U.S.-Japan Cooperation in the Obama Administration's Green Initiatives

September 29, 2009

Keynote Speaker:
The Honorable Eileen Claussen, President, Pew Center on Global Climate Change

Panelists:
The Honorable Eileen Claussen, President, Pew Center on Global Climate Change
Gen Hajime Ito, President, JETRO New York

Moderator:
Michael A. Levi, Senior Fellow for Energy and the Environment, Council on Foreign Relations

A distinguished panel of environmental specialists met at Japan Society to reflect on how the U.S. and Japan can work together on climate change issues in the run-up to the December Copenhagen conference and beyond.

In talking about climate change, "we must always put the science first," said keynote speaker Eileen Claussen of the Pew Center on Global Climate Change. Climate change "is happening much faster than predicted," as storms, droughts and floods intensify and the melting of Arctic and Antarctic ice accelerates. "These problems will only worsen without significant action to cut back global emissions of greenhouse gases."

Beyond the dangers to the environment are the needs of the global economy. "If we are to build ourselves out of this economic downturn, we must do it by creating a new economy--and the economy that is ripe for rebuilding is the energy economy."

Most Americans understand this: recent ABC News/Washington Post polls found that 75 percent of those surveyed support federal action on global warming. Yet Congress is unlikely to pass comprehensive legislation on greenhouse gases before the Copenhagen talks in December.

"Many have suggested that without a complete U.S. plan in place, the international talks will fail"--but "I don't share this view," she declared.

In June, the House of Representatives voted to put in place an economy-wide cap and trade system that would cut greenhouse gas emissions to 83 percent below 2005 levels by 2050, with interim steps of 3 percent below the 2005 levels in 2012, 17 percent below in 2020, and 42 percent below in 2030.

"Yes, it was a narrow win. And, yes, it was a difficult vote for many in the House. And, yes, we still have a steep hill to climb in the Senate, because there remains a great deal of opposition. But the House effort, led by Congressmen Henry Waxman and Ed Markey, sent a clear signal to families, workers and businesses that a clean energy future is possible," Ms. Claussen said.

In February of this year, the Obama administration stimulus package allotted some $80 billion to clean energy programs, ranging from smart grid technologies to mass transit. In April, the Environmental Protection Agency proposed findings that will, if made final, allow greenhouse gases to be regulated under the Clean Air Act. A new EPA greenhouse gas registry will cover 10,000 facilities and 80 percent of greenhouse gas emissions in the U.S.; and the EPA and the Department of Transportation have put forward a new automobile mileage standard of 35 miles per gallon, to take effect in 2016.

Private businesses in the U.S. are taking action too, she said, notably the United States Climate Action Partnership, or USCAP, led by Fortune 500 companies such as Alcoa, GE and Shell along with environmental groups including the Pew Center. "A decade ago, it would have been unimaginable for leading businesses to sign onto an agenda advocating cap and trade and other measures to achieve dramatic reductions in U.S. emissions."

Senators Kerry and Boxer are about to present a cap and trade bill to the Senate, but the Senate is not likely to act on climate change until after the debate on health care is concluded, Ms. Claussen said. The many open issues range from the allocation of emissions allowances and the nature of regulatory oversight for carbon markets to the impact on consumers and businesses, including energy-intensive manufacturing industries. "To beat back the small but vocal anti-climate sentiment, and to create enough cover for Republicans and moderate Democrats, who are on the fence about supporting climate action in the current political environment, the White House needs to get out there and aggressively make the case for action, and, yes, flesh out the details of exactly what that action should entail."

The costs of ignoring climate change are both environmental and economic: regulatory uncertainty means businesses will continue to delay needed investment in new energy sources and new low-carbon technologies.

At the UN climate summit earlier in September, both President Hu Jintao and Prime Minister Yukio Hatoyama spoke of "the importance of international cooperation in areas from technology transfer to financing for developing country mitigation efforts," Ms. Claussen said. The Major Economies Forum is working to help narrow gaps in the broader climate talks. "The administration also has launched a high-level energy and climate dialogue with China," and there are plans to set up a joint U.S.-China center for research on clean energy.

