Domestic Credit Scheme and Agricultural Sector in Japan:
Achievements and Future Challenges
February 2, 2011
United Nations University, Tokyo, Japan
Daisuke SAWAUCHI (Policy Research Institute, MAFF)
International Symposium on “Climate Change and Agriculture”
Content
1. Emissions Trading Scheme and Agriculture Sector in Japan
Achievements
Future Challenges
2. Economic Evaluations of Farmer’s Energy Saving Investment
Investment and Uncertainty
Investment Promotion Effect of the Domestic Credit Scheme
2
3
EMISSIONS TRADING SCHEME & AGRICULTURE SECTOR IN JAPAN
45%37%
GHG emissions from fossil fuels use by agriculture, forestry and fisheries sector
Greenhouse farm Fisheries Other
89%
2%
Sectoral GHG emissions (2005)
Energy Industrial processSolvent AgricultureWaste
GHG emissions from agriculture in Japan
4
• Agriculture accounts for 2% of total GHG emissions.
• Fossil energy use by farms accounts for 1% of total GHG emissions.
• Greenhouse farms accounts for 45% of total GHG emissions from energy use in AFF sector.
• Amount of emissions is increased by 219% from 1990 level.
Source) Greenhouse Gas Inventory Office of Japan
Source）Oikawa (2007).
Integrated domestic market for emissions trading
5
Surplus in the target
Company A
1) ETS (Cap & Trade)2) Domestic credit
GHG emissions Reduction by farms etc.
Shortfall in the target
3) Kyoto credit
Overseas emissions reduction
Amount ofGHG
emissions
Amount of GHG
emissions
Major companies
Source) Global Warming Preservation Headquarters
Company B
Start from Oct. 2008
Credit trade (example)
Note: The project must
be assessed by verifier
reduce CO2 from energy use(N2O and CH4 is planned to be built in)
be based on the stated methodologies
6
Farms(Credit seller)
Major company(Credit purchaser)
# Reduce CO2emission# Monitor amount of reduced CO2
Domestic credit verification committee
Verifiers# Approve of Project design # Certify amountof credit
Assess project design & Implementation report
Trade of certified Domestic Credit
As of Jan. 27, 2011Number of farmer’s applications: 55
(Total number of application: 716)
• Cut flower (e.g. cut rose) farm’s applications account for about 40%– Mainly large‐scale farms or production organizations of greenhouse farms
• Among others include vegetable (tomato, melon, etc.) and livestock farms
• About 50% of purchasers are electric power companies
Overview of farmer’s application
7Source） http://www.maff.go.jp/j/kanbo/kankyo/seisaku/s_haisyutu/zisseki.html http://jcdm.jp/
Farmer’s CO2 reduction methodologies
• Introduction of Heat pump: 60%– Reduce CO2 emissions by 66% (450 tCO2/year/application) on an average
• Introduction of wood biomass boiler: 20%– Reduce CO2 emissions by 98% (610 tCO2/year/application) on an average
• Among others include the use of livestock biomass and LED lamps
8Source） http://www.maff.go.jp/j/kanbo/kankyo/seisaku/s_haisyutu/zisseki.html http://jcdm.jp/
MAFF study group’s report (2009)
• Current situation of Farmer’s GHG emissions– Large uncertainty in farmer’s GHG emissions
– Small amount of GHG reductions per a farm
– Small scale of farm operation
• Future effort– Making GHG emissions from agriculture ( CH4 and N2O) eligible for trade
– Creation of aggregators
– Matching between farmers and credit purchasers
Future Challenges
9Measures for standard farmers’ applications are needed
10
ECONOMIC EVALUATIONS OF FARMER’S ENERGY SAVING INVESTMENT
Overview<Purpose>
• Evaluate the impact of the Domestic Credit price on the farmer’s investment in energy saving equipment
<Case>
• Cut rose farm with standard size and technology
• Introduction of heat pump
<Methodology>
• Real options (RO) analysis
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Economic Efficiency is the key to investments and GHG reductions
