Technology transfer under the CDM Materializing the myth in the Japanese context?

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Technology transfer under the CDM Materializing the myth in the Japanese context?Malik Amin Aslam aa ENVORK: A Research and Development Organization , House #7, Street #30, F-7/1, Islamabad, PakistanPublished online: 15 Jun 2011.

To cite this article: Malik Amin Aslam (2001) Technology transfer under the CDM Materializing the myth in the Japanese context?, Climate Policy, 1:4, 451-464

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Technology transfer under the CDMMaterializing the myth in the Japanese context?

Malik Amin Aslam∗ENVORK: A Research and Development Organization, House #7, Street #30, F-7/1 Islamabad, Pakistan

Received 20 March 2001; received in revised form 6 June 2001; accepted 25 August 2001

Abstract

The paper investigates the role that the clean development mechanism (CDM) could play in enhancing theeffectiveness of north–south technology transfer. This is done by first exploring the issue of technology transfer inthe context of existing north–south experiences to bring out the basis for the poor and unsatisfactory performance.This is followed by bringing out the intrinsic relevance of appropriate technology transfer for combating the globalclimate change issue.

The paper then analyses the potential for such an appropriate and sustainable transfer, as well as effective diffusionand deployment of technologies under the CDM. Various aspects of the evolving design of the CDM are investigatedto analyze the potential for overcoming the historical barriers across the north–south divide.

Any potential for technology transfer under the CDM would need to be supported by an effective frameworkin the developed countries as well as a conducive environment in developing countries. In searching for such acooperative and complementary model, the paper analyses the current Dutch strategy to bringforth certain salientfeatures that could be applicable for other countries.

Finally, a Japanese model for technology transfer is developed which can build upon domestic strengths as adoptapplicable features of the Dutch strategy in order to capitalize any latent potential under the CDM. This is doneby first investigating the effectiveness of the existing Japanese technology transfer framework and then extendingrecommendations for adapting it to reflect the shifting resource flow paradigms under the climate change regime.

Keywords:CDM; ODA; Kyoto Protocol

1. Introduction

Climate change presents humanity with an extremely complex and daunting challenge. Effective actionon this front predicates the need to work across uncharted waters and carve out new and bold paradigms.

∗ Tel.: +92-51-2276412; fax:+92-51-2274868.E-mail address:[email protected] (M.A. Aslam).

Climate Policy 1 (2001) 451–464doi:10.3763/cpol.2001.0147 www.climatepolicy.com

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452 M.A. Aslam / Climate Policy 1 (2001) 451–464

The enormity of this challenge is further compounded by the need for triggering concerted global ac-tion while encompassing the wide political, social and economic disparity across the globe. It is thus,no surprise that progress on the issue has been a Herculean task raising numerous contentious issues,mostly across the north–south political divide. However, the disparities and the disagreements have beencomplemented with some progressive and encouraging developments. The Kyoto Protocol stands out inthis respect. It has laid out a bold vision for cooperative global action based on the north accepting respon-sibility and agreeing to take the lead in acting and the south promising collaboration without comprisingtheir right for sustained economic development.

In this regard, the clean development mechanism (CDM)1 has marked a watershed development byextending a forum for north–south collaboration and allowing an opportunity for their, mostly divergent,interests to attain a common ground. This has been possible owing to the mutual benefits and incentivesavailable to both parties under the market driven concept, in the form of cost-effective commitmentcompliance for the north and potential for “additional” sustainable development financing for the south.Within the larger context of sustainable development, is encompassed the promise of transferring thecutting edge greenhouse gas abatement technologies to the south. The CDM concept is viewed as aneffective means of subsidizing a technological “leapfrogging” of developing country economies and,subsequently, placing them towards a more carbon friendly growth trajectory.

2. Technology transfer

The issue of technology transfer has been long touted as a panacea for alleviating the problems ofdeveloping countries and as a means for realizing the elusive promise of sustainable development. Overthe years, the issue has broadened into a multifaceted concept that encompasses both “soft” as well as“hard” aspects.

Technology is increasingly taken to mean not only machines and equipment but also the skills, abilities,knowledge, systems and processes necessary to make things happen (Srinivas, 1998).

The “soft” aspects allude to the creation of enabling environments within developing countries by un-dertaking capacity building, transferring expert knowledge as well as enhancing awareness within thosecountries. It encompasses activities that relate to the enacting of facilitative policy interventions in de-veloping countries, the enhancement of the technological knowledge base as well as the formulation ofactual processes linked directly with particular projects. On the contrary, the “hard” aspects refer to thetransfer of actual machinery, equipment and innovative technologies into developing countries. In thisregard, the phrase “technology empowerment” has, sometimes, also been used to refer to the collectiveand effective implementation of both these aspects.