Ms. Claussen's hope for Copenhagen is a strong interim agreement that will:
• "Outline a new legal framework for verifiable mitigation commitments by all major economies," both developed and developing;
• "Establish the nature and scale of support that will go to developing countries";
• "Include a clear mandate to conclude a final agreement by a date certain"; and
• "Set an ambitious level of effort," including "a global goal of cutting emissions at least 50 percent by 2050, an aggregate 2020 target for developed countries and a collective peaking year for developing countries."

Such an interim agreement will not require congressional action.

"There is no doubt that anything short of a full and final agreement in Copenhagen will strike some as a woeful failure," she concluded. "But given how complex the issues are, and how far apart countries remain, achieving even a provisional agreement of this kind in the short time left is a huge challenge. I think we can meet the challenge and use the Copenhagen meeting as an opportunity to put some of the toughest issues behind us, and create positive momentum going forward. Rather than a grand culmination, Copenhagen could be a powerful springboard toward a final deal."

Prime Minister Hatoyama's commitment to cut Japan's emissions by 25 percent from 1990 levels by 2020 is the equivalent of a 30 percent reduction from 2005 levels, Gen Hajime Ito of JETRO New York pointed out. This is far larger than the target pledged by former Prime Minister Aso, and far larger than the EU's unilateral pledge of 20 percent below the 1990 base year, which works out to just 9 percent below 2005 levels.

Prime Minister Hatoyama promised to mobilize "all available policy tools," including a domestic emissions trading system as well as a feed-in tariff program, whereby utility companies buy electricity generated from renewables at a price sufficient to guarantee "a comfortable profit margin," he said. The new prime minister also pledged to consider a global warming tax.

However, the prime minister warned that "Japan's efforts alone cannot halt climate change," Mr. Ito observed. Japan accounts for just 4 percent of the world's CO2 emissions from fuel combustion. By contrast, China and the U.S. account for 20 percent each. Thus action by China and the U.S. is essential, and there must be an end to what's been described as the Alphonse-and-Gaston routine whereby neither China nor the U.S. has been willing to take the first step.

Japan's desire is to play a role in developing a mutually agreeable framework to bridge the differences between China and the U.S., he said. The technology side of such a framework will involve not only replacing fossil fuels with clean energy sources, but also developing greater energy efficiency, a sphere in which Japan is already a leader.

If gains in clean energy and energy efficiency aren't enough to bring CO2 emissions below target levels, a final step would entail limits on economic growth--but this should be indeed a last resort, he said.

In 2009 CO2emissions in nearly every developed country will actually decrease, Mr. Ito pointed out, precisely because of the declines in GDP due to the global recession. What's needed going forward is to maintain healthy, sustainable growth while boosting clean energy technologies and increasing energy efficiencies.

President Obama and former Prime Minister Aso agreed to bilateral exploration of several technology fields, including low-carbon technology, nuclear energy, energy conservation and energy-efficient vehicles, he noted. Yet businesses in the U.S. and Japan are much further along than their respective governments in cooperating on environment-friendly projects. Japanese and American firms are working together on smart-grid research in New Mexico. Toshiba and Westinghouse are collaborating in nuclear energy, as are Mitsubishi and GE. Sanyo is now making a high-end battery for Ford, and Hitachi will be supplying batteries to GM.

The share of American electricity production captured by renewables has been doubling or tripling every year, but that starts from a low level, he said. Nuclear power accounts for about 20 percent of the market. Meanwhile, almost 50 percent of the electricity produced in the U.S. comes from coal, which is dirtier than any other source.

Earlier this year, President Obama spoke of making the U.S. "the world's leading exporter of clean energy," but in the seven months that Mr. Obama has been in office, "it is China that has stepped on the gas in an effort to become the dominant player in green energy," Mr. Ito observed. In 2008, China's Suntech, Baoding Yingli and JA Solar ranked third, sixth and seventh, respectively, in solar cell production worldwide. A German solar-cell company, Q-Cell, ranked number one, reflecting the substantial support of the German government for renewable energy, among other things through a wide range of feed-in tariffs. The U.S.'s First Solar ranked second, up from fifth place in 2007. Japan's Sharp, which was second in 2007, fell to fourth.

