

Realize 「Decarbonized Society」 (Net-zero)

as early as possible in the 2nd half of this century

・NDC (Decided by the Global Warming

Countermeasures Headquarter on July 17, 2015）

・Long-term Strategy

（Cabinet decision on June 11, 2019）

・Long-term energy supply

/demand outlook (Energy

mix)

（METI decision in July, 2015）

・Basic energy plan

（Cabinet decision on July 3, 2018）

・Global warming

countermeasure plan

（Cabinet decision on May 13, 2016）

・Basic environmental plan

（Cabinet decision on April 17, 2018）

Consistent

Continuous reduction for 5 years since 2014 Base year emission FY2013: 1.408 billion tCO2 ※Number at the time of target setting

Mid-term target

Long-term target （Goal）

（Target： Stacked）

• NDC of Japan (Decided

by Global Warming countermeasures Headquarter on March 30, 2020) Pursue further mitigation rather than stay at this level In line with the energy mix update, aiming for ambitious target reflecting further mitigation efforts

FY2018(Confir med value): 1.24 billion tCO2 (12% reduction from FY2013)

Innovative Environmental Innovation Strategy (Decided by the Integrative Innovation Strategy Promotion Conference on January 21, 2020) Aiming to establish innovative technologies by 2050 to make “Beyond Zero” possible

6

Ministry of the Environment Government of Japan

The Long-term Strategy under the Paris Agreement (Cabinet Decision on June 11, 2019)

7

Ministry of the Environment Government of Japan

Spread of Decarbonization in Corporate Management

*As of October 19, 2020

◼ Number of approved companies: 488 (75 are Japanese companies.) ◼ The 2nd largest in the world ◼ 1,471 financial institutions, companies and governments around the world (311 are in Japan.) expressed their support. ◼ The largest number in the world ◼ Number of participating companies: 263 companies worldwide (40 are Japanese companies.). ◼ The 2nd largest in the world Number of companies that support TCFD(Top 10 countries & regions) Number of approved companies with SBT by country (Top 10 countries)

[source] TCFD website TCFD Supporters ( https://www.fsb-tcfd.org/tcfd- supporters/)

List of companies working on TCFD, SBT and RE100 Construction：Sekisui House, Ltd. / Daito Trust Construction Co., Ltd. / Daiwa House Industry Company, Limited /TODA CORPORATION / LIXIL Group Corporation / Sumitomo Forestry Grocery : Ajinomoto Co., Inc. Electric Appliances：KONICA MINOLTA, INC. / Sony Corporation / Panasonic Corporation / Fujitsu Limited / FUJIFILM Holdings Corporation / RICOH Company, Ltd. Chemical: SEKISUI CHEMICAL CO., LTD. Pharmacy：ONO PHARMACEUTICAL CO., LTD. Other products：ASICS Corporation Information & Communication：Nomura Research Institute, Ltd. Retail Trade：ASKUL Corporation / AEON CO., LTD. / J. FRONT RETAILING Co., Ltd. / MARUI GROUP CO., LTD. Real estate：MITSUBISHI ESTATE CO., LTD.

Compiled from the [source] RE 100 home page (http://there100.org/). Industr y classification is prepared by the secretariat by applying the Japan Standard Industrial Classification, etc.

Number of companies participating in RE 100 by country (Top 10 countries)

TCFD SBT RE100

[source] Science Based Targets homepage Compiled from Companies Take Action (http://sciencebasedtargets.org/companies-taking-action/). Industry classification is prepared by the secretariat by applying the Japan Standard Industrial Classification, etc.

8

Ministry of the Environment Government of Japan

2050 Zero Carbon Cities in Japan

◼ 175 local governments announced their commitment to net zero carbon emissions by 2050. ◼ These local governments represent 82 million people (64.7% of Japan’s population), and 3.6 trillion USD in GDP. As of Nov 25, 2020

Population of zero carbon cities

half of Japan’s popu pulati tion

http://www.env.go.jp/en/earth/cc/2050_zero_carbon_cities_in_japan.html

(mil.)

9

Ministry of the Environment Government of Japan

Tax for Climate Change Mitigation

Tax Revenue

Revenue is allocated to the introduction of renewable energy and drastic strengthen of energy conservation

Tax rate per tCO2 Enforcement Stage

Taxable Objects Current Tax Rate From Oct.1, 2012 From April 4, 2014 From April 4, 2016

Crude oil/Oil products [per 1kl] （JPY 2,040）

＋JPY 250 （JPY 2,290） ＋JPY 250 （JPY 2,540） ＋JPY 260 （JPY 2,800） Gaseous hydrocarbon

[per 1t] （JPY 1,080）

＋JPY 260 （JPY 1,340） ＋JPY 260 （JPY 1600） ＋JPY 260 （JPY1,860） Coal

[per 1t] （JPY 700）

＋JPY 220 （JPY 920） ＋JPY 220 （JPY 1,140） ＋JPY 230 （JPY 1,370） ※bracket means the energy tax rate

