Green Products Market Development in Japan

2.1 Overview of Japan's Green Technology Policies Prior to the Financial Crisis

According to Japan's Agency for Natural Resources and Energy (ANRE), in 2004, Japan imported 94% of its primary energy source from overseas (ANRE 2007). As such, securing stable and sufficient access to energy supplies is an issue of national security for the Japanese. The impact of the energy crises that emerged from the two oil shocks in the 1970s and Gulf war (Figure 1 [ PDF 233.8KB | 1 page ]) show clearly just how vulnerable Japan's economy is to global conditions.

This reliance on other countries for energy has been the primary motivator for Japan's never-ending search to improve its energy efficiency. Establishing mechanisms that radically improve the energy efficiency of its technologies, commodities, industrial processes, and social infrastructure have helped Japan to become one of the most energy-efficient economies in the world (Figure 2 [ PDF 50KB | 1 page ]). Technologies that it has developed over the years have also provided the added benefit of improving Japan's global competitiveness as a leading producer of high-tech, energy-efficient and eco-friendly goods.

Most recently, Japan has become known for producing eco-friendly automobiles. At a time when other carmakers were focused on making the fastest and largest cars, Toyota focused on researching and developing its first commercially-viable hybrid car, the Prius. Beginning in 1993, the idea emerged out of concerns held by Toyota's executive management regarding “whether the car should remain as is through thein the 21st century?” The issue of global warming had already reached the international agenda, particularly since the testimony of Dr. James Hansen at the US Congress in 1988, where he warned about the dangers of rising CO₂ emissions. The issue became crystallized in 1992 when the UN Framework Convention on Climate Change (UNFCCC) was adopted at the Rio Earth Summit, and when it later came into force in 1994. Three years later, Toyota produced the first hybrid vehicle ever to be available on the international market in 1997—the year that the Kyoto Protocol was adopted.

For several years after, however, the sales of the hybrid vehicles were slow. The pioneering product needed to wait until around 2004–2005 when society and consumers' demands slowly began to change (Figure 3 [ PDF 53.9KB | 1 page ]). Firstly, the Kyoto Protocol, and in 2006, the momentum accelerated with the announcement of the British Government's Stern Review on ‘the Economics of Climate Change' and the release of the documentary, the ‘Inconvenient Truth' by Former US Vice President, Al Gore; both of which triggered large public attention on the economic costs of not taking action now.

When the issue of climate change crossed from the sciences and into realms of society, policy, and business, the market grew for green products and services like the Prius. This is a historical example of where the private sector had the foresight and leadership to innovate and invest in pioneering eco-friendly technologies before there was market demand for green products. In contrast, government policies were either behind the times or not visible, largely because there was a lack of demand by constituents at a period when economic growth was stable [2.0% in 2004]. It was only later when it became evident that sales of hybrid cars would start to exceed traditional models that governments started to see this sub-sector as potential area for economic development.

Renewable energy is another sector that some perceive as receiving insufficient public policy support, particularly in recent years. Ironically, given the Japanese over-reliance on imported energy, boosting domestic sources of renewable energy should have been an immediate priority to reduce this dependency. Critics of Japan's public investment in renewable energy often refer to the photovoltaic sector. Temporal trends of social demand and technological advancements for photovoltaic technology exhibit similar correlations shown for the hybrid vehicle in Figure 3 above. However, without policy support, Japan has fallen behind Germany as the world-leader in photovoltaic production despite the level of technological advancement of Japan's renewable energy sector (Figure 4 [ PDF 53.9KB | 1 page ]).

2.2 Japan's Stimulus Package

On 10 April 2009, the Japanese government announced it would implement a range of fiscal stimulus measures to both prevent the worst impacts of the immediate global financial crisis and strengthen its economy against the long term unavoidable impacts of climate change. The package, worth US$154 billion, was designed to increase Japan's GDP economic growth by 2% and create jobs for 400,000 to 500,000 people. The package included an employment adjustment subsidy, vocational training provision, financial loans and support, acceleration of the implementation of public projects planned throughout the year, encouraged innovation towards creating a low-carbon society, establishment of a “resourcecircular society” (one that encourages the principles of “reduce, reuse, recycle”), revitalization of local medical care and child care, renovation of social infrastructure, enhancement of R&D, tourism promotion, social security reform, and disaster management.