Domestic credit scheme and farmer’s investment
Investment step Investment cost and returns
Introduction of energy saving equipment
Application to domestic credit scheme
○Purchase the equipment○Reduce in energy cost
○Pay application fee （e.g. verification fee etc.）
○Income from credit sales
12
Returns from investment
13
Returns from investment = Increase in (Revenue‐Expenditure)
Before investment After investment
Cost of investment
ーー
Purchase of equipmentApplication fee
Expenditure Seed and seedling・・・EnergyElectricityHeavy oil
Other materialsLaborOther cost
Seed and seedling・・・EnergyElectricity(increase)Heavy oil(decrease)
Other materials(increase?)LaborOther cost
Revenue Cut rose sales Cut rose sales(increase?)Credit sales
Uncertainty in expenditure and
revenue↓
Returns from investment
Uncertainty in farmer’s investment
Heavy oil price in 2008 doubles from 2000Source) MAFF statistics division
14
110
136
126
153
161
216
80
100
120
140
160
180
200
220
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Cut rose Fertilizer Heavy oil Electricity
(Base 2000 = 100)
Price of Kyoto Credit(Source: http://www.joi.or.jp/carbon/h_index.html)
• Fluctuating around ¥1,500/tCO2 in recent years
Note: The price is different from the domestic credit price.
15
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2010.1‐12Average：¥1,468/tCO2
2008.4‐2010.12Average：¥1,853/tCO2
2008.4‐12Average：¥2,818/tCO2
2009.1‐12Average：¥1,584/tCO2
Miximum：¥3,822/tCO2
（2008/7/14）
Minimum：¥1,016/tCO2
（2009/2/16）
¥/tCO2
Response to Uncertainty
• Waiting for investment has value under uncertainty
• If the price of heavy oilrise, heat pump is efficientfall, heavy oil boiler is efficient
→Large uncertainty may disturb farmer’s investment
16
Overview of the RO analysis
• Index for size of uncertainty：0H/0M• Large index means large uncertainty 17
<Investment decision>Farmers use expected returns (R) as investment decision criteriaR<M：Do not investM<R：Invest (not considering
uncertainty)H<R：Invest (considering
uncertainty )
0Expected returns to investment (¥)
Value of opportunity
for investment
MMarshallian trigger by NPV
HHurdle rateof RO analysis
Option value(value for waiting)
Previous studies show
2‐5
Scenarios
• Assuming uncertainty on oil price, cut rose price, etc.
• Farm account data is mainly based on Kanagawa prefecture (2002) but partially updated by using current statistics 18
Description Credit price（per 1tCO2）
Scenario 1 Credit price has same fluctuation as Kyoto credit
¥1,300～¥1,700（Ave. ¥1,500）
Scenario 2 Credit price is twice as Kyoto creditprice and has fluctuation
¥2,600～¥3,400（Ave. ¥3,000）
Scenario 3 Credit is traded in the fixed price ¥1,500(fixed)Scenario 4 Credit is traded in the fixed high
price¥5,000(fixed)
Scenario 5 Farmers don’t apply to the scheme ー
Results
Uncertainty shows smallest at Scenario 419
Discussion
• Mature investment decision is needed– All scenarios show larger 0H/0M than previous studies
• Domestic credit scheme would be effective to promote farmers energy‐saving investment– Fixed (and high) credit price policy shows the best
contribution to the farmer’s investment
• Accumulation of the case studies are needed– E.g. wood biomass boiler, GHG reductions from
livestock and paddy field, etc. 20
Summary1. Emissions Trading Scheme and Agriculture Sector in
JapanInstallation of heat pump by large scale cut rose farmer
Treatment for agriculture GHGs and standard individual (small scale) farmers
2. Economic Evaluations of Farmer’s Energy Saving Investment
Mature investment decision is needed
Domestic credit scheme would be effective to promote farmers energy‐saving investment
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Thank you for your kind attention
