1. The Pricing of Carbon Emissions from Business Perspective in Northeast Asia Presenter: Xianbing Liu Senior Policy Researcher/Task Manager Kansai Research Centre, IGES, Japan

2. 21 December, 2013 ACMSA 2013 Presentation Structure ❖ Background of the MBIs project ❖ Surveys and the samples under the project ❖ Major results from the project studies ❏ Determinants for energy saving practices ❏ Company’s MBIs awareness and subjective acceptability ❏ Carbon prices affordable for the companies; ❏ Choice experiment of carbon pricing policies ❖ Research policy implications ❖ Major outputs and efforts in impact generation 2

3. 21 December, 2013 ACMSA 2013 Overall Framework of MBIs Project Basic ideas: a) Advantages of MBIs; b) Importance of clear and stable policy signals; c) Successful MBIs Practices in Europe; d) Laggard policy progress in Asia; e) Core competence of IGES; f) Research field of KRC Geographical focus: China, Japan and the Republic of Korea Policy focus: Financial subsidy, carbon taxes and GHG emissions trading scheme Overall objective: To support the related policy discussions from company’s viewpoints in this region 3

4. 21 December, 2013 ACMSA 2013 Climate Policies in the Three Countries JapanChinaKorea Targets To reduce its 1990 emissions by 6% from 2008-2012 To reduce emissions by 25% from 1990 levels by 2020 (With the premise) To reduce emissions by 80% from 1990 levels by 2050 Improving energy efficiency at least by 30% by 2030 To reduce national energy intensity by 20% by 2010 and to increase renewable energy in the national mix to 15% by 2020 To cut CO 2 emissions per unit of GDP by 40-45% by 2020 compared with 2005 levels (Voluntary target) To reduce by 30% by 2020 compared with BAU levels (Voluntary target) To achieve 46% improvement of energy efficiency by 2030 To increase renewable energy in the national energy mix to 11% by 2030 Major policies for industrial sector Keidanren Voluntary Action Plan GHG Emissions Calculation, Reporting and Disclosure System Feed-in-tariff for renewable energies Subsidies from NEDO, METI and MOEJ Energy-related taxes GHG ETS on trial Carbon tax policy Energy Efficiency Standards Top 10,000 Energy-consuming Enterprises Program Subsidies and rewards for energy-saving Differential electricity pricing system Resource-related tax Pilot GHG ETS in 5 cities and 2 provinces Carbon tax policy in discussions Target Management System (TMS) Energy Use Reporting System Energy Audit Requirement Financial subsidies Preferable loans Tax reduction Energy-related tax GHG ETS since 2015 Carbon tax policy in discussions 4

5. 21 December, 2013 ACMSA 2013 Surveys under MBIs Project and the Samples YearItemChinaKoreaJapan FY2010 ObjectiveMeasure company’s practices in energy saving and identify the determinants MethodQuestionnaire survey and econometric analysis Target companies Based in Taicang city, Jiangsu Province 362 business sites of 244 companies Samples collected 125, with 80% from chemical, textile & dyeing and machinery sectors 66 business sites, 60% from power, petro-chemical and paper sectors FY2011 ObjectiveMeasure company’s MBIs awareness, acceptability and carbon price affordability MethodQuestionnaire survey, econometric analysis and WTP modeling estimations Target companies Three energy-intensive sectors: Iron & steel, cement and chemical industries Samples collected 170, more than 70% belonging to the three focused sectors 62, all from the three sectors and 93.5% is TMS target companies FY2012 ObjectiveMeasure the company’s preference to design alternatives of carbon pricing tools The same as the studies of FY2010 and 2011 in China and Korea MethodPolicy choice experiment and modeling analysis Target companies Companies in western Shanxi Province and eastern Jiangsu Province Focused on the three sectors as in FY2011 465 large energy-using companies in Hyogo Samples collected 201, almost half from each province 150, more than 60% from the three sectors 230, half from food, chemical, steel and electronic sectors 5