As of September 2009, certain economic sectors in Japan have slowly returned to positive balance sheets, like the automobile industry. The likely cause of this is the injection of fiscal stimulus funds by the Japanese government, coupled with efforts of other governments to stabilize their own economies. Sales of household electrical appliances subsidized under the stimulus package have increased, contributing to the upturn. One notable exception was the sale of air conditioners, which suffered more from low consumer demand due to a cooler summer in Japan this year – likely caused by the El Niño effect. For other products still experiencing negative indicators, the situation may have been much worse without the stimulus package.

2.2.1 Boosting Sales of ‘Green' Automobiles as a Response to the Economic Crisis

The end of 2008 to the first half of 2009 was a severe time for major carmakers worldwide. Eight Japanese and three American automobile makers reportedly lost market share by 3.3% to 55% in the first half of 2009. In contrast, other European and Korean makers increased their shares due to growth in demand for more affordable and smaller vehicles, particularly in emerging economies that were less impacted by the crisis. For Japanese vehicles particularly, sales reached their lowest point in 40 years (Figure 5 [ PDF 53.1KB | 1 page ]).

The automobile industry is Japan's largest employer, accounting for around 4.9 million direct and indirect jobs. In this context, the government announced it would directly provide assistance to boost the industry (Ministry of Economy, Trade and Industry 2009). Around US$2.1 billion in tax reductions was granted to “eco-cars” and around US$3.7 billion dollars in subsidies to consumers who purchased “eco-cars” during the 2009 fiscal year. The following sub-sections will provide a brief outline the components of the subsidy.

2.2.2 Detailed Description of the Eco-car Tax Reduction and Subsidy

The eligibility of automobiles for the eco-car tax reduction and subsidy is determined by the type of engine, fuel use, level of fuel efficiency, emission levels, vehicle weight, etc. The list of eligible vehicles also includes a wide range of models, some of which have not yet been produced in mass production for the market, but are there for the purpose of promoting R&D, such as plug-in hybrid vehicles (Table 1 [ PDF 29KB | 1 page ]). The diverse list of eligible cars is designed to include, rather than exclude, the best performing vehicles in all categories.

Box 1: Eco Car Subsidy Policy [ PDF 27.4KB | 1 page ]

2.2.2.1 Automobile Taxes in Japan

Several types of state and provincial/municipal taxes are imposed on automobiles and light weight vehicles: the Automobile Tax, Automobile Acquisition Tax, Automobile Weight Tax, and Light Weight Vehicle Tax. The tax scales are set based on sizes, engine volumes, weights, and vehicle use purposes (private/business). In addition to these taxes, the Gasoline Tax and Diesel Oil Delivery Tax are also imposed when purchasing fuel. Among these taxes, the Gasoline Tax, Diesel Oil Delivery Tax, Automobile Weight Tax, and Automobile Acquisition Tax are deposited to the Road Construction and Improvement Special Account (Doro Tokutei Zaigen), which have been designated to specifically fund road constructions all over Japan for many years.

Table 2 [ PDF 31.2KB | 1 page ] lists examples of the benefits provided by the eco-car tax reduction for three models: Toyota Prius, Honda Insight, and Nissan X-Trail; all of which are 100% eligible under the stimulus package.

The total of all three Automobile Taxes (Automobile Acquisition Tax, Automobile Tax, and Automobile Weight Tax) amounts to approximately 10% of the vehicle's price. Of the vehicles that are 100% eligible for the eco-car tax reduction, 6–7% out of 10% are exempted from these taxes. With the eco-car subsidies, the stimulus package will bring the new vehicle's price down by 12–20% if it is purchased to replace a car that is 13 years or older, or 9–12.5% without the replacement. As of September 2009, the eco-car subsidy will no longer be applied to new purchases of Toyota's Prius, however, as current production capacity cannot meet the rapidly increased demands since April 2009. Consequently, those who have placed purchase orders of the Prius may not receive the vehicle before the subsidy expires at the end of March 2010.