（Note）0.76 JPY for gasoline per l by converting the added tax increase (760JPY) (After April 2016 (Normal year))

[FY2013] JPY 90 billion [FY2014 and FY2015] JPY 170 billion [After 2016 (normal year)] JPY 260 billion

• Tax rate corresponding to the amount of CO2 emissions for all fossil fuels (JPY 289/t-CO2)
• Enforced from Oct. 2012 and increases in the tax rate gradually over 3 and a half years
• All the tax revenue will be allocated for curbing energy-originated CO2 emissions

JPY301 Coal JPY779 Crude oil/ Oil products JPY400 Gaseous hydrocarbon (LPG/LNG)

Current tax rate Additional tax rate

Tax for Climate Change Mitigation

Petroleum and Coal Tax

10 10

Ministry of the Environment Government of Japan

J-Credits: Decarbonization through ‘Climate Change x Digital’

SMEs Supporting efforts to decarboniz e companies

AI・IoT Technolog y

J-credit trading market utilizing blockchain technology (“ezzmo”)

households

Company A （program manager） Company B （company participating in SBT, etc.） Help creating a trading market utilizing the blockchain led by the private sector STEP2

Enhancin g enterpris e value

Expansion of credit creation/transaction volume through computerization of application procedures and simplification/automation of credit certification procedures STEP１

purchase/utilizatio n supply/selling

Part 1: Leaders Dialogue – Net Zero

ASIA PACIFIC Edition Regional Carbon Pricing & Markets Series

Part 2: Scene Setter – Asia Pacific Markets Outlook

ASIA PACIFIC Edition Regional Carbon Pricing & Markets Series

Regional Carbon Pricing & Markets Virtual Series - Asia Pacific Edition

Jointly organized by IETA and the Carbon Pricing Leadership Coalition (CPLC) & World Bank Virender Kumar Duggal Principal Climate Change Specialist Asian Development Bank 1 December 2020

Climate Change and DRM Challenges

14

The Alarming Gap

15

Pre-COVID-19 global commitments were already insufficient to meet the Paris Agreement’s goals. Current commitment s in NDCs would lead to a temperature rise of 3.2oC this century.

The Alarming Gap

16 Image Source: Climate Action Tracker, September 2020

▪ Economists have for long recognized climate change as a market failure because

• f the externalities of anthropogenic GHG emissions as an undesired side-effect of

economic activities. ▪ Carbon pricing internalizes external costs of GHG emissions by transferring the burden of environmental damage to those who are responsible for it in the first place. ▪ It can provide a clear signal to GHG emitters and provides them an option to either reduce or pay for their emissions should they choose to continue emitting. ▪ Carbon pricing can thus provide economic incentives for achieving the broader environmental objectives to the society cost effectively. Carbon Pricing

17

▪ Carbon pricing can take the form of various instruments such as carbon tax, emissions permitting, emissions trading systems, carbon offsetting requirements, carbon crediting mechanisms, results-based finance and shadow carbon pricing. ▪ These options ensure that policymakers can work either through punishing the emitters (e.g. through a tax), rewarding the reducers (e.g. through carbon crediting) or guiding an

• rganization’s decision (e.g. through internal shadow pricing).

▪ Carbon Tax creates a financial liability for emitters giving them incentives to innovate and transit to clean energy and energy efficient operations. A carbon tax sets a fixed carbon price for the emitters and creates a level of certainty on the revenue generation, but not the level of emission reductions to be accomplished. ▪ Cap-and-trade program typically involves a government-set quantitative limit (cap) on the level of greenhouse gas emissions allowed with the system leaving the price for emissions to be determined by market supply and demand.

Carbon Pricing

18

▪ As countries move from the rescue to the recovery phase, it is right time to move towards carbon pricing or accelerate its implementation to (i) prevent a distorted recovery; and (ii) to raise revenues to soften the hit on fiscal deficits or support consumption and investment.1 ▪ A predictable and clear carbon pricing policy signal, either in terms of a cost (tax) of future emissions or quantity of emission reductions expected, can also help reorient capital towards appropriate investments, support innovation, accelerate deployment of new technologies and help safeguard against transitory risks. ▪ Carbon pricing schemes can be designed to be timely (countercyclical), support growth, simple to administer, help retain fiscal space and not negatively impact businesses and slow economic recovery. ▪ Carbon pricing schemes can support energy transition and foster regional cooperation. There is an emerging opportunity for mobilizing finance through scaling-up international cooperation through Article 6, but lack of near-term demand is a challenge.

▪

1Burke, S. F., & Bowen, A. (2020). Policy brief Pricing carbon during the economic recovery from the COVID-19 pandemic.

