Carbon Leakage or Bridging the Energy Efficiency Gap

Local governments in two of forty-seven prefectures in Japan, Tokyo and Saitama, introduced Cap-and-Trade Emission Trading Schemes in 2010 and 2011, respectively. These schemes require large-scale facilities located in Tokyo and Saitama to reduce CO2 emissions generated from energy consumption to certain levels. There are several literatures reporting that the policy implementation has reduced CO2 emissions by the compliance facilities to some extent. However, there remains a concern about an issue of “carbon leakage” that can lead to an increase in CO2 emission from non-regulated facilities, that has not been examined yet.

The study presented in this ZEW Research Seminar employs a difference-in-difference analysis using a facility-level panel data to investigate whether a compliance institute (the owner of compliance facilities) increase CO2 emission at large-scale facilities outside Tokyo and Saitama. The preliminary results suggest that the compliance institute reduces CO2 emission at large-scale facilities outside Tokyo and Saitama. This finding implies that once a facility faces such a severe regulation and its institute starts investing energy-efficient appliances and/or learning a better way to save energy, these practices are applied also to other facilities under the same institute. In other words, the result may reflect the fact that introducing the Cap-and-Trade Emission Trading Schemes in Japan contributed to reduce the so-called energy efficiency gap, whose positive effect exceeded the negative effect of emission leakage.