In reality, unfortunately, the issue has been beset with a lot of unrealized hype and is marred witha lot of skepticism, suspicion and mistrust across the north–south divide. A number of factors havecontributed to the growing cynicism linked with this issue with the foremost being its intrinsic linkwith the, mostly, “tied” aid policies of developed countries. The transfer of technologies to developing

1 CDM stipulated under Article 12 of the Kyoto Protocol.

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M.A. Aslam / Climate Policy 1 (2001) 451–464 453

countries has suffered from being primarily financed through official development assistance (ODA)2

flows from the developed countries that have been strongly driven and clandestinely biased by “exportpromotion” doctrines.

This has resulted in contingent and conditional aid packages that have included technologies not alwaysthe most appropriate or the most cost-effective for developing countries. These transactions have beenfurther affected by a very weak developing country leverage in deciding the nature of these financialflows and the linked technological packages. The developing countries have suffered from what maybe termed the “beggars cannot be choosers” syndrome while dealing with these donor driven resourceflows. Under this scenario, scant attention has been paid to the local assimilation and adaptation of thesetechnologies. Subsequently, in what has been aptly termed as the “parachute dropping” approach of thedonors, inappropriate and unsustainable technologies have been unabashedly dumped upon developingcountries.

There are, hence, genuine developing country reservations and concerns with any new claims of pro-moting “technology transfer”. It is no surprise that these concerns have also permeated within the climatechange context with the CDM being termed as the “Convenient Dumping Mechanism” by some skeptics.However, it needs to be analyzed whether the CDM can effectively deliver where the previous ODAdirected resource flows have seemingly failed?

3. Technology transfer under the CDM

The tainted cry of technology transfer has once again been raised within the climate change context.In this regard, there is no denying the fact that both the development as well as the transfer and widescaled deployment of appropriate greenhouse gas abatement technologies is endemic and critical to anysuccessful action on climate change. Technology transfer is, undoubtedly, growing to be one of the keyvehicles for global climate change mitigation.

No one knows for sure if technology will save the planet from the threat of climate change, but withoutnew technology we probably do not stand a change (Chupka, 1997).

The potential of the CDM for realizing this development as well as diffusion of technologies, however,remains to be analyzed. Exploring the potential of north–south technology transfer through the CDM anumber of features of the market driven concept stand out to distinguish it from the previous resourceflows. Prominent amongst them are the following.

1. CDM is a form of “ trade” and not“aid ”: Probably the most important feature of the CDM conceptis the fact that it is an economic response to a market driven cost savings opportunity as well as thechance for capitalizing an “unvalued” commodity. The incentive is provided by the large disparity incarbon abatement costs between the developed and the developing countries complemented by theenvironmental neutrality to the geographic location of these reductions. Both of these factors combineto carve out a strong market incentive for extending the locational flexibility of GHG reductions, whichforms the basis of the CDM concept. In extending this flexibility the concept is also providing the

2 ODA: here and elsewhere in the paper ODA refers specifically to aid flows which should ideally meet the criteria of beingofficial in nature, development or welfare oriented and concessional in character. It should be noted that this is different fromother official flow (OOF) such as credits extended by Export Promotion Government Agencies.

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developing countries an opportunity of securing “additional” revenues linked with capitalizing thesecarbon reductions.

Thus, it is aiming to transform the north–south transaction into a “trade” with mutual benefits tobe attained by both parties. This feature drastically shifts the nature of the historical north–southrelationship built around unidirectional aid flows and automatically extends significant leverage to thedeveloping country in controlling the nature of this resource flow. This should assist them in guarding,as well as furthering, their national sustainable development objectives by ensuring that the mostappropriate technologies are transferred through the CDM projects.

2. Private sector focus under the CDM: Another distinguishing feature of the CDM is that it wouldbe aiming towards direct and active participation of the private sector and endeavoring to put thelarge global FDI3 flows on to more carbon friendly trajectories. Although Article 12 of the KyotoProtocol alludes to the participation of both “private and public entities” it can be safely inferred that,in all likelihood, the national emission commitments4 would be downloaded on to the private parties.This should automatically trigger project activity by the private sector, driven by national regulatoryobligations and seeking the most cost-effective and credible carbon reductions. Furthermore the directinvolvement of private sector financial interest, should provide the impetus for the selection anddeployment of locally appropriate technologies as well as ensuring the effective and optimal utilizationof the technology over the life of the project, thereby securing long-term project sustainability.

3. Host country involvement: Besides the indirect leverage attained through the CDM being a tradetransaction, the developing country “host” government would also be required to provide approval toany CDM project carried out in the country. This direct involvement would further ensure that thedeveloping country could aim to attain the technologies that are most suitable and sustainable withinits local environment. This could provide a very strong filter against any “dumping” of unwanted andinappropriate technologies but would need to be supported by a knowledge based and informed “host”government with clearly laid out sustainable development priorities as well as CDM objectives.