Box 2: Taxes Related to Automobiles and Light Weight Vehicles [ PDF 31.2KB | 1 page ]

2.2.3 Impact of the Tax Reduction and Subsidy on Vehicle Sales

In August 2009, car sales in the US and Japan began to show weak but slight increases (1– 2.2%) in sales for the first time in 22 and 13 months, respectively—no doubt helped in large part by the fiscal stimulus. Table 3 [ PDF 126KB | 1 page ] provides an outline of the top 10 selling cars in Japan in August 2009.

In June 2009, the Toyota Prius became the top selling passenger car for the first time in the Japanese market; 22,292 new Prius cars out of a total 219,836 were sold in June 2009 (Japan Automobile Dealers Association 2009). As of August 2009, Prius has remained as the top selling car for 4 consecutive months (see Figure 6 [ PDF 126KB | 1 page ]). In July, the total number of sales of Toyota Prius and Honda Insight (another hybrid model) reached almost 38,000 out of a total 118,539 passenger cars sold (or 32%). Purchase orders for the new third-generation Toyota Prius has so far exceeded supply: more than 200,000 orders were placed since the new model was announced in May 2009, and currently there is a long waiting list for buyers who cannot receive it before March 2010.

2.2.4 Criticisms: Larger versus Lightweight Vehicles

Some argue that under the tax reduction and subsidy program, “eco-cars” have been defined in a misleading way, which has led to some larger passenger vehicles qualifying for the benefits despite their lower fuel efficiency rate compared to other eligible choices. Nonetheless, it should be noted that the first priority of the eco-car policy is to stimulate demand and alleviate the impacts of the financial crisis. Many models available in the market have already cleared the current fuel efficiency and emission standards, requirements that must be met in order to be eligible for the tax reduction. A significant reason for this is the competitive culture of Japanese car manufacturers, nurtured through the government's Top- Runner system (see 2.4.2).

There are several types of categories of automobiles for different administrative purposes (such as registration and taxes). As such, it is critical for the purpose of this paper to clearly differentiate between the two categories: passenger cars (Joyousha) that have engines larger than 0.66L and lightweight vehicles (Kei Jidosha) that are driven with engines less than 0.66L. According to the Automobile Inspection & Registration Information Association (2009), as of the end of May 2009, the total number of passenger vehicles and lightweight vehicles amounted to 57 million (30.7 million passenger cars and 26.3 million lightweight vehicles) in Japan.

The category of lightweight vehicles emerged out of market demands that began in the 1950s. Despite safety concerns that these vehicles had a less robust body, demand remains high, particularly in rural areas where having more than two cars per family is recognized as common sense. As of March 2009, the number of lightweight vehicles owned in Japan reached 26 million, corresponding to 49.5 light weight vehicles per 100 households (Japan Mini Vehicles Association 2009).

The most popular lightweight vehicle and second-best in all categories of vehicles, as of August 2009, was the Wagon R (Suzuki). Its fuel efficiency of 22–23.5 km/L (10-15 fuel efficiency measurement mode), while not better than a hybrid car, performs better than some normal-sized passenger cars. These cars are also sold at an affordable price of around 900,000 yen (US$10,000) and up, contributing to their popularity. As shown in Table 3, factors such as affordability, lower taxes and lower maintenance costs of lightweight vehicles seem to play a more significant role in consumers' decision making process than fuel efficiency. However, the total sale of lightweight vehicles in recent months has declined due to relatively larger incentives offered on normal-sized eco-cars, like hybrids³. While having the highest fuel efficiency rating, the Toyota Prius is one of the most expensive vehicles in similar automobile categories. Nonetheless, it has been the top-selling car since June 2009, indicating that there is a large market of Japanese consumers willing to pay higher prices for more environmentally-friendly goods. This is supported by the unusual fact that the price of a used second-generation Prius in July 2009 was the same as or even higher than that of a new Prius of the same generation. A similar demand can also be seen as a result of the American stimulus package (see Box 3 [ PDF 49.3KB | 1 page ]). While a large part of this accelerated trend in consumer behavior is a result of the Japanese government's eco-car policy, it should also be recognized that hybrid cars are firmly perceived as an economically viable and socially responsible choice in today's global economic context. This mindset is expected to continue beyond the life of the stimulus package.

