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Countdown to Copenhagen Government, business and the battle against climate change A report from the Economist Intelligence Unit Sponsored by Countdown to Copenhagen Government, business and the battle against climate change © Economist Intelligence Unit 2009 1 Preface C ountdown to Copenhagen: Government, business and the battle against climate change is an Economist Intelligence Unit report that investigates the current regulatory outlook within key regions of the world and the prospects for change within the marketplace. Lead sponsors of the research include The Carbon Trust, KPMG, SAP and Shell. This report builds on our 2008 report on sustainability, Doing good: Business and the sustainability challenge , which highlighted that environmental issues, such as improved energy ef Þ ciency, were at the forefront of the corporate sustainability agenda.

In this, our 2009 sustainability report, we therefore focus in particular on the issue of climate change, reviewing the progress being made both within the regulatory and policy environment, as well as within business. The Economist Intelligence Unit bears sole responsibility for the content of this report. Our editorial team provided the political analysis, executed the survey, conducted the interviews and wrote the report.

The Þ ndings and views expressed do not necessarily re ß ... more. less.

ect the views of the sponsors. Our research drew on three main initiatives: ! The Economist Intelligence Unit 9s country analysis team provided overviews of the regulatory environment in the US, EU, Japan, China and India. ! We conducted a wide-ranging global survey of senior executives from around the world during November and December 2008. In total, 538 executives took part, of which more than one-half (53%) were from the C-suite and 24% were CEOs. The executives polled represented a cross-section of industries and a range of company sizes. ! To supplement the survey results, we also conducted in-depth interviews with 18 executives, including CEOs and heads of sustainability and/or climate change, as well as national and local government stakeholders. Jacob Hamstra, Ben Jones, David Line and Simon Tilford provided the political analysis for part I of this report. Dr Paul Kielstra was the author of part II. Gareth Lofthouse and James Watson were the editors. Countdown to Copenhagen Government, business and the battle against climate change © Economist Intelligence Unit 2009 2 We would like to thank all the executives who participated in the survey and interviews for their time and insights. Dr Laura Ediger, Environmental Manager, Business for Social Responsibility Dr Jeanne Ng, Director of Group Environmental Affairs, CLP Group Yasuhiro Kishimoto, Adviser, Clinton Climate Initiative, Tokyo Midori Mitsuhashi, Clinton Climate Initative, Tokyo Dr Patti Wickens, Environmental Manager, De Beers Group Sir Nigel Knowles, Co-CEO, DLA Piper Dawn Rittenhouse, Director of Sustainable Development, DuPont Santosh Maheshwari, Group Executive President, Grasim Francis Sullivan, Adviser on the Environment, HSBC Bruce Bergstrom, Vice-president of Vendor Compliance, Li & Fung Ltd Dr Len Sauers, Vice-president of Global Sustainability, Procter & Gamble Dr Eckhard Plinke, Head of Sustainability Research, Sarasin Bank Dr Wolfgang Bloch, Head of Corporate Environmental Affairs, Siemens Noel Morrin, Senior vice-president of Sustainability, Skanska Adrian Webb, Southampton Institute Teruyuki Ohno, Senior Director, Urban and Global Environment Division/Bureau of Environment, Tokyo Metropolitan Government Gavin Neath, Senior vice-president of Communications and Corporate Responsibility, Unilever Group Scott Wicker, Vice-president of Sustainability, UPS Interviewees Countdown to Copenhagen Government, business and the battle against climate change © Economist Intelligence Unit 2009 3 Contents Executive summary 4 Towards Copenhagen: The prospects for a new international treaty to tackle climate change 6 PART I 3 A changing regulatory environment 7 Introduction: the road to Copenhagen 7 The US perspective 8 Obama administration 9s key energy pledges 10 The EU perspective 11 The EU 9s 20:20:20 strategy 12 On track to meet Kyoto targets? 15 The Asia-Paci Þ c perspective 16 China 16 China 9s major energy policies 16 India 19 National Action Plan on Climate Change, Government of India, June 2008 19 Japan 21 Tokyo leading the way 21 PART II 3 Business and climate change 23 Introduction: why business matters 23 The Þ rst steps on a long journey 24 Action on climate change I: Measurement and carbon reduction 25 Further down the road: impacts and markets 27 Action on climate change II: Products and services 30 Finally, adaptation 31 Action on climate change III: Adaptation as opportunity 32 Keeping on the straight and narrow:costs and the economic malaise 32 Towards a global carbon trading system 37 Setting the rules of the road: the role of government 36 Levelling the playing Þ eld 38 Conclusion: a long road ahead 41 Appendix 42 Countdown to Copenhagen Government, business and the battle against climate change © Economist Intelligence Unit 2009 4 Executive summary 2009 has the potential to be a watershed year for climate change. The clock is counting down to the Copenhagen conference in December, where the world 9s governments will meet with the aim of thrashing out a workable successor to the Kyoto Protocol 4and bringing both developing and developed countries into the framework in some way. The outcome will set the tone for climate-change action over the coming decade. Part I of this report considers the prospects for Copenhagen, and gives a more detailed overview of the speci Þ c policy and regulatory initiatives under discussion within key countries, including the US, EU, Japan, China and India, which collectively account for the lion 9s share of the world 9s greenhouse gas emissions. Whatever policymakers in these various regions decide, the impact of regulation will fall primarily on the corporate sector, which is directly responsible for at least 40% of all greenhouse gas emissions. Part II of this report considers the current attitudes within business regarding climate change, the actions that are being taken and the impact of the global economic outlook on the efforts being made. It also poses questions about whether new environmental policies and strategies will blunt competitiveness within business. Key Þ ndings emerging from the research include the following: ! The economic downturn will have mixed effects on climate-change efforts for both governments and business. Precisely determining the impact of the current global recession on the climate- change efforts of both business and governments is dif Þ cult, with countervailing forces at work. Many governments will be reluctant to place greater burdens on business than they have to in such challenging circumstances. However, some are also providing signi Þ cant sums of money in order to mitigate the economic downturn, with major investment in renewable energy infrastructure and energy-ef Þ ciency projects on the cards in many countries. At a business level, a greater emphasis on cost control will lead many Þ rms to embrace the easy wins of energy ef Þ ciency, which many Þ rms are already engaging with to reduce costs (see next point). Although such gains are typically incremental, the bene Þ ts can be large 4and usually rely on proven technologies: Unilever, for example, says it has saved about ¬250m over the past decade on carbon cutting initiatives. Moreover, a sharp drop in business activity as a result of the global economic Countdown to Copenhagen Government, business and the battle against climate change © Economist Intelligence Unit 2009 5 downturn will reduce demand for energy, thereby