1. The Pricing of Carbon Emissions from the Business Perspective in Northeast Asia May 27, 2013 Presenter: Xianbing LIU Senior Policy Researcher Kansai Research Centre/IGES, Japan

2. May 27, 2013 Shanghai Forum 2013 2 Background: The Project on MBIs (Market-based Instruments) Basic thinking: 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 Overall objective: To support the related policy discussions from the business viewpoints in this region Geographical focus: Japan, China and the Republic of Korea Policy focus: Financial subsidies, carbon taxes and GHG emissions trading schemes Discussed in this presentation

3. May 27, 2013 Shanghai Forum 2013 3 Climate Policies in the Three Countries JapanChinaKorea Target To reduce its 1990 emissions by 6% from 2008-2012 To reduce emissions by 25% from 1990 levels by 2020 (based on the premise with the participation of all major emitting countries) 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 ※ These are voluntary targets on its own country conditions To reduce by 30% by 2020 compared with BAU levels (It is said this equals to a reduction of 4% compared with 2005 level) ※ It is a voluntary target on its own country conditions Counter- measures (mainly for the industry) Keidanren Voluntary Action Plan on Environment Energy saving-related law GHG emissions Calculation, Reporting and Disclosure System Energy-related taxes Carbon offset scheme, carbon financing scheme (voluntary) ETS is under trial, carbon tax introduced since Oct. 1, 2012 (Energy supply side) All new coal-fired power plants to be state- of-the-art commercially available with better technologies (Energy demand side) Imposes a significant portion of overall 20% energy intensity improvement by directly targeting around 1,000 largest state-owned enterprises Resource-related taxes Pilot of GHG ETS, discussions of ETR Adoption of a legal and regulatory framework, GHG and Energy Target Management System, carbon emission trading, the creation of a national GHG inventory reporting system by 2010 Energy-related taxes Start GHG ETS since 2015, Discussions in carbon tax

4. May 27, 2013 Shanghai Forum 2013 4 Objectives of the Surveys in FY2011 1)Monitor the company’s awareness and overall acceptability of energy saving and climate policies, particularly the economic instruments; 2) Estimate the company’s affordable carbon prices using the model of willingness-to-pay (WTP) and MBDC format; 3) Understand the barriers for the company’s energy saving investments and responses to the emerging carbon pricing policies. The surveys in China and Korea were conducted in FY2011. The survey in Japan was arranged in FY2012 as a complementary one under the MBIs project of KRC/IGES in the 5 th phase (FY2010-2012).

5. May 27, 2013 Shanghai Forum 2013 5 MBDC Card for Model Estimations & Survey Items 15 increase options in Energy costs Five levels of acceptance Main Items: ◈ Basic information of the firms; ◈ Firm’s energy use status; ◈ MBDC format on the left; ◈ Factors affecting firm’s cost affordability and policy awareness; ◈ Awareness of policies and energy saving technologies; ◈ Factors affecting firm’s decisions in energy saving investments; ◈ Firm’s reactions to possible policy interventions; ◈ Pay back time for energy saving investments; ◈ Etc.

6. May 27, 2013 Shanghai Forum 2013 6 Estimation Models for Individual Companies Affordable energy cost increase ratio, with a CDF F(r) Mean value of V i Possibility for accept an increase threshold, r ij An error term with a mean of zero Assumed a normal accumulative distribution with a mean of μ i and a standard variance of σ i A vector of determinant factors

7. May 27, 2013 Shanghai Forum 2013 7 The Survey Areas in China Shandong Province: 57 Shanxi Province: 79 34 samples from other areas

8. May 27, 2013 Shanghai Forum 2013 8 Distribution of Respondents in China Number of samples Number in total (Percentage) SmallMediumLargeUnclear Iron & steel142710152 (30.6) Cement2471133 (19.4) Chemical12214138 (22.4) Paper186015 (8.8) Others19121032 (18.8) Number in total (Percentage) 70 (41.2) 75 (44.1) 22 (12.9) 3 (1.8)170 (100.0) 3 energy-intensive sectors mainly targeted in this survey

9. May 27, 2013 Shanghai Forum 2013 9 Company’s characteristics Number of samples Number in total (%) SmallMedium Large Medium Large Sector Cement262111 (17.7) Steel-85316 (25.8) Petro-chemical-13 935 (56.5) Number in total (%)2 (3.2)27 (43.5)20 (32.2)13 (21.0)62 (100.0) TMS 226171358 (93.5) Non-TMS-13-4 (6.5) Number in total (%)2 (3.2)27 (43.5)20 (32.2)13 (21.0)62 (100.0) Distribution of Samples in Korea

10. May 27, 2013 Shanghai Forum 2013 10 The Survey Area in Japan ► Posted to all the 465 manufacturing companies with annual energy use over 1,500kl TOE; ► 117 are members of Hyogo Environmental Protection Association; ► 348 are posted with the letter of Hyogo government; ► 72 association members responded; ► 158 collected with the letter of Hyogo government; ► A total of 230 valid samples gathered.