2.2.5 The Future

By the end of this year, the Japanese automotive industry is set to introduce electric and plug-in hybrid vehicles to the market. The government, in collaboration with industry and academia, has also invested ¥7.4 billion in R&D in an attempt to develop the “next generation” in high-performance automobile batteries to be used by hybrid, electric, fuel-cell and other new vehicles in the future. It is also developing the battery-charge infrastructure needed nationwide to support the mass use of such vehicles (Figure 7 [ PDF 49.3KB | 1 page ]). Demonstration activities are expected occur at the end of 2009-early 2010, beginning first with taxi fleets and rental cars (Matsunaga 2009).

2.3 Tackling the Problem from Many Angles: Combining Automobile Fuel efficiency Standards, Emissions Standards, Lower Traffic Volume and Improved Traffic Management⁴

Economic growth is inevitably linked with increased motorization. There is no one policy solution that can reduce the environmental impact from the transport sector, but rather what is needed is a whole suite of well-designed policies to address the issue from different angles. This section outlines the various approaches taken by the Japanese government to achieve compatibility between environmental concerns and economic growth for the road transport sector. This includes various measures introduced to reduce automobile emissions and fuel consumption, as well as to improve traffic management and reduce traffic volume. Figure 8 [ PDF 229.9KB | 1 page ] traces how Japan has been able to reduce its transport CO₂ emissions since their peak in 2000.

2.3.1 Fuel Efficiency

As CO₂ emissions from automobiles account for more than 20% of Japan's total emissions (see Figure 1), improving fuel efficiency is a critical component of any strategy aimed at mitigating climate change. Japan's Law Concerning the Rational Use of Energy (Shoene Ho) is designed to promote the continuous improvement of energy and fuel efficiency of various products including environmentally friendly vehicles produced by auto-manufacturers, dealers and retailers (UNESCAP 1999). By the end of the target year, auto manufacturers and importers of automobiles are required to improve average fuel efficiency to a level higher than the designated fuel efficiency standard set for each category of automobiles. The average fuel efficiency is calculated using the following equation.

Box 4 [ PDF 360.6KB | 1 page ] outlines the evolution of Japan's fuel efficiency policies over time. Notably, the years in which fuel efficiency standards were introduced or revised occurred when energy or environmental issues were acute or prominent on the global agenda.

The way in which the target fuel efficiency standards are set is based on a “Top-Runner” method. The fuel efficiency target is set at equal to the best fuel-efficient car available in the market at time. By the target year, all other models are expected to meet or better that target. By using the best available product on the market as the standard, it also demonstrates to other producers that the target has already proved to be feasible and achievable. Passenger cars and cargo vehicles fall under categories of products for which “Top-Runner” standards are adopted. In addition to fuel efficiency, the Top-Runner method is also used for improving energy-efficiency of household electrical appliances (see Section 2.4.2).

The Government also introduced in 2004 an incentive called the “Green Tax System” which exempted taxes on any cars that achieved top levels of fuel efficiency and emission reductions. As a result, the 2010 fuel efficiency standards were on average, achieved in FY 2005 by all companies (Matsunaga 2009).

2.3.2 Emission Standards of Automobiles

Since the 1950s, the worsening of environmental conditions, such as air pollution, began to have serious impacts on human health in Japan. In response to this, the government established legal systems such as the Environmental Agency in 1972, and the deployment of air pollution monitoring stations nationwide, to monitor a) general air quality, and b) automobile emissions along major roads. As of 2008, all general air-quality monitoring stations have recorded acceptable levels of most target pollutants; however, this was not the case for emissions monitoring stations located along major roads. In 9 out of 47 provinces in Japan, air quality along major roads did not meet environmental standards. Box 5 [ PDF 70.2KB | 1 page ] provides details on the automobile emissions standards established in Japan.

2.3.2.1 NO₂ from Automobile Emissions

There are 1810 monitoring stations in total all over Japan; 1379 for monitoring the NO₂ in general air quality and 431 for monitoring automobile emissions along major roads. In 2007, 94.4% (up by 3.7% in 2006) of monitoring stations reported that levels of NO₂ were within acceptable levels. In the Tokyo area, monitoring data from 5 stations did not meet greater2 environmental standards, however there was an 11% improvement compared to the year before (Ministry of Environment 2007).