4. Size of the CDM: The size of the CDM is still far from certain and the modeling research done onthis issue works with a host of assumptions in coming up with predictions of the size. One of theconservative figures cited for the resource flow is of between US$ 5 and 10 billion per annum (Vrolijk,1999). If this figure is compared with the normal ODA flows of approximately US$ 50 billion perannum and the FDI global flows of around US$ 240 billion per annum it is evident that the CDMfigure is not too big. However, it does carry the potential of leveraging much larger investments andits utility and effectiveness for carbon mitigation gets significantly enhanced if it is utilized for thetransfer of “cutting edge” and cleanest technologies. These would be able to attain the maximumcredits as well as influence the larger FDI flows to shift on to more carbon friendly trajectories. Thus,the size optimization of the CDM suggests that the best and cleanest technologies should get chosenand diffused through the mechanism.

5. Nature of CDM project activity: The possible CDM projects can be generally categorized under twomain sectors, energy and forestry. Although still under the purview of international negotiations, thereis a growing consensus for proceeding along a phased sectoral progression whereby the easier andmore credible energy sector projects are first implemented followed by CDM involvement with theforestry sector at a later stage. This would strengthen the nexus between clean energy development

3 Foreign direct investments.4 Of Annex-1 countries.

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and the CDM by allowing the instrument to provide a carbon subsidy for the transfer of clean energytechnologies to developing countries in areas such as efficiency enhancement and renewables. Theenergy sector, especially the power generation area is an undeniably high growth area for the developingcountries with forecasted investments in the range of US$ 68 billion per annum. It is possible toreduce the GHG emissions from these new generation activities by as much as 25% by transferringlow polluting and high efficiency technologies without compromising on economic growth (Bernsteinet al., 1999). Moreover, by their very nature, technological sectors such as renewables and efficiencyenhancement measures have a positive overlap with sustainable development priorities of most “host”developing countries. Thus, the CDM could well act as a natural vehicle for financing the technological“leapfrogging” in these sectors through capitalization of the carbon savings benefit.

Thus, all of the above factors carry the potential to act as strong drivers for ensuring that technologytransfer under the CDM is both appropriate as well as sustainable from the developing country perspec-tive. However, practical realization of this latent potential is dependent upon aligning the design of theinstrument to positively correlate to meeting this objective as well as directing the developed countryresource flows accordingly.

4. Harnessing the CDM potential

As outlined above, the CDM concept, owing to certain design features, carries a latent potential foraffecting the “appropriate” transfer of technology from developed to developing countries, which haseluded the biased ODA flows of the past. There is a need to work out a collaborative model between thenorth and the south that can cater to both the soft and the hard aspects of technology transfer, be driven bylocal needs, adapted to the developing country operational environment and sustained through facilitatedprivate sector participation.

Presently, there is a political debate going on the issue of the admissibility of ODA flows for CDMrelated activities. The proponents call for ODA to be utilized for CDM activity owing to the fact that itmight be able to mitigate the (potential) geographical distribution imbalance of the CDM projects. In doingso it could ensure wider distribution of CDM related benefits especially amongst the LDCs which could,otherwise, miss out on a private sector driven CDM operating in a globally competitive environment.Opponents, meanwhile argue that this could divert the, already dwindling, ODA flows away from prioritydeveloping country sectors such as health, education and poverty reduction which are, not necessarily,covered through CDM activity. Although still in the purview of political negotiations, there seems to bea growing consensus that ODA activity should complement and leverage CDM activity but should notdirectly finance project activity.

Such a measure could carry strong implications for the effective transfer of technologies to developingcountries whereby the ODA could be used for creating conducive enabling environments by perpetuatingthe “soft” aspects of technology transfer in developing countries. This could include enhancing thecapacity and raising awareness for CDM related activities within both the public and private sectors byundertaking focused programs for extending guidance for policy formulation, technology prioritizationbased upon local needs as well as transferring of technological know-how for project development.

Such measures would, in effect, lay the grounds for the optimal selection as well as sustainable deploy-ment and diffusion of suitable and appropriate “hard” technologies in developing countries. Thus, theODA flows could be used in this manner to actually facilitate the mainstream CDM investment through

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the developed country private sector. This would ensure that the transfer of technologies becomes a twostep process utilizing the collaborative strengths of the government driven and public sector ODA flowsas well as the market driven and private sector focused CDM.

This process, nonetheless, would need to flow through a supportive country framework in developedcountries and towards a receptive and conducive environment in developing countries. Moreover, asearlier stated, the former part could, in effect, form the basis for realizing the latter through exercisingthe “soft” aspects of technology transfer.