6. 21 December, 2013 ACMSA 2013 Determinants for Industrial Energy Saving Determinant factors Energy saving practice level (15 activities) China (N=125)Korea (N=66)Japan (N=230) External pressures Pressure from the government Pressure from industrial association Pressure from business competitor (+) *** Internal factors Awareness of energy management problems (+) ** Willingness to improve energy efficiency (+) ** (+) *** Top management support (+) * (+) ** Internal training specific for energy saving (+) *** (+) * (+) ** Control Current energy price level (+) ** Company size (+) * (+) *** Industrial sector belongings Note: ***, ** and * respectively means significant at 1%, 5% and 10% level; (+) means the positive relationship. 6

7. 21 December, 2013 ACMSA 2013 MBDC Card for Estimating Cost Affordability 15 increase options in Energy costs Five levels of acceptance 7

8. 21 December, 2013 ACMSA 2013 Affordability Responses of Samples in China (N=111) Energy Cost Increase Ratio (%) Strong Rejection (%) Rejection (%) Barely Acceptable (%) Acceptable (%) Easily Acceptable (%) Total (%) 0.10.0 1.833.364.9100.0 0.30.0 5.445.149.6100.0 0.50.00.914.450.534.2100.0 0.70.04.517.150.527.9100.0 1.01.88.137.835.117.1100.0 3.06.314.443.227.98.1100.0 5.07.218.946.921.65.4100.0 7.011.729.742.312.63.6100.0 10.019.842.329.76.31.8100.0 15.031.541.424.32.70.0100.0 20.046.041.410.81.80.0100.0 30.055.937.85.40.90.0100.0 50.075.721.62.70.0 100.0 70.084.715.30.0 100.0 87.412.60.0 100.0 8

9. 21 December, 2013 ACMSA 2013 Affordability of All the Samples in China (N=111) 50% of the samples corresponds to the ratios of 2.8% and 9.3% on the two curves. 9

10. 21 December, 2013 ACMSA 2013 Carbon Prices Affordable for the Companies CountryChina (N=170; Unit: Yuan/t-CO 2 )Korea (N=62; Unit: KRW/t-CO 2 ) Sector Iron & steel (N=34) Cement (N=17) Chemical (N=27) Iron & steel (N=11) Cement (N=5) Chemical (N=20) MEANAFFORD8.8%7.7%9.9%2.5%2.8%2.6% Affordable carbon price42.738.683.73,7702,6003,950 CountryJapan (N=230; Unit: JPY/t-CO 2 ) Sector Food processing (N=29) Chemical (N=26) Iron & steel (N=11) Electronics (N=12) MEANAFFORD2.0%3.1%1.5%2.6% Affordable carbon price6831,062426801 a) Similar acceptable ratios in energy cost increases due to pricing of carbon for companies of Japan and Korea, which are much lower than Chinese companies; b) Similar range of carbon prices affordable for companies in Japan and China (5-13 $/t-CO 2 ); c) Carbon prices affordable for Korean companies are 2.3-3.5 $/t-CO 2 ; d) The business affordability is much lower than the price level needed for realizing Copenhagen pledges of the three countries. 10

11. 21 December, 2013 ACMSA 2013 Company’s Awareness and Acceptability of MBIs Policy TypePolicy item Policy awarenessPolicy acceptability ChinaKoreaJapanChinaKoreaJapan MBIs Economic incentives Subsidies for energy saving projects 3.753.212.824.193.183.60 Soft loan for energy saving investments 3.031.803.433.36 Tax credits for energy saving projects 3.563.272.834.213.823.79 Subsidies and grants for energy efficient products 3.313.713.543.66 Carbon pricing tools Carbon tax policy 2.872.932.743.362.022.63 GHG emissions trading scheme 2.863.312.513.612.092.65 Command-and-control regulations (CCRs) Energy saving target and responsibility system 3.633.66 Energy use and GHG emissions reporting system 3.663.63 Voluntary approaches (VAs) Certification of energy efficient products 3.852.73 Voluntary energy saving agreements 3.853.413.10 Note: The data is the mean of scores. For policy awareness: ‘1’ = ‘completely unknown’; ‘3’ = ‘moderate understanding’; ‘5’ = ‘very clear’. For policy acceptability: ‘1’ = ‘completely unacceptable’; ‘3’ = ‘moderate acceptance’; ‘5’ = ‘fully acceptable’. 11