Figure 9: Air Pollution Monitoring Stations that Meet NO2 Environmental Standards in Japan (%) [ PDF 51.4KB | 1 page ]

2.3.2.2 Particulate Matter

Atmospheric concentrations of particulate matter (PM) have greatly improved since the Automobile NOx and PM Law was passed in 2001. In recent years, the western part of Japan has detected higher concentrations of PM and at levels higher than environmental standards, suggesting that a major source of these particulates are neither industrial nor automobile emissions.

Figure 10: Air Pollution Monitoring Stations that Meet PM Environmental Standards in Japan (%) [ PDF 51.4KB | 1 page ]

2.3.2.3 Photochemical Oxidant

Out of 1,173 monitoring stations in Japan (1143 general air-quality and 30 automobile emissions monitoring stations), only 1 station from each category achieved the photochemical oxidant environmental standard (less than 0.06 ppm over a one-hour average) in 2007. Unlike other pollutants, atmospheric concentrations of photochemical oxidant have been slightly increasing over the past few years. Managing this pollutant as well as sources of other volatile organic compounds (VOCs) or non-methane hydrocarbons (NMHC) poses a great challenge despite existing environmental standards for automobile emissions.

Figure 11: Annual Averages of Detected Day Time One-Hour Maximum Concentrations of Photochemical Oxidants at Monitoring Stations for General Air Quality and Automobile Emissions [ PDF 49.6KB | 1 page ]

Traffic and industrial activities appear to be the main polluting source of photochemical oxidants; this is based on data showing the distributional spread of areas where alarm warnings have been issued because photochemical oxidant levels were detected at higher than 0.12ppm. One research study in particular concluded that diesel engine vehicles emit more VOCs with higher ozone producing capacities such as non-saturated hydrocarbons and aldehydes (Hoshi et al. 2003). The Heisei 17 Emission Standard (see Box 5 [ PDF 70.2KB | 1 page ]) has been tightened to include the Non-Methane HydroCarbons (NMHC) emission standards for gasoline vehicles. As a result, diesel filters are now increasingly installed to capture these pollutants and prevent them from entering the atmosphere.

With regards to the eco-car policy, there are no visible effects yet on photochemical oxidant atmospheric concentrations. It is clear that air pollution is still an environmental problem in Japan, so incentives like the eco-car policy to promote the further reduction of NMHC from automobiles should be incorporated throughout general policies to address photochemical oxidants and other air pollutants.

2.3.3 Improved Traffic Management in Japan

Effectively managing road traffic is an indispensable way of “greening” the transportation sector. For example, building efficient and affordable public transportation or providing bicycle infrastructure to encourage more people to cycle when traveling short distances have demonstrated to be highly effective in reducing the number of cars on the road and minimizing transport emissions. Developing countries in Asia now have the choice to either create a more environmentally-friendly transport infrastructure that is less costly in the long run (in terms of health, managing population growth, environment and maintenance costs), or follow the path of developed countries which are now spending millions of dollars to shift their original infrastructure to cope with a changing environment, population and consumer needs.

2.3.3.1 Increased Bicycle Use

In recent years, bicycle sales have been gradually increasing as more and more consumers in Japan are recognizing it as an environmentally friendly and low-cost form of transportation. According to Japan's National Police Agency (2009), in 2004, more than 80 million bicycles were in use nationwide. In response to this increase, the National Police Agency in 2006 reviewed traffic issues from having more cyclists on the street.

Although the total number of bicycle accidents has decreased in the past four years, the number of accidents between bicycles and pedestrians has increased four times since 1999 (Japan's National Police Agency 2009) . Japan's Road Traffic Law was revised in 2008 attempted to clarify regulations as to where and when cyclists are allowed on pedestrian paths and car lanes. In principle, cyclists are expected to use car lanes unless riders are younger than 13 years old, older than 70 years old, or are handicapped. Bicycles may be allowed on pedestrian lanes during times when car lanes are too dangerous to travel on (for example, from having too many parked cars and/or there is heavy traffic on the roads).