cutting emissions in the short term. But there is bad news too. Lower demand also reduces the cost of fossil fuels, making investments in emission- reduction technologies with longer payback periods less enticing. Owing to tighter credit availability, the Þ nancing needed for larger capital-intensive projects is not as easy or cheap to come by as it once was. A lower carbon price also reduces the attractiveness for developed-economy companies to offset their emissions by investing in clean energy projects in the developing world. Two-thirds (67%) of companies polled for this report agree that the current economic environment means environmental issues will necessarily drop down the agenda. ! More companies than not have established some kind of climate-change strategy, although most simply consider energy ef Þ ciency. More than one-half (54%) of executives polled for this report say that their companies have a coherent policy in place to address climate change, although the scope of such policies varies widely. Actions focus on core internal activities and facilities, rather than involving suppliers, business partners and customers. As one executive highlights, producing too much carbon is a new indicator of inef Þ ciency. Indeed, for most companies, climate-change action begins (and ends) with energy ef Þ ciency. Nearly two-thirds (62%) have implemented some degree of improvement in this area over the past two years 4far ahead of all other actions. This will remain the case going forward, although an encouraging minority of Þ rms are exploring more advanced initiatives including, importantly, greater consideration of both customers and suppliers. ! Real adaptation to climate change is out of the sights of most Þ rms right now. Three-quarters (75%) of respondents agree that companies as a whole have been slow to prepare for the long-term impact of global warming on their business. Unsurprisingly, climate-adaptation strategies remain a vague concept today, but tend to involve two key elements. The Þ rst is risk management (assessing supplier vulnerability to things such as reduced crop yields or water supply, or business continuity in extreme weather events, for example). The second is genuine consideration of the new opportunities emerging. This is not to say that nothing is happening: nearly one in four (24%) have made some degree of preparation for possible disruptions to operations, while 18% have worked to increase the resilience of their supply chains. In terms of exploring new opportunities, the Þ ndings are more encouraging (see next point). ! A signi Þ cant minority of Þ rms are discovering new market opportunities. Nearly one in four (23%) executives say their Þ rms have assessed the carbon impact arising from the lifetime use of their products or services (that is, considering both the production impact across a supply chain, as well as the eventual use by customers). Those who have done so often say such analysis provides unexpected results 4and new opportunities. Procter & Gamble, for example, discovered that heating water for laundry cycles accounted for a huge percentage of the company 9s total emissions, directly leading to the development of a cold water detergent. Overall, 40% of respondents say their Þ rms have developed new products or services in the last two years that help to reduce or prevent environmental problems 4 and the demand for such goods and services is likely to rise as other Þ rms and consumers seek to improve their energy ef Þ ciency. Even if some of this is just marketing 4and eight out of ten (79%) respondents agree that too many Þ rms use climate change as merely a marketing tool 4a serious effort Countdown to Copenhagen Government, business and the battle against climate change © Economist Intelligence Unit 2009 6 is under way in many industries to develop wholly new products, from electric cars and energy-ef Þ cient microprocessors to new home loans. Nearly one in three (30%) executives say such development will be a high priority in the coming years. ! Emissions trading schemes will spread beyond the EU 4and a carbon price of ¬30-50 is seen by business as the sweet spot for effecting change. A novelty less than two years ago, emissions trading schemes (ETSs) are become increasingly widespread today. The EU is steadily expanding the scope of its ETS, the world 9s largest. The new president, Barack Obama, supports the establishment of a federal ETS in the US, while Canada, Japan and Australia are all exploring the idea. But as the EU scheme has demonstrated, an inadequate price provides an insuf Þ cient incentive for businesses to change their habits 4and the EU carbon price has rarely risen above ¬20 since its inception. About two-thirds (65%) of respondents (for whom it was relevant) indicate that a carbon price of up to ¬50 would be enough to have a signi Þ cant effect on their energy usage, with a price somewhere between ¬30 and ¬50 per tonne of CO 2 seen as the sweet spot for change. But a change in the price of carbon of this degree looks out of prospect right now. This is primarily because of the weakness of economic growth, which will cut emissions 4and thus the carbon price. ! A growing number of companies favour more environmental regulation 4providing there is a level playing Þ eld. Over one-half (56%) of surveyed companies believe that more government regulation is necessary in this sector. In fact, for the relatively few companies that do lobby, more are arguing for tighter regulation than looser 4at both the national and international levels. Business is not embracing red tape: instead, executives realise that rules are coming and are seeking clarity in order to make responsible investment decisions. Above all, they want a level playing Þ eld in which to compete. This points to a concern that will also preoccupy the negotiators at Copenhagen: how to create a new framework to combat climate change, without burdening their own economies with regulations that sap competitiveness relative to other rivals globally. Towards Copenhagen: The prospects for a new international treaty to tackle climate change Climate-change negotiators are preparing to hash out a successor to the Kyoto Protocol at a December meeting in Copenhagen, amid one of the most severe global recessions in living memory. Three key things will need to be achieved for Copenhagen to be a success: ! developed economies will have to agree to major cuts in emissions; ! developing economies will have to limit future emissions; ! developed economies will have to lend a helping hand in terms of Þ nance and technology. None of these will be easy. The EU has upped the ante by adhering to its ambitious target of cutting emissions by 20% by 2020, from 1990 levels, and potentially 30% if others join in; expanding its emissions trading scheme; increasing reliance on renewable energies; and improving energy ef Þ ciency. So the world is now looking to the US to follow suit as the new president, Barack Obama, outlines his goals and priorities during his Þ rst 100 days in of Þ ce, ending the previous administration 9s lack of enthusiasm on the issue. Will Copenhagen deliver a solution? In all likelihood an agreement will be reached, not least because none of the key parties will want to be held responsible for the negotiations failing altogether. Whether there is time to achieve the grand bargain between the developed and developing worlds needed to put global emissions on a sustainable path is much more questionable. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 7 Introduction: the road to Copenhagen A ll major governments now recognise that global warming is a reality and is being caused by emissions of greenhouse gases such as carbon dioxide. The next ten months will determine whether they have the political will to arrest the rise in emissions and, crucially, to agree how the necessary cuts are to be shared out among them. A series of UN meetings will culminate in a summit of the 190 participating countries in Copenhagen in December this year, when a successor to the Kyoto Protocol (which expires in 2012) is due to be signed. A global agreement will require the participation of all the major emitters, be they developed or developing economies. But it will not be possible to persuade countries such as China and India to take action to curb their emissions unless all the major developed economies move Þ rst. China is now the biggest source of greenhouse gas (GHG) emissions in the world, ahead of the US. But in terms of emissions per head, Chinese levels are just one-quarter of those in the US and Indian emissions are just 10% of US levels. The EU has upped the ante ahead of negotiations. By adhering to its ambitious target to cut emissions by 20% by 2020 (from 1990 levels) despite the severity of the economic downturn, the EU has hit the ball Þ rmly into the US 9s court. The US refused to ratify Kyoto, ruling out mandatory reductions in its emissions. The country 9s greenhouse gas emissions have risen by 15% (in 2006) since 1990; had it rati Þ ed Kyoto its emissions would have had to have fallen by 6%. In a major departure from the previous US administration, the new president, Barack Obama, supports progressive reductions in US emissions. However, it is still unclear whether America is prepared to make deep unilateral cuts. Many developing-economy governments believe the US has a moral obligation to do so, and that US moves to cut its emissions drastically should not be conditional on the Chinese and Indians imposing binding caps on theirs. The developing economies also need to shift ground, however. While it may be too soon to talk about caps for countries with low emissions per head, it is clear that the current trajectory in China and other big industrialising powers is unsustainable. They need to reduce the rate of growth in per-head emissions. If they refuse to, it will be hard to sustain political support for unilateral action in developed countries. PART I 3 A changing regulatory environment Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 8 One possible solution is technology transfer. In exchange for agreeing to put in place measures to curb their emissions, the developed economies could provide subsidised access to environmentally advanced technologies. The promise of access to expertise and capital could prompt concessions from the developing economies. But Western Þ rms fear loss of control over their intellectual property. And Western governments fear this would, in turn, undermine Western Þ rms 9 incentives to develop such technologies in the Þ rst place. December 9s agreement will therefore need to include three key elements if it is to be a success. First, the developed economies, in particular those with very high emissions per head such as the US, Canada and Australia, will have to commit to big cuts. Second, developing economies will have to concede that cbusiness as usual d is no longer an option and accept limits on their future emissions. Third, developed economies will need to agree to help Þ nance the adoption of low emissions technologies in developing economies. What is going to happen? The downturn in the US economy is gathering pace and protectionist sentiment is on the rise. The US administration could Þ nd it hard to adopt measures that increase its Þ rms 9 costs relative to those based in fast-industrialising countries. But unless the US agrees to make major unilateral steps, compromise on the part of the developing economies, which themselves face a severe deterioration in their economic prospects and rising social pressures, could prove elusive. An agreement will be reached, because none of the key parties will want to be held responsible for the negotiations failing altogether. However, it is unlikely to include the grand bargain between the developed and developing worlds needed to put global emissions on a sustainable path. This section of the report will focus on the policy and regulatory outlook within the key parties to the negotiations: the US, the EU, China, India and Japan. Why have some governments proved more ambitious than others? What are the political and economic constraints facing the various governments? What are the areas of potential consensus between these governments and what are the principal areas of disagreement? The US perspective The world is looking to the new administration of Barack Obama to solve many ills; taking a lead on energy and climate-change challenges is no exception. Mr Obama has raised hopes for a radically new direction for the US, declaring even prior to taking of Þ ce that energy reform will be the most important economic issue facing the country. However, those sentiments were voiced at a time of soaring oil prices and before the Þ nancial crisis pushed the world into deep recession. Therefore a key determinant of energy and climate-change policy will be the administration 9s willingness and ability to stick to stated long-term goals and push through dif Þ cult policies in the face of a Congress that has traditionally shown little appetite for anything that tends to raise the cost of energy. In his inaugural address, Mr Obama indicated that a new direction for climate change and energy policy remained a high priority. cEach day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet, d he said, pledging to work with other countries to croll back the spectre of a warming planet d. On energy priorities, he added: cWe will build the&electric grids&we will harness the sun and the winds and the soil to fuel our cars and run our factories. d Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 9 Although broad generalisations, Mr Obama has backed up his commitments with his selections for his energy and climate-change team, starting with the creation of the cglobal warming czar d post and the choice of Carol Browner as the Þ rst appointee, with the title of White House co-ordinator of energy and climate policy. She is a former administrator of the Environmental Protection Agency (EPA) under Bill Clinton, and long-time advocate of tough environmental protection standards. Also, Steven Chu as energy secretary is a Nobel Prize-winning scientist who has advocated a move away from fossil fuels, particularly coal, while both Lisa Jackson as head of the EPA and Nancy Helen Sutley as chair of the White House Council on Environmental Quality told senators at their joint con Þ rmation hearing that they would advocate a more rigorous application of existing environmental protection rules, even if it meant higher costs for businesses. Since taking of Þ ce, Mr Obama has stuck to his intention for installing a cap-and-trade system to reduce carbon emissions. Some in his administration have said that a carbon tax would be more ef Þ cient, although Democrats running Congress are focused on cap-and-trade. Representative Edward Markey (D-MA), the chair of the House Energy and Environment subcommittee, said draft climate change legislation will be ready by the US Memorial Day, at the end of May. Mr Markey commented on the success of the 1990 Clean Air Act 9s cap-and-trade scheme for sulphur emissions as an example of the type of market-based solution favoured by Democrats in Congress. Mr Markey said the ultimate goal is to pass climate change legislation by end-2009. Inside the much-debated US economic stimulus package are numerous programmes that make up part of a cGreen New Deal d spending plan, both for environmental and job-creating purposes. A report commissioned by Greenpeace and conducted by consultants ICF International said the environmental measures in the stimulus package