The global solar cell industry is no small thing: in 2008, global production of solar cells reached 6.8 gigawatts of electric power, the equivalent of six or seven nuclear plants. Chinese firms are working hard to penetrate foreign markets, and indeed are relying heavily on green technologies in developing the next generation of the country's industrial base, Mr. Ito concluded. What's going on in Washington, D.C. and Copenhagen does matter, but "in the real market," the corporate market, there's already "fierce competition."

***

Moderator Michael Levi of the Council on Foreign Relations began the Q&A:

Japan's target under the Kyoto Protocol was already quite ambitious. What actually happens on the ground to get from that previous target to this 25 percent goal?

Given that Japan's marginal cost for reducing emissions domestically is higher than for China and India, it's clear that some part of the 25 percent will be attained through offsets, Mr. Ito replied. The specifics are being reviewed currently in Tokyo.

Is there any chance that the U.S. will set a target of this sort?

"You have to be realistic about where we are," responded Ms. Claussen. "We're now about 14 percent or 15 percent above 1990, so we would have to overcome that plus do more. I think the 17 percent in the House bill is about as ambitious as you're going to get from the U.S."

What do you suspect will pass the Senate, if you had to guess?

Either 17 percent, or perhaps 14 percent, Ms. Claussen said. Other issues are as important or more so than the target itself, "so it's a question of what the package looks like and how you can build a coalition of 60 votes."

Will something resembling Waxman-Markey be acceptable to Japanese negotiators?

"The most important thing to break the current hurdles is how to create the basic framework on fairness between the developed and developing countries," Mr. Ito said. "What we have to do is create a new paradigm for development to show developing countries."

What is your view on the carbon tariffs provision in the House bill?

"It's a terrible idea," Ms. Claussen responded. There's little discretion given to the president, so the tariffs will activate almost automatically. To avoid the tariffs, a country has to adopt a carbon-reduction program comparable to that of the U.S.--"and as a practical matter China is not going to do what the U.S. is going to do, or what Japan is going to do, or what Europe is going to do. It's going to do less."
"I think it's going to be in U.S. legislation and there is probably nothing that anyone can do about it," though the Senate version may be somewhat more moderate, she added. "What does that mean? Everybody else hates it also. It could start a trade war. What a mess."

Everybody but the French hates it.

"Yes, fair enough," Ms. Claussen commented.

"Personally I oppose the trade measures," Mr. Ito said. They're complex to administer, they set up the real possibility of conflict, and only a small fraction of U.S. energy-intensive imports come from China, so they likely won't have much of an effect.

The Pew Center's solution "is through allocating allowances so that the playing field can be level for some period of time," which is also in the House bill and will likely be in any Senate bill as well, Ms. Claussen said.

We still have substantial barriers to trade in clean technologies, both tariffs and other barriers like Chinese local content requirements. Do you see any prospect for reform on this front?

There's talk, "but I don't think it's real enough yet," Ms. Claussen replied.

Some developing countries are pushing for a relaxation of intellectual property controls on clean technologies. Where do you see a potential resolution there?

Compulsory licenses have been used for AIDS medicines, Mr. Ito said. We do have to protect intellectual property sufficiently to avoid undercutting incentives for innovation.

"I cannot imagine that we would sign anything with compulsory licensing--period. I just don't see it," Ms. Claussen said.

In the short run, low tech is more important than high tech for helping the developing countries reduce their CO2 emissions, Mr. Ito added. "Maybe we could apply some sort of bottom-up approach" to home in on "what technology you really need. If it is not a very critical technology, we could provide it at a reasonable cost, even at a zero cost."

In energy technology, IP is generally a very small part of the value, whereas for HIV/AIDS it was a dominant part of the value. So, a very different sort of role.

Turning to nuclear technology: the U.S. has objected to the spread of reprocessing technology, whereas Japan has a broader approach. Is there room to cooperate between the two countries?

The new administration likely will continue support for nuclear power facilities, which today produce 26 percent of electric power in Japan, Mr. Ito said. Japan should boost its use of nuclear power, because despite some safety and nonproliferation concerns, it's reliable, clean, and relatively cheap. This is a promising area for cooperation between the U.S. and Japan, as seen on the corporate side with Toshiba's relationship with Westinghouse and Hitachi's with GE.