12. 21 December, 2013 ACMSA 2013 Payback Time for Energy Saving Investment Percentage of the samples (%) Payback time (Years)<0.50.5-11-22-33-55-10>10In total China (N=127)5.512.630.7 13.44.72.4100.0 Korea (N=62)3.212.948.433.91.6100.0 Japan (N=220)0.52.37.322.341.424.51.8100.0 a) 1-3 years of payback time expected by Chinese and Korean companies; b) The payback time expected by Hyogo companies is longer at 3-5 years; c) High expectation to the profitability of energy saving investments reveals the effectiveness of carbon pricing policies; d) Providing subsidies shorten the payback time and remove barrier of upfront cost, and is therefore useful at the earlier stage of LCT applications. 12

13. 21 December, 2013 ACMSA 2013 Attributes and Levels of Carbon Tax and GHG ETS A: Carbon Tax PolicyB: GHG ETS Attributes Levels Attributes Levels China (Yuan/t-CO 2 )Korea (KRW/t-CO 2 )ChinaKorea Tax rate 1) 10; 2) 30; 3) 50; 4) 100 1) 1,000; 2) 2,000; 3) 3,000; 4) 5,000 Cap setting 1) Based on the company’s historical emissions; 2) Based on the sector’s advanced emission levels; 3) Differentiated measures for the existing and new established companies Tax relief measures 1)No relief; 2) Preferential treatment to energy-intensive companies; 3) Preferential treatment to companies actively reducing emissions to a certain level Allowance allocation 1) All for free; 2) 5% auction, the rest for free; 3) 10% auction, the rest for free; 4) 30% auction, the rest for free Use of tax revenues 1) General budget; 2) Specific fund for energy saving and climate change ； 3) To reduce company’s other taxes Penalty 1) A fine the same of market price of carbon emissions; 2) 3 times of market price; 3) 5 times of market price Starting time 1) During the 13 th FYP (2016-2020); 2) During and after the 14 th FYP 1) Since 2015; 2) Since 2021 Compliance period 1) 1 year; 2) 3 years Criteria for carbon leakage 1) Carbon intensity; 2) Trade intensity 13

14. 21 December, 2013 ACMSA 2013 Design for Choice Modeling An example format of choice experiment Option A Option B Change in attribute level from A to B (+: Better; -: Worse) Attribute A1B1+ A2B2- A3B3+ A4 (Price) B4 (Price) + Tick a box ☐☐ An example of contingent ranking Option AOption BOption C Attribute A1B1C1 A2B2C2 A3B3C3 A4 (Price)B4 (Price)C4 (Price) Ranking of options: 1: ; 2: ; 3:. An example of pair-wise comparisons Option AOption BChange in attribute level from A to B (+: Better; -: Worse) Attribute A1B1+ A2B2- A3B3+ A4 (Price) B4 (Price) + Tick one level: 1--2--3--4--5--6--7--8--9--10 Strongly prefer A Strongly prefer B An example of contingent rating AttributeOption A: A1; A2; A3; A4 Tick one level showing your preference: 1--2--3--4--5--6--7--8--9--10 Very low preference Very high preference Applied for this research 14

15. 21 December, 2013 ACMSA 2013 Experiment Design and Choice Set Examples Policy attributeOption A01Option B01 Tax rate (Yuan/t-CO 2 )5010 Tax relief measureNo relief measure Preferential treatment to energy- intensive companies Use of tax revenuesGeneral budget Specific fund for energy saving and climate change Starting timeDuring and after the 14 th FYP Please tick the one you prefer □□ Policy attributeOption A01Option B01 Cap setting Based on the company’s historical emissions Based on the historical emissions for the existing companies, and the sector advanced emission levels for the new entrants Allowance allocation3% auction, the rest for freeAll for free PenaltyA fine of 3 times of the market priceA fine of 5 times of the market price Criteria for carbon leakage industry Carbon intensityTrade intensity Please tick the one you prefer □□ ◆ Design method is the same as carbon tax policy; ◆ An example set of GHG ETS in Korea. ◆ Design Expert 8.0 was used; ◆ D-optimal design applied; ◆ 12 Choice sets constructed; ◆ Two versions, 6 sets for each; ◆ An example set of carbon tax policy in China. 15