Another related policy change that seems to have brought visible, positive results was the introduction of countermeasures to prevent the illegal parking of cars. Since its strict enforcement in 2006, illegal parking has been drastically reduced. While these policy changes were initially aimed at reducing traffic jams, accidents and improve traffic safety, it has had some unintended but positive effects in terms of promoting an environmentallyfriendly life style. It not only discouraged the use of automobiles, thereby reducing the number of cars on the road (and total traffic volume), it has also made it easier for cyclists to travel on the road. Improvements in human health have also been recorded, potentially providing large benefits to the economy over the long term (Japan's National Police Agency 2009).

A combination of all these factors has increased the number of people shifting away from cars to bicycles. To both cope with and encourage this trend, there is a need for governments and automobile drivers in major cities in Japan to provide a safer environment for cyclists. Providing specific cycle lanes and allowing cyclists to bring their bikes on buses and trains are other ways to increase the use of public transportation and bicycles.

2.3.3.2 Car-Sharing Business Sector

In many cases, travel involves long distances which cannot ordinarily be done by bicycles. In this case, innovative ways of reducing the number of cars on the road are being explored. One way is through more “green” driver behavior, which can be achieved without purchasing hybrid vehicles and electric vehicles. Voluntary local carpooling is one such example of environmental good practice. Public policies that have encouraged such modal shifts have provided positive results, like less traffic volumes. However, carpooling or car-sharing should not be restricted to just the public policy field: they can be promising new niche markets for businesses looking to harness changing social attitudes towards green services.

The car-sharing business sector in Japan is still in its embryonic stage of marketing and system development. According to the Foundation for Promoting Personal Mobility and Ecological Transportation (2009), as of January 2009 there are 357 car-sharing stations, 563 cars available for sharing in total, and 6,396 registered members in Japan. Compared to figures in 2008, those numbers increased by 20%, 10% and 97%, respectively. There are 24 NPOs and private businesses (including both large rental car companies and small enterprises) promoting this new lifestyle. They are also given support by public policies that subsidize the establishment of car-sharing stations and information technology systems. The user/car ratio of 20 is considered to be a minimum level required for business profits in Japan.

Figure 12: The Car-Sharing Business Sector in Japan [ PDF 46.4KB | 1 page ]

Compared to other developed countries such as the US and some European countries in which 0.07 to 0.1% of the national population is registered under a car-sharing system, only 0.01% of Japan's population is registered. Therefore, Japan still needs multi-faceted efforts at market development and policy support to enhance this emerging trend. Introducing demand-side policy incentives such as priority or free parking in convenient urban center locations would provide a visible and practical motivation to boost growth in this sector.

Box 6: Car Sharing Business in the US–Opportunity from Crisis [ PDF 50KB | 1 page ]

2.4 Energy Efficiency of Household Electronic Appliances

The current economic crisis has negatively affected global sales of Japanese electronic goods. However, economic indicators show that by August 2009, most companies might have reached or are close to the worst of the crisis. Data on sales volume and gross & net profit/loss from the Q2 business period have shown that plunging sales have slowed. It is not clear if this trend will transition into a stable recovery path.

CO₂ emissions from households and offices account for about 30% of Japan's total emissions (Figure 1), exceeding the transportation sector. Reducing emissions by households will be indispensible in achieving the national CO₂ emissions reduction goal.

Despite the strong economic downturn, according to a survey on sales between 31 August 2009–6 September 2009 by the Ministry of Economy, Trade, and Industry (METI 2009a) sales of eco-household electronic appliances, particularly television sets, have increased by about 20% compared to the same month of 2008. This shift in consumer behavior was helped in large part by a Japanese government initiative called the “Green Household Appliance Promotion Policy” or “Eco-Point System.”

2.4.1 “Eco-Point System” Component of the Stimulus Package

The Eco-Point System was introduced as part of Japan's stimulus package and is designed to: encourage consumers to choose “greener” household appliances, promote energy efficient appliances, boost economic activity in the manufacturing sector, and encourage dissemination of terrestrial digital broadcasting televisions (the current broadcasting system is scheduled to transition to terrestrial digital broadcasting in 2011). Green household products that have eco-points include air-conditioners, refrigerators, and terrestrial digital broadcasting televisions which have a 4-star or greater rating on their standardized energy efficiency label (see Section 2.4.2). Consumers who purchase these products between 15 May 2009 and 31 March 2010 are entitled to receive, upon request, eco-points which can be redeemed for designated goods and services. An increasing number of retailers are now offering pre-paid cards & shop coupons, region-specific products, and energy-efficient & environmentally-friendly products that can be exchanged with eco-points.