will deliver savings of some 61 million tons of greenhouse gas emissions per year, equivalent to taking 13 million cars off US roads. The package 9s cgreen d programmes run the gamut, from mandating federal government purchases of clean-burning truck ß eets, to funding local government efforts to reduce emissions, to piloting new heat and power technologies for industry. The news for the traditional energy industry was not all bad. Mr Chu told senators at his con Þ rmation hearing that he would support a broad-based energy policy, including nuclear power, oil and gas drilling, solar plants and a csmart grid d that could help bring more wind power to market. He even reversed a previous anti-coal stance, saying he would not wait for cclean coal d (carbon capture and storage, or CCS) technology to progress before supporting new coal- Þ red power plants. Also, Ms Browner has had several business associations after leaving government that suggest a broader perspective, including board membership of APX, a California-based company active in various energy trading exchanges founded in the wake of deregulated energy markets, as well as nascent emissions cap-and-trade markets in various states. Nonetheless, the fossil fuel end of the energy business and big carbon emitters should expect a more dif Þ cult policy environment ahead, while there are likely to be enhanced incentives for those in emerging energy technologies, especially in transport, in energy-saving businesses and in those that bene Þ t from the growth of carbon emissions trading. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 10 Carbon markets Wasting little time in setting its new global warming agenda, Mr Obama 9s administration acted swiftly to reverse the Bush administration 9s block on California setting its own GHG emissions for automobiles. The move opens the way for California and as many as 18 other states to install stringent limits of automobile emissions that go beyond federal regulations. In addition, Mr Obama also ordered the Transportation Department to write new rules that will begin the Þ rst overhaul of the nation 9s fuel economy requirements in more than three decades. The California law, which was originally to take effect for 2009-model cars, requires automakers to cut emissions by nearly one- third by 2016, four years ahead of the current federal timetable. The result would increase the fuel ef Þ ciency in the American car and light truck ß eet to roughly 35 miles per gallon from the current average of 27. The change on car standards will likely help plans for a federal carbon-capping initiative. Based on Mr Obama 9s outline energy plan, a carbon-capping effort would include cstrong annual targets d aimed at reducing US emissions to 1990 levels by 2020, with a mid-century cut of 80%. Mr Obama has also pledged US$15bn in annual spending to boost private-sector efforts on clean energy, including solar, wind, biofuels, nuclear and clean coal technologies. When running for of Þ ce, Mr Obama was careful to tie carbon-reducing efforts to economic incentives. These include channelling revenue raised from auctioning emissions permits (estimated at US$30bn-50bn per year) towards developing and deploying clean energy technology, creating cgreen collar d jobs and helping low-income Americans afford higher energy bills. There are a slew of other green energy planks in the new administration 9s plans. These include reducing US oil consumption by at least 35% by 2030; federal government help to cover healthcare costs for retired workers in the car industry in exchange for domestic car companies investing at least 50% of the savings into the production of more fuel-ef Þ cient vehicles; raising fuel economy standards for cars to 40 mpg and light trucks to 32 mpg by 2020; and eliminating incandescent light bulbs by 2014. Current carbon schemes The Þ rst mandatory carbon-capping scheme in the US commenced on January 1st 2009: the Regional Greenhouse Gas Initiative (RGGI, nicknamed cReggie d) comprised of a group of ten North-eastern and Obama administration 9s key energy pledges ! Mandate that 25% of electricity should come from renewable sources by 2025. ! Federally mandated emissions cap-and-trade market to reduce emissions by 80% from 1990 levels by 2050. ! Increase fuel-ef Þ ciency standards for cars and trucks by 4% per year. ! Mandate that all new vehicles can run on biofuels by 2013. ! Increase plug-in electric vehicles on the road to 1m units by 2015. ! Provide car and parts manufacturers with US$4bn in tax credits and loan guarantees for updating plants to produce more energy- ef Þ cient cars. ! On nuclear, address key issues, such as security and waste, before an expansion of nuclear power is considered d. ! Promise to modernise the national utility grid. ! Weatherproof 1m low-income homes each year. ! Construct a natural gas pipeline in Alaska. ! Create a job-training programme for clean-energy technologies and add 5m cgreen collar d jobs. ! Make all new buildings carbon-neutral by 2030. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 11 mid-Atlantic states working to cap emissions in what could be a precursor to a federal carbon market. Member states are Connecticut, Delaware, Maine, Maryland, New York, Massachusetts, New Hampshire, New Jersey, Rhode Island and Vermont, with several other observer members. The stated aim is to cap and then reduce carbon emissions from the power sector by 10% by 2018, with the Þ rst compliance period running from 2009 to 2011. RGGI 9s Þ rst two permit auctions, held in September and December 2008 respectively, raised about US$70m, and a third is scheduled for March 2009. The proceeds are distributed to the states that use the money to fund renewable energy efforts and alleviate any increases in energy costs. The auction aims at creating a ccarbon currency d and RGGI futures contracts are traded through both the Chicago Climate Exchange and the New York Mercantile Exchange (NYMEX). The scheme 9s designers have been careful to avoid some of the problems encountered by the EU 9s scheme, where the granting of permits resulted in huge windfall pro Þ ts for power companies and a plethora of efforts aimed mainly at making pro Þ t but having marginal carbon-reducing impact. Although it is being watched closely by other states and interested parties, the RGGI scheme is unlikely to carry on in its initial form as its goals will probably be seen as too modest by the new government. California, for one, has already passed a law that requires a 25% reduction in state CO 2 emissions by 2020, with the Þ rst major controls taking effect in 2012, although this has been criticised as too ambitious and likely to drive businesses away from the state. Lots of advice The new administration and Congress are getting advice from business, too. About 30 of the country 9s largest companies, such as carmakers, major oil Þ rms and power companies among others, have offered their cblueprint for legislative action d. Their proposal features a plan for a phased reduction of CO 2 emissions of 80% by 2050, albeit from 2005 levels, and allowing for a range of 97-102% by 2012. US carbon dioxide emissions grew by 18% between 1990 and 2006, and Mr Obama has said that 1990 is his reference year for reducing CO 2 emissions by 80% by 2050. The big company lobby group generally called for the granting of emission permits and for a generous programme of carbon offsetting. Such a light touch approach is unlikely to gain much traction and opponents in Congress have described the group 9s proposal as cself-serving d. It is likely that the Obama administration will move quickly and proposals might be expected to reach Congress by mid-2009, although smooth passage is unlikely based on past efforts. The shape of legislation and the pace at which it is