The U.S. is "heading toward more nuclear slowly," Ms. Claussen commented. Though the House bill did not address nuclear energy, the Senate bill will, simply because "of the 10 possible Republican votes for a Senate bill, all 10 are big advocates for nuclear power." There's some interest in reprocessing, but "we're pretty far away from that"; the Senate bill is almost certain to have provisions on funding and on the waste issue.

How broadly shared are your views on an interim agreement in Copenhagen?

"In private conversations for two years the strongest European advocates for everything have said, 'Well, we probably won't get it,' but publicly they continue to say, 'We want everything,'" Ms. Claussen replied. Some of this is domestic politics, and then too, "I think they have someone to blame, and that is us, the U.S."

Is there the same political pressure in Tokyo?

As a member of the Kyoto Protocol, "we are ready to enhance or to revise or continue the existing framework," Mr. Ito responded.

If China agrees to take some actions, not a target, do you think that is acceptable from Congress's point of view?

"The optimist in me... says it's possible," Ms. Claussen replied, even though it takes 67 votes in the Senate to ratify a treaty, as opposed to 60 to approve a domestic bill. However, getting treaties through the Senate is very difficult. With the Law of the Sea Treaty, for example, the U.S. complies, but it hasn't actually ratified the treaty.

What I hear is that if the U.S. is going to commit legally, people need to see the Chinese and the Indians commit legally, even if it's in a different form. And if they can't get that, then the second-best is not this asymmetric approach, but one where essentially everyone registers their actions, but no one actually commits to them. Does that strike you as the way things might be going? And if we end up in that second category, is that acceptable?

"No. Not to me," because it would be very hard to verify what's genuine, Ms. Claussen said. "Although it appears that the administration sort of might be there, which makes me very queasy."

What do you think China needs to do to make this a fair, equitable and effective international approach?

"The international negotiating term is measurable, reportable and verifiable set of commitments, which could include renewable requirements, efficiency improvements, policies--they've got some fairly ambitious auto standards--things like that," Ms. Claussen replied. "And something that shows a shift away from burning coal without carbon capture and storage... To me, that would be good enough. And I think we could make the case in Washington that that's good enough."

The most important thing for Japan is "to create a framework where the U.S. and China can join," Mr. Ito said.

It's clear that the U.S., Europe and Japan aren't going to come up with the 1 percent of GDP as financial support that the Chinese and the Indians have asked for. But what is realistic?

"The finance discussions are way behind all the other discussions," and "I don't see developing countries agreeing to anything without an agreement on that," Ms. Claussen said. "The real question is how fast you can come to some numbers that are reasonable, legitimate and deliverable, which is a challenge in itself."

"China has money, and they need technologies, and also they are already doing a lot of business activities in the real world," Mr. Ito commented.

"Yes," said Ms. Claussen. "I don't actually see China being a recipient."

Government funding is important, but it's not enough, Mr. Ito continued. A global emissions trading system would mobilize private monies, but to have an international cap and trade system you need a cap, and a cap is an international binding target, which is the hardest thing to achieve.

The audience joined in the Q&A:

Why was 1990 chosen as a baseline? Between 1990 and 2008, which countries contributed the most to total CO2 emissions, and why is that not addressed instead of just emissions?

There's clearly an issue of fairness, "and of course developed countries should take responsibility for the accumulated emissions, including prior to 1990," Mr. Ito said. There needs to be a rule addressing post-1990 emissions contributions, perhaps based on population growth.

The 1990 baseline "was a political decision that actually I think favored Europe for a variety of reasons," Ms. Claussen said, and is now part of international law. A formula, "which I think you can't do," would include "many, many factors," including historic emissions, per capita emissions, future emissions, and capacity to do reductions. Ultimately "every country has to feel that it's fair. And it's a set of political decisions."

Mr. Levi commented, "You can use any base year you want. What actually matters is what you're doing relative to it."

What can be done to give consumers incentives to do things on a small scale that could add up to large-scale improvements?

Japan set ambitious energy efficiency goals to promote competition among companies, "and it worked," Mr. Ito said. In six years, the energy efficiency of a refrigerator has gone up by 55 percent. When people talk about smart grids they often focus on large installations, "but I think the most important innovation is the so-called microgrid, which is comprised of the smaller windmills, small solar cells, and advanced batteries." The Toyota home is one example; Panasonic also does work in this area.