11. May 27, 2013 Shanghai Forum 2013 11 Distribution of Respondents in Hyogo, Japan Sector Number of samples Number in total (Percentage) SmallMediumLarge Food processing0321042 (18.3) Chemical024630 (13.0) Iron & steel012820 (8.7) Electronics0121325 (10.9) Others48425113 (49.1) Number in total (Percentage) 4 (1.7) 164 (71.3) 62 (27.0) 230 (100.0)

12. May 27, 2013 Shanghai Forum 2013 12 Company’s Energy Use Structure in China 62% 32%

13. May 27, 2013 Shanghai Forum 2013 13 Energy Cost Ratios in Total Sales of Chinese Samples For large and medium firms: 20-30% of energy cost in production cost.

14. May 27, 2013 Shanghai Forum 2013 14 Energy Use Structure of the Samples in Japan 49.7%26% 73.9%11.3% 33.8%43.2%

15. May 27, 2013 Shanghai Forum 2013 15 Affordability of the Samples in China (N=111) 50% of the samples corresponds to the ratios of 2.8% and 9.3% on the two curves. Two curves were simulated: One is the sum of easily acceptable + acceptable. The other is the sum of easily acceptable + acceptable + barely acceptable. The real affordable ratio shall be between these two curves.

16. May 27, 2013 Shanghai Forum 2013 16 Affordability of Steel Companies in China (N=34) 50% of the samples corresponds to the ratios of 2.6% and 9.3% on the two curves.

17. May 27, 2013 Shanghai Forum 2013 17 Affordability of All the Samples in Japan (N=153) 50% of the samples corresponds to the ratios of 0.6% and 3.2% on the two curves.

18. May 27, 2013 Shanghai Forum 2013 18 Affordability of All the Samples in Korea (N=36) The R squared for regressions of the two sets of data is 0.9565 and 0.9721. Affordability on the part of 50% of the samples corresponds to energy cost increase ratios of 0.6% and 2.3%.

19. May 27, 2013 Shanghai Forum 2013 19 Distribution of Cost Affordability in China VariablePercentileCentile (%)95% Conf. Interval (%) Panel A: All the samples (N=111) Mean of μ: 8.8% The std. dev. of μ: 9.0% 100.720.541.94 303.952.575.08 506.595.206.97 7010.237.0812.86 9018.5013.8328.91 Panel B: Samples from iron & steel sector (N=34) Mean of μ: 8.8% The std. dev. of μ: 9.9% 100.610.321.73 * 303.370.996.72 506.744.3610.35 7011.206.7516.03 9017.9413.1452.6 * Panel C: Samples from cement sector (N=17) Mean of μ: 7.7% The std. dev. of μ: 4.4% 102.191.945.08 * 305.172.256.81 506.755.0810.15 709.796.4713.12 9014.3110.1519.05 * Panel D: Samples from chemical sector (N=27) Mean of μ: 9.9% The std. dev. of μ: 11.2% 100.840.503.19 * 303.651.585.20 505.203.619.13 708.315.2025.71 9029.5811.1344.08 * * : Lower (upper) confidence limit held at minimum (maximum) of sample. ◈ Significantly and negatively associated with competition level; ◈ The large companies have higher affordability.

20. May 27, 2013 Shanghai Forum 2013 20 Calculations of Affordable Carbon Prices in China Energy type Energy use ratios (%) Current energy price a Emission factor b Iron & steelCementChemical Electricity27.8531.1918.620.618 Yuan/KWh0.8592 t-CO 2 /MWh Coal61.8261.6732.10746 Yuan/t1.9383 t-CO 2 /t Fuel oil0.642.3534.864450 Yuan/t3.0358 t-CO 2 /t Natural gas1.030.002.042.78 Yuan/m 3 2.1731 t-CO 2 /1,000 m 3 Steam0.660.006.51230 Yuan/t0.3231 t-CO 2 /t MEANAFFORD8.8%7.7%9.9% Data source: a www.askci.com; www.cngold.org;www.askci.com www.cngold.org b (Su et al., 2009); (NDRC, 2010). Affordable carbon price (Yuan/t-CO 2 ) 42.738.683.7

21. May 27, 2013 Shanghai Forum 2013 21 Distribution of Cost Affordability in Japan VariablePercentileCentile (%)95% Conf.Interval (%) Panel A: All the samples (N=153) Mean of μ: 2.3% Mean of std.dev. of μ: 3.7% 100.4 0.5 300.60.50.9 501.91.22.3 702.92.73.5 905.34.75.5 Panel B: Samples from food processing industry (N=29) Mean of μ: 2.0% Mean of std.dev. of μ: 3.7% 100.50.40.8 a 300.90.61.6 501.71.12.3 702.51.83.8 904.32.85.3 a Panel C: Samples from chemical industry (N=26) Mean of μ: 3.1% Mean of std.dev. of μ: 4.2% 100.50.40.5 a 300.5 2.5 502.60.64.3 704.82.85.7 907.45.012.0 a a Lower (upper) confidence limit held at minimum (maximum) of sample In addition: Iron & steel sector (N=11): Mean of μ: 1.5% Mean of std. dev. of μ: 3.1%. Electronics sector (N=12): Mean of μ: 2.6% Mean of std. dev. of μ: 3.7%.