implemented will depend on the administration 9s determination to plough a path through entrenched interests on all sides. The EU perspective After almost two years of fraught negotiations, the European Council agreed on a climate-change package in mid-December 2008, which was subsequently approved by the European Parliament. The headline goals are for a reduction in EU greenhouse gas emissions by 20% on 1990 levels by 2020 4or 30% if other industrial nations sign up to a successor to the Kyoto Protocol 4and an increase in the share of renewable energy sources to 20% of overall EU energy consumption. However, with a group of Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 12 member states pushing hard to limit the potential impact on the industrial sector, the EU has arguably weakened the means of achieving its goals. The revision of the emissions trading scheme The EU 9s climate-change package comprises four key pieces of legislation. The Þ rst is a revision of the EU 9s emissions trading system (ETS), a cap-and-trade system for CO 2 that has been operating since 2005. The ETS sets an overall limit on emissions from power generators and heavy industry, with Þ rms allocated permits to emit CO 2 that can be bought or sold on the open market. The system currently covers more than 10,000 installations. These account for almost one-half of the EU 9s CO 2 emissions and 40% of its total GHG emissions. From 2012 the ETS will include the aviation sector, before being extended from 2013 to cover all major industrial emitters. A new annual EU-wide limit on GHG emissions will be set, instead of national caps, and reduced each year to achieve a cut in total emissions of 21% by 2020, from 2005 levels. Among the main sticking points during negotiations over the changes was a proposal to alter the way permits are distributed. During the Þ rst two phases of the ETS (2005-07 and 2008-12) the majority of permits were allocated free, reducing incentives to invest in cleaner technologies. But plans to require all industries to purchase their emission permits from 2013 were signi Þ cantly watered down because of fears that the extra costs would cause industrial relocation and raise unemployment. Under the new agreement, 100% auctioning of emission allowances will apply only to the energy sector (with many exceptions for the newer member states). For other industries, auctioning will be introduced progressively between 2013 and 2027. There is also the possibility of exemptions for sectors The EU 9s 20:20:20 strategy 1) Total EU GHG emissions reduced by 20% (compared with 1990 levels) by 2020. EU pledges to move to a target of 30% if other industrial nations sign a Kyoto successor: ! Extending the EU ETS to include aviation (from 2012) and additional industrial sectors (from 2013). EU-wide emissions cap for ETS sectors reduced annually to ensure reduction of 21% (on 2005 levels) by 2020. ! Full auctioning of ETS permits for the energy sector from 2013. Auctioning to be introduced progressively for other energy- intensive industries, with 80% free quotas in 2013 falling to 30% in 2020 and full auctioning by 2027. Exemptions for sectors at risk of ccarbon leakage d. ! At least 50% of receipts from sale of ETS permits to be used to Þ nance climate-change adaptation or alleviation policies, the development of clean technology, the Þ ght against deforestation and adaptation aid for developing countries. ! Emissions from non-ETS sectors (road and maritime transport, agriculture and buildings, among others) to be reduced by 10% overall by 2020 compared with 2005 levels. Member states permitted to purchase Clean Development Mechanism (CDM) credits worth of up to 50% of their EU emissions in the period 2013 320. ! Emissions from new cars cut to 130 grams CO 2 per kilometre by 2015 and 95 grams by 2020. ! Quality of fuel directive sets a target for a reduction of 10% by 2020 for the greenhouse gases emitted during the processing of fuel used for transport. 2) Renewable energies to account for 20% of the EU 9s energy mix by 2020: ! At least 10% of transport fuel in each country must come from renewables. ! Transferable cguarantee of origin d certi Þ cates to promote virtual trade in renewable energy. 3) Energy consumption to be reduced by 20% through energy ef Þ ciency: ! European Energy Ef Þ ciency Action Plan identi Þ es 85 actions to make buildings, appliances, transport and energy systems more energy ef Þ cient. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 13 exposed to international competition and possible ccarbon leakage d (the relocation of production to countries with less stringent rules), which could extend to 90% of EU manufacturers. These would be lifted only in the event of a Kyoto successor being agreed. Burden sharing and solidarity The second part of the climate-change package determines how the burden of reducing GHG emissions will be shared. At a European Council meeting in October 2008 eight countries, led by Italy and Poland, refused to accept their proposed national targets. The impasse was overcome with an agreement that the east European member states could actually increase their emissions. A new csolidarity fund d was also agreed, Þ nanced by part of the receipts from the sale of ETS permits, which provides coal-dependent states with subsidies to help them diversify and modernise their energy sectors. Even after its extension the ETS will still account for less than one-half of all EU emissions. Consequently, member states are committed to reducing emissions in other areas, such as buildings, agriculture, and road and maritime transport. Member states 9 national objectives re ß ect their relative wealth. Within these limits, governments are free to decide which sectors will shoulder the greatest burden and which policy tools to employ (such as energy standards, green taxes, recycling, traf Þ c management, etc). One area already singled out as worthy of an EU-wide effort to reduce emissions is passengers cars, which account for around 12% of all emissions. In December 2008 the EU agreed new standards that will limit emissions from new cars to 130 grams CO 2 per kilometre by 2015, falling to 95 grams by 2020. This represents a signi Þ cant advance on the 2005 standard of 159 grams, although the automotive sector successfully lobbied to prevent a more rapid implementation. -30 -20 0 -10 10 20 30 -30 -20 0 -10 10 20 30 Luxembourg Ireland Denmark Sweden UK Netherlands Finland Austria Belgium Germany France Italy Spain Cyprus Greece Portugal Slovenia Malta Czech Republic Hungary Estonia Slovakia Poland Lithuania Latvia Romania Bulgaria Emissions reductions in non-ETS sectors (targeted % change in emissions from 2005 to 2020) Source: European Commission. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 14 Renewable energies A third part of the package is a new directive on renewable energy con Þ rming the EU 9s target for 20% of energy consumption to come from renewable energies by 2020, compared with around 8% currently. Objectives were set for each member state, varying by wealth and resource potential. Within these limits, member states will be free to set targets for different sectors and the optimal mix of technology. The one exception to this is the requirement that member states achieve a minimum 10% share of renewable energy in the transport sector by 2020 (from around 2% currently), subject to strict criteria on the use of biofuels. In the long run, the EU wants to promote internal trade in renewable energy, providing incentives for the growth of production in the most cost-ef Þ cient locations. By far the most important source of renewable energy will continue to be biomass, with large agricultural producers such as France, Germany, Italy and Spain having the greatest potential. Wind power could also play a signi Þ cant role in meeting the targets, with most potential capacity lying off the north-west coasts of Ireland and the UK and in the North Sea. However, trade in green energy is likely to be slow to take off given the patchwork of different support schemes in operation (such as quotas or cfeed in d tariffs), limited interconnector capacity and dif Þ culties for member states in simply achieving their own targets. Carbon capture and storage Given the signi Þ cant contribution (around 40%) that power plants make to overall emissions of CO 2 , the EU is keen to support the development of new technology that could reduce emissions from traditional fuels such as coal, oil and gas. Part of the climate-change package releases a budget of 300m ETS allowances to fund the construction of commercial demonstration projects operating Malta Luxembourg Hungary Cyprus Czech Republic Belgium Slovakia Netherlands UK Poland Ireland Bulgaria Italy Greece Germany Spain Lithuania France Romania Slovenia Estonia Denmark Portugal Austria Finland Latvia Sweden 0 10 20 30 40 50 0 10 20 30 40 50 2005 2020 target Share of energy from renewable sources (% of final energy consumption) Source: European Commission. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 15 CCS technology. Equivalent to ¬6bn-9bn, this is believed to be suf Þ cient to Þ nance around nine or ten projects by 2015. There remain considerable doubts about the feasibility of large-scale CCS technology. Even assuming it can be made to work, the carbon price at which CCS would be economically viable is assumed to be around ¬40 360/tonne, compared with around ¬18/tonne at the end of 2008. 20:20:20 by 2020 The agreement on the climate-change package was a big political success for the EU. As noted by the French president, Nicolas Sarkozy, who held the EU 9s rotating presidency during the second half of 2008: cNo continent has given itself such binding rules. d The adoption of the targets on emissions reduction and renewable energy completes what is known as the EU 9s c20:20:20 strategy d, the third element being a goal of reducing energy consumption by 20% by 2020 through increased energy ef Þ ciency. On track to meet Kyoto targets? Under the Kyoto Protocol, the EU15 pledges to reduce overall GHG emissions by 8% (compared with 1990 levels) between 2008 and 2012. The European Environment Agency estimates that by 2006 the EU15 had achieved a reduction of 2.7%. The EU27 achieved a reduction of 7.7% between 1990 and 2006. If all planned measures discussed are adopted, the EU15 could achieve a reduction of 11% (from 1990 levels) by 2010. The best case scenario for the EU27 is for a reduction of 10% by 2010. In the absence of a climate-change package, the EU27 9s emissions would decrease by 12% by 2020. The EU27 9s target of a 20% reduction of emissions by 2020 is attainable with a climate-change package, but would require a cut of a similar magnitude to that achieved by 2010, in half the time and without the bene Þ t of the collapse of heavy industry in eastern Europe in the early 1990s. Growth of EU25 renewable energy, by technology (TWh) Other (a) Tide & wave Wind Biofuels Biogas Solid biomass Biowaste Hydroelectric 2020 2015 2010 2005 0 500 1,000 1,500 2,000 2,500 3,000 3,500 0 500 1,000 1,500 2,000 2,500 3,000 3,500 Source: Green-X Model from Fraunhofer Institute and Energy Economics Group, Vienna University. (a) Includes solar thermal, photovoltaics, heatpumps and geothermal. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 16 Environmental groups were unimpressed, however. In addition to concerns over the number of emissions permits allocated free of charge, critics argue that it offers member states too much scope to avoid reducing their own emissions by paying for reductions in developing countries. Undoubtedly, the package has been heavily revised compared with original proposals to address concerns in Germany and elsewhere over the potential for carbon leakage, as well as concerns among the newer member states that the package would raise energy costs. However, while it may be natural to assume that the looming global economic downturn has blunted the EU 9s desire to press ahead with its climate-change objectives, the opposite could in fact be the case. With successive EU governments announcing Þ scal stimulus programmes, the list of cgreen d projects bene Þ ting from state support is steadily growing longer. This includes support for the car industry to develop low-emissions vehicles, tax incentives to enable households to buy greener cars or insulate their homes, and the promise of investment in new energy-saving infrastructure. As much as anything, the EU 9s attempts to stimulate the growth of green technology is driven by the need to reduce dependence on imported energy, while gaining a competitive advantage in an industry with huge potential for growth. The Asia-Paci Þ c perspective China At some point in 2006, the world 9s fastest-growing major economy earned another, less laudatory title by overtaking the US to become the biggest emitter of carbon. In terms of emissions per head, levels in China are still just a fraction of those of Western countries, so it is likely to hold this unwelcome distinction for many years to come. Fortunately, then, the attention Chinese policymakers are paying to climate-change issues is also increasing dramatically. Not so long ago, measures designed to cut greenhouse gas emissions were seen as a rich-world concern. Now, csave energy, cut emissions d has become a well-worn government slogan and energy-ef Þ ciency targets are being used to evaluate the China 9s major energy policies 1) Energy intensity to be reduced by 20% from 2005 levels by 2010: ! Actual reductions were 1.6% in 2006 and 3.7% in 2007. ! Shutting down inef Þ cient factories and power plants. ! Top-1,000 Enterprises Programme promotes energy-intensity reductions by large, nationally prominent companies that account for around one-third of industrial production. 2) Renewable energy to account for 15% of energy by production by 2020: ! Wind power to account for 100 gw by 2020. ! Biomass to generate 30 gw of power by 2030. ! 30% of municipal waste to generate power by 2030. 3) Other measures: ! Fuel-economy standards extended to rural areas. ! Reduction of subsidies on energy- intensive export industries. ! Higher energy-ef Þ ciency targets for lighting, buildings and industry. ! Expansion of clean-coal and coalbed- methane extraction technologies. Sources: World Resources Institute (11th Five-Year Plan, 2006-10; National Climate Change Programme, June 2007; White Paper on Climate Change, October 2008). Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 17 performance of provincial of Þ cials. Key policies The Þ rst sign that China was getting serious about climate change came in 2006, when policymakers and researchers from 12 government ministries produced a long report on the domestic impact of global warming. It caught the attention of China 9s top leaders by predicting that global warming could reduce China 9s agricultural output by 10% in the next two decades. Since then, energy-saving targets and regulations couched in the language of climate-change mitigation have proliferated. These include, most notably, aspects of the government 9s 11th Five-Year Plan (covering 2006-10); a National Climate Change Programme published in 2007; and a White Paper on Climate Change issued in 2008 (see box). These documents outline policies focused on two goals: reducing energy intensity (a measure of energy consumed per unit of GDP) and expanding the use of renewable energy. The government has a high-pro Þ le pledge on each count. The Þ rst is to reduce energy intensity by 20% from 2005 levels by 2010, primarily by shutting down inef Þ cient factories and power plants, but also by