As of 31 August 2009, METI reports that a total of 10.4 billion eco-points were distributed since the policy was established; 77% of these were issued for purchases of television sets (see Table 4 [ PDF 90.6KB | 1 page ]). In monetary terms, 1 Eco-Point 1 yen, therefore more than ¥10.4 billion (US$104 million) of the stimulus package budget is required to fund this system. The total number of television sets purchased under this system to date, has been more than 200,000 units – which is the minimum amount estimated by assuming only 46V-sized TVs were purchased to replace older units (39,000 points given for each purchase). The price of 46V TV ranges from ¥160,000–280,000. Therefore in economic terms, the value-add of TV sets promoted by the Eco-Point system could be roughly equated to around US$440 million. A full list of eco-points earned for air conditioners, refrigerators, and television sets can be found in the Appendix [ PDF 25KB | 2 page ].

There has been criticism of the Eco-Point System however, particularly in regards to whether it provides higher incentives for larger TV sets. The actual CO₂ reduction targeted through the Eco-Point System needs to be evaluated at the end of the program to ensure the environmental impacts of the system has been beneficial.

The Eco-Point System only emerged early this year, and its management system was designed to handle 20 million transactions by the end of March 2010. It can be argued that the swift implementation of this system within such a short time frame was aided by a combination of favorable corporate and consumer attitudes formed in recent years, and reinforced through Japan's energy efficiency regulations. Established in 1979, these regulations have encouraged the market to continually improve the environmental performance of Japan's household electrical appliances.

2.4.2 “Top-Runner” Standard: Japan's Existing Energy Efficiency Policy since 1998

Several motivating factors have led to the establishment and revision of Japan's energy efficiency policies. Immediately after the second global oil shock, the national government passed the Law Concerning the Rational Use of Energy to slow down growing national demands for energy since 1979. Other motivating factors include the desire to achieve greater utility-cost savings and more recently, to reduce CO₂ emission from household appliances.

In 1988, the government introduced a new system that would promote technological innovation through market competition, called the “Top-Runner” system (or “Front-Runner system”). The system sets an energy efficient target to a level equal to the most energyefficient model in the market at the time. By a certain target year, all other producers must create products that either meets, or is higher than, the target. This system differs to other international standards which are based on setting the minimum efficiency requirements. For Japanese companies, the Top-Runner system has been the key driver in their push to compete and produce goods with the world highest efficiency rating. In a highly competitive market where Japanese consumers constantly demand the latest and best models, those who fail to meet the target are not only “shamed” but are likely to lose market share. Currently, there are 21 products covered under the Top-Runner system (shown below), which are together responsible for about 50% of all household/work and office energy consumption.

List of product categories under the Top-Runner system: (i) passenger vehicles, (ii) cargo vehicles and trucks, (iii) air conditioners, (iv) refrigerators, (v) freezers, (vi) rice cookers, (vii) microwaves, (viii) fluorescent lights, (ix) toilet seat heaters, (x) television receivers, (xi) VCRs, (xii) DVD recorders, (xiii) computers, (xiv) hard drives, (xv) copy machines, (xvi) heaters, (xvii) gas stoves, (xviii) gas water heaters, (xix) oil water heaters, (xx) vending machines and (xxi) electric transformers.

Top-Runner Standards are set for each of these 21 products, taking into consideration the range of energy efficiency performances of products currently available in the market. Each new standard has a target year. The standard is calculated by taking a weighted average of the energy efficiency rating of all existing products in that category at that particularly time. Future expectations of potential for technical advancements, energy efficiency improvement scenarios, and cost and market demand projections are then incorporated into the calculation. All manufacturers and importers in each category of products are expected to meet the new standard by the target year.

2.4.2.1 Projections of Energy Efficiency Improvements

The Top-Runner Standard uses energy efficiency improvement projections which have been set for each category. Generally, the Top-Runner Standard is within 3 to 10 years, and for 110 and 160% improvements in energy efficiency. Many products have not just met these standards but surpassed them by higher than expected margins. For example, when the energy efficiency target of refrigerators was set at 30.5%, the eventual efficiency rate gained was a total 55.2% in 2004 compared to 1998 levels.