Energy suppliers "make more money the more they supply," Ms. Claussen said. We in the U.S. have to change this so that companies "actually can make more money by supplying less, so that the incentives go in the right direction." U.S. consumers tend to ignore things like Energy Star labels that point them to more efficient choices, particularly when energy prices are really low, and industry does the same.

Mr. Levi asked, "What's happening in the U.S. at the state level?"

"California is the one to look at," Ms. Claussen said. "California energy prices are high. It is the most energy-efficient state by a lot."

"They are doing it the way they have always done it, which is with lots of little rules that govern virtually everything, which may not be the best model nationwide, but is the place I think to look for where the innovation is and what's going on."

Some 27 states have renewable requirements, and many states have incentives for energy efficiency, she added. The Pew Center's website, Pewclimate.org, has state maps showing the various programs and their effects.

A member of the audience asked, "Why is it that we don't force ourselves to focus less on caps and more on building up renewables?"

"A lot of people agree we need a price signal that penalizes higher carbon sources and helps with lower carbon sources," Mr. Levi said. "But what else do we need in order to catalyze the transformation?"

A carbon price is very effective when it comes to deploying existing technology, but if that were the only support for renewables, at least currently, the price would be very high, Mr. Ito said. But if we relied only on the carbon price, it would be very high. "From that point of view, personally I support the government-driven R&D projects," which are very effective both in Japan and in the U.S. Beyond this, competition among private businesses "is going much, much further than we had expected," with the price of solar cells down 40 percent over the last two years.

At the federal level, the U.S. has not been ambitious in the way we could be, Ms. Claussen said. Tax credits for renewables have to be re-approved every year or every two years. "There is no certainty about the size of the market, and that's a huge issue," indeed "impossible if you're doing real planning for the future."

Mr. Levi asked, " Do feed-in tariffs make sense in the U.S.?"

At the Pew Center, Ms. Claussen replied, "we have looked at it, and we haven't concluded how you would do them in a way that actually makes sense. Which doesn't mean that there isn't a way. We just haven't figured it out yet."

Where do you see natural gas playing into the transition?

Natural gas is 50 percent less greenhouse-gas-intensive than coal, and the U.S. has a lot of it, Ms. Claussen said. For political reasons, it's not likely to replace coal entirely, because to get coal-state senators on board "you've got to be able to show that coal is going to be around for some period of time."

"Quite honestly if we don't figure out carbon capture and storage, we have a huge problem, because the Chinese continue to build coal-fired power plants at very rapid rates," she added.

"The technology is in the oil fields" already, in the form of EOR, enhanced oil recovery, said Mr. Ito. It will take time to address the challenges of cost, public acceptance, and liability issues, so "I am personally a strong supporter of natural gas." With improved technologies, it's now possible to produce gas from shale fields, which "is drastically changing the demand and supply structure of natural gas in the United States."

"If there is a price for carbon, I think you're going to see it, because it's available," Ms. Claussen said.

Is there any prospect in the near or medium term of linking U.S. and Japanese cap and trade systems, or is it premature to begin talking about this sort of thing?

"Ideally you would link all the cap and trade systems," Ms. Claussen said. "We are probably going to be the farthest behind."

"It's purely my personal point that it is unrealistic to create a globalized emissions trading market at once," Mr. Ito said. It's more likely that the U.S., Europe and Japan will establish domestic emissions markets "and try to link these markets first from the developing countries," and then gradually expand.

What are the lessons we can learn from the Clean Development Mechanism experience?

There are a variety of fairness issues, Mr. Ito said. Chinese emissions are increasing overall, for example, and yet a project in China that cuts emissions from a given source creates value under the CDM framework. By the same token, when an American investment bank receives a 100 percent return on a CDM investment, that too raises questions of fairness.

"Where we are in terms of how it should be changed, actually it's not entirely clear to me," Ms. Claussen said.

"We're torn between two different directions," Mr. Levi said. "We know certain things don't work. On the other hand, one of the fundamental challenges of climate policy is long-term credibility. So revising policies frequently runs against that. And when you're asking people to make very long-term investments, that is something of a challenge."

-Katherine Hyde