raising energy-ef Þ ciency standards. The second is to generate 15% of China 9s energy from renewable sources by 2020. So far, these policies have been moderately successful. China has reduced its energy intensity, although it is unlikely to reach its target. The government has also ploughed money into indigenous alternative-energy development, in particular wind capacity, although its contribution to the country 9s total energy mix remains marginal. China has also begun to take advantage of global and domestic mechanisms for emissions trading. The country has enthusiastically embraced the Clean Development Mechanism (CDM), a UN-sponsored cap-and-trade mechanism that allows rich countries to buy carbon credits from poor ones. China accounts for by far the greatest share of the billions of dollars worth of projects funded through the CDM (see chart). On the domestic front, China has already set up carbon exchanges in Clean development mechanism: China versus the rest Expected average annual cCertified Emission Reductions, CER d from registered projects by host party (1 CER=1 tonne CO 2 ) (share of total: through end-2012) China 55.44% Others 7.99% South Africa 1.01% Malaysia 1.12% Indonesia 1.27% Argentina 1.63% Chile 1.71% Mexico 3.15% South Korea 5.77% Brazil 7.82% India 13.09% Source: UN. Total: 253,168,912 Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 18 Beijing, Shanghai and Tianjin. Yet the country is a long way from developing the legal and Þ nancial infrastructure required to operate an effective large-scale trading mechanism. As these caveats suggest, the primary signi Þ cance of China 9s nascent regulatory emphasis is the message it sends by formally using language about climate change to underpin energy policy. There are limits to this indirect approach. When of Þ cials talk about climate change as such, their preferred term is the passive-sounding cadaptation d, not cabatement d or creduction d. Like India, China argues that its economic development imperatives and low per-head emissions absolve it of responsibility to reduce carbon emissions before it gets as rich as industrialised countries. Nevertheless, many analysts argue that if the US is committed to emissions reductions, and if developed countries pledged major cash and technology transfers to help developing countries cut emissions, China could commit to reducing growth of carbon emissions. Business implications What does all this mean for business? As the example of CDM suggests, given the right alignment of incentives, China will welcome market-based efforts to combat rising emissions. Meanwhile, China 9s own incentives to tackle climate change will only become more powerful. The government worries that impacts from the greenhouse gases warming the earth 9s atmosphere could also raise the political temperature, sparking social unrest. China 9s dependence on energy imports provides another compelling rationale for energy ef Þ ciency. In the near term, however, it would be a mistake to overemphasise China 9s climate-change commitments and the business opportunities they could create. A lack of policy co-ordination, power struggles between different levels of government, and the opacity of the government 9s accounting and project evaluation processes have impeded the implementation of existing regulations. For as long as China 9s power sector continues to be dominated by heavily subsidised state-owned companies, foreign and private Þ rms will be reluctant to make major investments to supply renewable energy. Optimistic The rise of China: World per capita carbon dioxide emissions from the consumption and flaring of fossil fuels, 1980-2006 (Million Metric Tons of Carbon Dioxide) 7 8 9 10 6 5 4 3 2 1 0 7 8 9 10 6 5 4 3 2 1 0 Source: Energy Information Administration. Japan India China 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 19 forecasts for high returns on investments in the wind sector have not been realised so far. Lastly, anecdotal evidence suggests that environmental regulations are being quietly set aside in an effort to soften the impact of the global economic meltdown. This raises concerns about the durability and enforcement of China 9s climate-change-related policies, most of which were inked in the bubble years of 2006-07. India When India announced a National Action Plan on Climate Change (NAPCC) in June 2008, environmental campaigners were encouraged that the world 9s fourth-biggest polluter had Þ nally come on board with international efforts to reduce greenhouse gases. India may still be poor, but its vast size and fast- growing economy mean that its emissions are projected to increase steadily. The government estimates that energy use 4mostly of carbon-heavy coal 4will quadruple by 2025. As the social, economic and diplomatic costs of higher emissions rise, will the government respond in ways that impose constraints and pose opportunities for businesses operating in India? In the short term, the answer is largely cno d. A closer look at the government 9s action plan reveals few speci Þ c policies. The NAPCC calls for a cgraduated shift d from fossil fuels to renewable sources of energy. But there is no concrete commitment to limit emissions, beyond a pledge not to allow per-head emissions to exceed those of industrialised countries. Given that India 9s per-head emissions are still only a small fraction of the OECD average, this formulation leaves plenty of room for manoeuvre 4even if developed countries manage signi Þ cant cuts to emissions. Indeed, it would have been hugely surprising if India committed to binding emissions targets 4something that no developing country has done under the Kyoto Protocol. As the successor agreement to Kyoto is hashed out over the next couple National Action Plan on Climate Change, Government of India, June 2008 1) National Solar Mission: ! Increasing production of solar cells to 1,000 mw per year. ! Increasing generation of solar power to 1,000 mw per year. 2) National Mission for Enhanced Energy Ef Þ ciency: ! Requiring energy savings in major industries. ! Providing energy-ef Þ ciency incentives, such as tax breaks. ! Funding public-private partnerships aimed at reducing energy consumption. 3) National Mission on Sustainable Habitat: ! Extending energy conservation requirements in urban planning. ! Raising fuel-economy standards and expanding public transport. ! Recycling and producing power from urban waste. 4) National Water Mission: ! Improving water-use ef Þ ciency by 20%. 5) National Mission for Sustaining the Himalayan Ecosystem. ! Ecological protection and conservation in the Himalayan region. 6) National Mission for a cGreen India d: ! Increasing India 9s forest cover from 23% to 33%. 7) National Mission for Sustainable Agriculture: ! Developing cclimate-resilient d crops and expanding agricultural insurance. 8) National Mission on Strategic Knowledge for Climate Change: ! Setting up a Climate Science Research Fund. ! Financing private-sector technological developments. Sources: Pew Centre on Global Climate Change, Government of India. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 20 of years, India, like other developing countries, is highly unlikely to commit to emissions reductions unless these are formulated within a framework based on the per-head principle. It will be some time before policies related to climate change become a major feature of India 9s regulatory environment. This is not to say that the government will ignore the issue. The NAPCC presents eight cNational Missions d that will shape India 9s climate policy over the next decade (see box). These will have some effect on the business environment, but the details will be much clearer after government ministries complete their now-overdue implementation plans. The government 9s most concrete targets concern solar energy and energy ef Þ ciency. Regulations currently on the drawing board will promote solar energy use by setting speci Þ c targets for commercial, industrial and urban consumers. In the meantime, the government will support big increases in photovoltaic production and solar power generation. In terms of energy ef Þ ciency, according to the NAPCC India will implement initiatives expected to save 10,000 mw by 2010. Energy-ef Þ ciency standards are to be integrated into regulations in a variety of sectors, ranging from urban planning and waste management to public transport. Additional objectives outlined in the NAPCC include water conservation (with the aim of achieving a 20% improvement in water-use ef Þ ciency), promotion of afforestation and sustainable agriculture, and more funding for climate-change research. However, these programmes largely represent efforts to mitigate the effects of climate change rather than to minimise or control emissions of the greenhouse gases that cause global warming. Win-win requirement India does have several climate-related regulations in place. These include initiatives to use cleaner technology in coal- Þ red power plants and legislation that requires the central and state governments to buy a minimum proportion of power generated from renewable sources 4amounting to 5% of grid purchase in 2009-10, increasing by 1% each year for another ten years. However, the Indian government naturally tends to support climate-change mitigation policies that have more direct economic bene Þ ts. This applies to market-based CDM projects that attract capital and create domestic economic opportunities, or energy-ef Þ ciency measures that aid the country 9s quest for energy security. Similarly, afforestation is primarily pursued as a way to combat drought and ß oods. This dynamic means that there will continue to be a steady stream of regulations couched in the language of controlling greenhouse gas emissions, but it also places limits on how thorough those policies are likely to be. Crucially, the NAPCC does not include funding estimates, speci Þ c directives or evaluation methods 4although a Council on Climate Change has been formed to take on these tasks. By the same token, India is unlikely to agree to binding emissions controls of any kind in the absence of additional external incentives, such as major transfers of funds and technology from developed countries. There are other challenges, too. If and when precisely targeted climate-change regulations are introduced, the key challenge will be enforcement. For now, the government 9s main focus is on Þ ghting terrorism, and the national election due by May 2009 will interrupt the policymaking and implementation processes. As a result, detailed industry- or sector-speci Þ c blueprints are unlikely to appear before 2010. Countdown to Copenhagen Part I: Government, business and the battle against climate change © Economist Intelligence Unit 2009 21 Japan Japan might have been expected to play a leading role in global efforts to reduce greenhouse gas emissions for two reasons: its widespread adoption of cutting-edge energy-ef Þ cient technologies (a legacy of its reliance on imported oil), giving it comparatively low per-head emissions; and its prominence in the Þ rst round of global talks on the issue, held in Kyoto in 1997. Yet its progress since ratifying the Kyoto Protocol has been lacklustre, not least because of the reluctance of big business in Japan to acquiesce to any mandatory emissions reduction targets, and the government 9s disinclination to impose such caps in the absence of consensus on the issue. TMG energy-related CO 2 reduction targets (unit: 10,000 tonnes) 1990 FY 2000 FY 2020 FY Targeted reduction against 1990 level Targeted reduction against 2000 level Industrial and commercial sector 2555 2570 2146 16% 16% Residential sector 1300 1433 1158 11% 19% Transport sector 1485 1766 1022 31% 42% Total energy-related CO 2 5340 5768 4326 19% 25% Source: Tokyo Metropolitan Government, November 2008 Tokyo leading the way The Tokyo Metropolitan Government (TMG), under the leadership of the governor, Shintaro Ishihara, has taken perhaps the boldest steps to reduce GHG emissions, with the goal of cutting such emissions by 25% from the 2000 level by 2020. Among other measures, it will launch a European-style carbon cap-and-trade scheme from April 2010, with mandatory targets and tradeable credits. The scheme is far from comprehensive: it will cover businesses that use an equivalent of 1,500 kilolitres or more of crude oil per year. These businesses operate 1,300 facilities in Tokyo that between them are responsible for just 20% of the city 9s total emissions. And Tokyo itself has little heavy industry; the capital is responsible for around 5% of Japan 9s total GHG emissions. Still, Teruyuki Ohno, senior director of the urban and global environment division at the TMG 9s environment bureau, stresses that the scheme 9s signi Þ cance lies in the fact that it is the Þ rst in Japan to impose mandatory GHG reduction targets 4and that it managed to overcome the objections of the capital 9s big businesses, which were initially set against the idea. But he realises that reducing Japan 9s emissions is a long road. cThe scheme was not planned with Kyoto goals in mind, d says Mr Ohno. cWe are trying to look at the post-Kyoto targets to 2020. d Describing the national government 9s tentative steps as cnot ef Þ cient d, he says the hope is that other cities and regions in the country will take action even if the central government drags its feet. cI don 9t expect Japan 9s government to follow immediately, but Tokyo 9s adopting the system will open doors for other areas in Japan, d he says. In the near term, the TMG hopes that certain neighbouring prefectures and cities will co-ordinate their climate- change initiatives with Tokyo. As well as the mandatory scheme, the TMG is planning to introduce GHG reduction incentives for the capital 9s 600,000 small and medium-sized enterprises, which between them account for one-half of the city 9s emissions. These will include tax breaks, with companies entitled to reductions of up to 50% of the Tokyo Business Tax depending on the level of investment in energy-saving measures. However, the problem with voluntary measures 4even if incentives are applied 4is that companies are far less likely to follow them in times of recession. cWe have already seen that some commercial facilities have announced delays in implementing [energy-saving] measures because of the current economic downturn, d comments Mr Ohno. But he insists that for smaller companies it may not take much in the way of new investment to make signi Þ cant energy savings. cOur surveys suggest that reducing CO 2 doesn 9t necessarily require re Þ tting facilities, d he says. cIn a lot of cases companies just haven 9t been using existing facilities ef Þ ciently. d © Economist Intelligence Unit 2009 22 Indeed, Japan runs the risk of missing its own Kyoto Protocol targets, which require the country to reduce its emissions of greenhouse gases to 6% below their 1990 levels by 2012, when the treaty expires. In November 2008 the Ministry of the Environment conceded that carbon dioxide emissions in the year to March 2008 had been a record 1.37bn tonnes, some 8.7% above the 1990 level. This was partly a result of unforeseen circumstances (such as an earthquake in Niigata that required the closing of Japan 9s largest nuclear power plant, meaning more power came from thermal plants, which emit more gases), but it also re ß ects a reluctance on the part of either the government or Japan 9s biggest producers to grasp the nettle. In Þ scal year 2007/08 (April-March), industrial sector emissions rose by 3.6% from the pr

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