22. May 27, 2013 Shanghai Forum 2013 22 Carbon Prices Affordable for Companies in Hyogo Energy use ratios (%) Energy price (Yen/GJ) Emission factor (t-CO 2 /GJ) All samples (N=218) Food processing (N=42) Chemical (N=30) Iron & steel (N=16) Electronics (N=25) Electricity49.7243.1948.8756.3173.8814330.0467 Coal1.800.001.033.940.00407.80.0907 Oil1.710.863.333.384.801188.50.0686 Natural gas4.919.438.430.00 781.90.0495 Heavy oil6.646.508.931.813.7621100.0693 City gas26.0333.8318.5027.6311.281834.30.0496 Heat2.474.026.430.00 5649.00.060 LPG2.831.591.333.000.281298.60.0589 Gasoline0.050.020.00 3927.70.0671 Diesel0.790.020.030.130.002859.40.0684 Kerosene2.720.453.100.066.002356.90.0678 Cokes0.280.00 3.690.001475.20.1078 MEANAFFORD2.3%2.0%3.1%1.5%2.6% Affordable carbon price (JPY/t-CO 2 ) 7396831062426801 Big gap with the carbon price needed for realizing Copenhagen pledge of Japan (30-50$/t-CO 2 ) 5-13$/t-CO 2

23. May 27, 2013 Shanghai Forum 2013 23 Distribution of Cost Affordability in Korea Panel A: All the samples (N=36) Percentile Centile (%) 95% Conf. Interval (%) Panel C: Cement sector (N=5) Percentile Centile (%) 95% Conf. Interval (%) Mean of μ: 2.6% The std. dev. of μ: 3.9% 100.380..110.5 Mean of μ: 2.8% The std. dev. of μ: 4.3% 100.11 1.53 300.70.481.42304.060.113.88 501.590.862.26501.840.118.81 702.621.723.62703.864.058.81 909.222.7513.2908.8120.28.81 Panel B: Iron & steel sector (N=11) Percentile Centile (%) 95% Conf. Interval (%) Panel D: Chemical sector (N=20) Percentile Centile (%) 95% Conf. Interval (%) Mean of μ: 2.5% The std. dev. of μ: 3.8% 100.48 0.95 Mean of μ: 2.6% The std. dev. of μ:3.8 % 100.270.110.6 300.870.481.59300.660.371.64 501.590.642.37501.570.652.71 701.771.4312.7702.691.56.7 9011.41.7413.3909.632.7211.3 *: Lower (upper) confidence limit held at minimum (maximum) of sample.

24. May 27, 2013 Shanghai Forum 2013 24 Carbon Prices Affordable for Korean Companies Energy type Energy use ratios (%) Current energy price *1 Emission factor *3 Iron & steel CementChemical Electricity63.9429.2551.3373.69 KRW/KWh1.428 t-CO 2 /toe *4 Coal3.6336.880.47113,138 KRW/t1.059 t-CO 2 /toe Fuel oil5.221.6210.00612,352 KRW/t0.875 t-CO 2 /toe Gas24.788.1815.54552 KRW /m 3 0.637 t-CO 2 /toe Steam0.19015.6830,000 KRW/t *2 0.3231 t-CO 2 /t MEANAFFORD2.522.772.55 Data source: *1 IEA, 2010 *2 International Journal *3 IPCC *4 Kim, 2009 Affordable carbon price (KRW/t-CO 2 ) 3,7722,6023,953 Kwon and Heo (2010): 36,545KRW/t-CO 2 (about 31$/t-CO 2 ) for achieving the national mid-term target of Korea. KIFP (Korea Institute of Public Finance) (2008): 25 EURO/t-CO 2 and equivalent to 31,328KRW/ t-CO 2 KIFP (2010): Suggested a carbon tax rate at the level of 1/8 of above in the first proposal.

25. May 27, 2013 Shanghai Forum 2013 25 A Brief Summary ◆ This presentation summarizes the estimation results of carbon prices affordable for the companies in China, Japan and Korea; ◆ The MBDC format and WTP model, traditionally used for the individuals, were innovatively applied; ◆ The sampled Chinese companies show relatively higher affordability to energy cost increases than the companies of Japan and Korea; ◆ The carbon prices affordable for the companies in China and Japan are similar at a range of 5-13$/t-CO 2, which is around 2-3 times of Korean companies; ◆ The estimated affordable carbon prices are meaningful for the ongoing discussions of carbon pricing policies in this region; ◆ Besides carbon prices, the viewpoints of businesses on the other policy attributes shall be measured for the design of appropriate carbon pricing tools; ◆ The policy gap for the realization of national carbon mitigation targets in medium and long term shall be further identified and bridged; ◆ The possibility for policy integration and coordination at regional level is an essential topic for discussions.

26. May 27, 2013 Shanghai Forum 2013 26 Thank you! Contacts: Xianbing LIU KRC/IGES Tel: +81-78-262-6634 Fax: +81-78-262-6635 E-Mail: liu@iges.or.jpliu@iges.or.jp URL: http://www.iges.or.jphttp://www.iges.or.jp