The incline of the energy efficiency scenario lines above represents the margin of innovation (Figure 13 [ PDF 138.9KB | 1 page ]). As seen in Figure 13, in general, the more mature a technology is, the less steep the line becomes, as the potential decreases for further energy efficiency gains with the same technology. Between the different product categories, the introduction of a newer technology does not necessarily mean it will have a steeper incline. For example, the Air Conditioner Top-Runner standard by 2004 was much steeper than flat-screen TVs, indicating there was significant room for improvements in the energy efficiency of refrigerators before 2004 than flat-screen TVs before 2007.

By setting a market-based standard that considers many market and technological factors, this Top-Runner Program has proven successful in achieving its goal while encouraging a dynamic and innovative market for household electric appliances and cars.

However, all of these efforts by suppliers would not have been sustained if consumers were not informed of such improvements or the overall environmental performance of the products. Without this critical information, consumers would have no ability to choose between more environmentally-friendly products and others. To inform consumers, the government introduced the Law Concerning the Rational Use of Energy that mandates retailers to properly display standard efficiency labels on products. There are two types of labels under the Top-Runner standard system. One uses a single criterion, which is applied to most of the products listed above. The other label is based on a Multi-Step Rating System and has five star criteria that are applicable only to three products: automobiles, household appliances and air conditioners. The following three figures will show how the multi-step rating system promotes more energy efficient products (The Energy Conservation Center Japan 2008).

2.4.2.2 Explaining the Multi-Step Rating System

Example 1 [ PDF 42.8KB | 1 page ]: Immediately after a Top-Runner standard for a product category is set (at 100%), the energy-efficiency of most products in the market are lower than the Top-Runner standard. The 100% level is set by looking into products available in the market. The illustration below shows such a case where the minimum energy efficiency standard achievement rate is 60% and the maximum is 98%. In this case, the range of 60 to 100% is divided into four steps, each assigned with 1 to 4 stars as shown in the above.

Example 2 [ PDF 42.8KB | 1 page ]: A few years after each Top-Runner standard is set, manufacturers typically make efforts to improve the energy-efficiency of their products. As such, more products with an energy efficiency rate higher than 100% will be made available to the market. At this stage, a review of the rating system is conducted. Assuming that the quality of the products in the market increases to the point that 50% of the products are able to achieve an energy efficiency rating higher than the Top-Runner standard (100%), the multi-steps are reset with the lowest and highest performing models posting an energy efficiency rate of 80% and 130% respectively (compared to the Top-Runner). See example below.

Example 3 [ PDF 53.2KB | 1 page ] : By the target year, most products available in the market would have achieved the Top-Runner standard. The example below shows a case where the energy-efficiency range of products available in the market is between 90% and 140%. The multi-steps are reset as below.

Time to review the Top-Runner standard:

A Top-Runner standard remains the goal for several years. As the energy-efficiency of products improves however, more products are given many stars, making it more difficult to compare performance. This is when the Top-Runner standard needs to be reviewed and set higher. According to Energy Conservation Center Japan, the Top-Runner standard is reviewed when more than 30% of products achieve the standard or when most products are given five stars.

For example, the multi-step rating criteria for flat-screen TVs (including LCD and plasma TVs) underwent a revision in 2008 as it was necessary to catch up with the energy efficiency improvements of these products (which had occurred at a much faster rate than expected when the previous criteria was set).

Example 4: Example of Multi Step Rating System Label with a 5-star performance [ PDF 53KB | 1 page ]

There have been assessments over the applicability of implementing the Top-Runner Program in other parts of the world (Nordqvist 2006). Overall, what has been recognized is that the primary reason for the policy's success is the level of stakeholder involvement, particularly by manufacturers who are subject to the standard. In setting goals, if manufacturers' capacities and technological constraints are understood, then the best and most feasible energy efficiency scenarios and standards can be designed. However, another review also argued that by compartmentalizing standards in each product category, this may allow certain technology and products with lower energy efficiency performance to survive (Ministry of Economy, Trade, and Industry 2007).

More policy and social research on the applicability of this policy in ASEAN countries is needed, including some small scale social experiments to see if ASEAN countries could introduce such a policy with a certain level of modification or simplification to suit local needs.

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