16. 21 December, 2013 ACMSA 2013 Attributes Determining Company’s Policy Choices The choice of carbon tax policyThe choice of GHG ETS AttributeChinaKoreaAttributeKorea Tax rate (TAXRATE) ( - ) *** Benchmarking for cap setting (CAP-B) (+, - ) *** Relief to energy-intensive companies (RELIEF-B) (+) *** Hybrid of grandfathering and benchmarking (CAP-C) (+, - ) *** Relief to energy efficient companies (RELIEF-C) (+) *** (+) ** Auction ratio for allowance allocation (ALLOCATION) ( - ) *** Specific fund for climate change (REVENUE-B) (+) ** A penalty of 3 times of credit market price (PENALTY-B) ( - ) *** Use to reduce company’s other taxes (REVENUE-C) A penalty of 5 times of credit market price (PENALTY-C) Starting time (TIME) ( - ) *** Use carbon intensity as leakage risk criteria (LEAKAGE) (+) *** Obs.1,041900 Note: ***, ** and * individually means significant at 1%, 5% and 10% level; (+) and (-) means the positive and negative relationship, respectively. Analysis models applied: MNL: Multinomial Logit RPL: Random Parameter Logit LC: Latent Class Model 16

17. 21 December, 2013 ACMSA 2013 WTP Values of Non-price Policy Attributes The choice of carbon tax policyThe choice of GHG ETS AttributeChina (Yuan/t-CO 2 )Korea (KRW/t-CO 2 )AttributeKorea (%) RELIEF-B -65.9-1,804 CAP-B 16.2 RELIEF-C-65.4 a -1,607CAP-C12.9 REVENUE-B-23.2-678PENALTY-B13.3 REVENUE-C-18.6 a 125PENALTY-C6.8 TIME6.4 a 1,665LEAKAGE-14.7 Note: Tax rate is used as the denominator for carbon tax and the auction rate for allowance allocation is the denominator for GHG ETS; a The estimated WTP is not statistically significant. Example explanations: ◆ Setting relief measure for energy-intensive sector (RELIEF-B) is the same as a decrease of 65.9 Yuan/t-CO 2 of tax rate in influencing the company’s policy choice; ◆ Similarly, using the tax revenue earmarked for climate change (REVENUE-B) rather than as general budget (REVENUE-A) equals to a decrease of 23.2 Yuan/t-CO 2 in tax rate. 17

18. 21 December, 2013 ACMSA 2013 Policy Implications of the MBIs Project Overall, this project studied the application of MBIs, especially carbon pricing tools, for enhancing energy saving and carbon mitigation from the business perspective; The identification of factors influencing company’s energy saving practices clarifies the direction for future policy efforts; Estimations of carbon price level affordable for the companies confirm the difficulty for closing the policy gap, and provide meaningful referendums for the development of carbon pricing policies; The policy experiment confirms the principles for the design of carbon pricing policies, including carbon tax and GHG ETS, and indicates the options preferable for the industry; The practical way is to combine a carbon tax with wide coverage but low tax rates with domestic GHG ETS focusing large emitters. The revenues from carbon pricing shall address R&D and earlier applications of LCT. 18

19. Invited presentations: 1) Symposium of UNDP 2) Sao Paulo Univ., etc. Present at conferences: e.g., EAERE, GCET, JSEEPS, KAPF, etc. 4+(2) Speedy Outputs Generation National policy makers & regional policy platform KRC/IGES Organizations in China: -Universities: Tsinghua, Tongji - Research Institutes: ERI/NDRC, RIFS/MOF - National Government: MOEP - Local governments, etc. Organizations in Korea: - Research Institutes: KEI, KECO, KEEI, GGGI - Government: MOE, MOKE - Universities - etc. Policy brief Networking Outcomes and Impact Generation Book Chapters (2) 1+(1) 1 (1) Networking 21 December, 2013 ACMSA 2013 19

20. 21 December, 2013 ACMSA 2013 Thank you for your attention! 20