Role le of Carbon n Pricing icing in Econo conomic ic Recov cover ery and Gree een n Growt

• wth

19

Successful use of Carbon Pricing Instruments in Asia and the Pacific

20

• f CDM projects

registered worldwide are located in Asia and the Pacific

• f JCM projects

registered worldwide are located in Asia and the Pacific

Source: ADB, 2020. Achieving Nationally Determined Contributions through Market Mechanisms in Asia and the Pacific.

88% 78%

❖ Rising interest in the Asia and Pacific region ❖ Growing trend in the use of carbon pricing (emissions-trading schemes (ETS), carbon taxes, offset credits) as a part of climate policy architecture ❖ 7 carbon pricing initiatives implemented or emerging on the national level: ▪ Domestic ETS – Australia, Kazakhstan, New Zealand, PRC, and ROK ▪ Carbon tax – Japan and Singapore ❖ Carbon pricing initiatives under consideration - Indonesia; Taipei,China; Thailand; and Viet Nam ❖ 20 of 41 ADB DMCs interested in using market mechanisms to achieve their NDCs

Source: World Bank (2020). States and Trends of Carbon Pricing 2020.

Singapore Taipei,China People’s Republic of

Carbon pricing: Growing momentum in Asia and the Pacific

Interest in carbon Pricing Instruments in Asia and the Pacific

22

20 out of 41 ADB DMCs are intending or considering

to use market mechanisms to achieve NDCs

➔These 20 DMCs cover 95.6% of emissions from all DMCs (or 41.2% of global GHG emissions). ✓ Experience with pre-2020 market mechanisms DMCs have extensive, albeit varied, experience in international and bilateral market mechanisms such as the Clean Development Mechanism (CDM) and the Joint Crediting Mechanism (JCM) ✓ Preparedness for post-2020 carbon market Some of these countries are taking significant steps by engaging in multiple international initiatives on market mechanisms while

• thers are focusing more on establishing domestic carbon pricing

instruments that can potentially be linked with international carbon markets

Raising Ambition using Article 6 Mechanism

Article 6 of the Paris Agreement lays the foundation for countries to use carbon markets to enable higher ambition in countries’ mitigation and adaptation actions.

• Article 6.2: Accounting guidance for reporting of

“internationally transferred mitigation outcomes” (ITMOs) with “corresponding adjustments”

• Article 6.4: An emissions mitigation mechanism to

issue units for programs or activities, building on Kyoto mechanisms (CDM, JI)

• Article 6.8: Work programme for non-market

approaches to advance cooperation that does not involve ITMOs.

23

24

Source: Warnecke, Höhne, Tewari, Day and Kachi (2018) Opportunities and safeguards for ambition raising through Article 6. The perspective of countries transferring mitigation outcomes. NewClimateInstitute

Raising Ambition using Article 6 - Host Country Ambition

Th Thank ank You

• u

Virender Kumar Duggal Principal Climate Change Specialist Fund Manager - Future Carbon Fund Sustainable Development and Climate Change Department Asian Development Bank Tel (632) 632-5937 vkduggal@adb.org www.adb.org

41 25

Part 2: Scene Setter – Asia Pacific Markets Outlook

ASIA PACIFIC Edition Regional Carbon Pricing & Markets Series

Part 3: Country Updates on Carbon Pricing – Current Developments and Future Opportunities

The emissions budget for 2021-25 (provisional)

• Current emissions budget is roughly a

straight-line reduction from today’s emissions towards the 2050 target

• It will require strong action across a

range of sectors to achieve

• Climate Change Commission will

provide advice on three, five year, emissions budgets to 2035 in the middle of 2021

28

10 20 30 40 50 60 70 80

Mt CO2-e

• e)

Provisional emissions budget (354 Mt CO2 2050 target = net zero all gases + 36% reduction in 2017 methane (22 Mt CO2-e) Forecast net emissions Required abatement = 15 Mt CO2-e

Unit supply settings

Unit supply settings determine auction volume by applying these steps from the budget:

• 1. Remove emissions from outside the scheme

from the NZ ETS cap (194m, mainly agriculture)

• 2. Remove freely allocated units (43m)
• 3. Remove volume of units to drive stockpile

reduction (27m) Set a limit on approved

• verseas units (0)
• 4. The remaining volume is available to auction

(90m)

10 20 30 40 50 60 70 80 2021 2022 2023 2024 2025

Mt CO2-e

Emissions outside the NZ ETS (194 Mt CO2-e) Free allocation projections (43 Mt CO2-e) Stockpile reduction (27 Mt CO2-e) budget (354 Mt CO2-e) Provisional emissions Remaining auction volume (90 Mt CO2-e)

These numbers will be updated annually

Part 3: Country Updates on Carbon Pricing – Current Developments and Future Opportunities

Part 4: Corporate Engagement – Getting Economies on a Downward GHG Trajectory

Wrap Up & Closing Address

ASIA PACIFIC Edition Regional Carbon Pricing & Markets Series

We would like to thank our Partner Sponsors:

ASIA PACIFIC Edition