The paper now explores the progressive and pro-active Dutch strategy aimed at utilization of the Kyotomarket based instruments as well as technology transfer. The objective is to draw out recommendationsfor development of a Japanese model for technology transfer through the CDM.

5. The Dutch strategy

The Dutch government, under the Kyoto Protocol, would have an obligation to cut GHG emissionsby 6% of 1990 levels in the first commitment period that translates into an absolute reduction of some50 million t of CO2 equivalent. In response to this anticipated national commitment the Dutch governmenthas formulated an integrated strategy which is one of the most progressive ones among the developedcountries. The initiative includes a combination of both domestic and international cooperative measures,aiming to divide the burden of their commitment equally amongst the two (i.e. 25 million t of CO2

equivalent each).

1. Domestic Measures: The government announced a “CO2 reduction plan” in 1997 initiated jointly byfour ministries (Ministry of Economic Affairs, Ministry of Environment, Ministry of Agriculture andMinistry of Transport). These four ministries jointly founded a Project Bureau, run cooperatively bytwo Dutch private executive organizations5 and having the mandate for extending subsidies to “highrisk” projects that can contribute to carbon reductions but which need additional support for coveringthe financial risks involved. The bureau relies on the recommendations of an external and independentadvisory committee for ranking and selection of the solicited project proposals. The results have beenquite impressive with almost NLG 2 billion of private sector investment facilitated through a subsi-dization of NLG 445 million.6 This set-up has been instrumental in spurring innovative technologieswithin the Dutch domestic market and providing seed subsidy to nascent, but potentially very potent,technological solutions for global warming mitigation. A list of appropriate technologies has beenidentified with Dutch expertise and competitive edge that have also been practically demonstrated fordomestic replication as well as international application.

2. International Measures: 7 The Dutch government has adopted a two phase approach in this case withthe AIJ pilot program coming in the first phase followed by the JI ERU-pt scheme:• AIJ Pilot Program:This program was initiated soon after COP1 in Bonn and was run by a Manage-

ment Board consisting of three ministries. The Ministry of Foreign Affairs, responsible for extendingoverall direction to the program and for funding direct project activities in developing countries, theMinistry of Economic Affairs, dealing with projects in central and eastern Europe and the Ministry

5 Novem and Senter.6 The total amount set aside for this “subsidy” scheme is NLG 937.5 million.7 Based on information at http://www.senter.nl/cop6.

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of Environment responsible for liaison and program reporting. The source of funding was pri-marily “additional” ODA but private sector involvement was also encouraged through the schemeby providing certain incentives such as tax benefits and official recognition of efforts. This pro-gram has been useful in securing practical experience and familiarity with AIJ project developmentin developing countries, initiating a network with partner “host” countries and, most importantly,establishing a list of Dutch technologies transferable to developing countries. The program officiallyended as of January 2000.

• JI ERU-pt scheme:Based on the experience gained in the above pilot program, The Netherlandshas developed a JI initiative called Emission Reduction Unit Procurement Tender (ERU-pt). Inthis case, the government is following a two-track policy whereby normal ODA flows are beingutilized for financing facilitative activities in targeted host countries that have signed MOU8 withthe Dutch government to participate in such activities. These facilitating activities, under guidance ofthe Management Board, include mostly the “soft” aspects of technology transfer such as capacitybuilding at environment ministries, setting up project development guidelines, emission transfernegotiation frameworks and other enabling activities in the “host” country. These aim to facilitateDutch private sector involvement at a later stage and complement the main activities of the ERU-ptwhich mandate purchase of high quality emission reductions from JI projects in selected sectors, bythe Ministry of Economic Affairs. The method of procurement is by open global and competitivetender and the first tender9 aims to procure 2–3 million t of CO2 equivalent from the market at aprice ranging between US$ 5 and 10 per t of CO2. The Netherlands is, thus, triggering the demand forcarbon credits by acting as the market leader in this field and becoming the first buyer country to bein the carbon market place. The government has earmarked a fund of around NLG 250–300 millionfor the JI ERU-pt scheme and is planning to expand the scope of this scheme to include CDMprojects in the near future with a possible fund of NLG 500 million.10

The Dutch strategy (Fig. 1) is, thus, utilizing a phased and complementary approach to address boththe “soft” and the “hard” aspects of technology transfer. The domestic measures are aimed at extend-ing a direct incentive for innovation by “subsidizing” Dutch industry’s expertise and potent, but risky,technological innovation in order to transform it into a practically demonstrated exportable commod-ity. These are matched by an international initiative that is working with the objective of facilitatingthe transfer and deployment of this technological expertise in developing as well as other developedcountries.

The temporally phased international initiative bears testament to this objective. Whereas, in the firstphase practical experience has been gained and bilateral links established with partner developing coun-tries through the AIJ activity, the second phase is now aiming to use ODA to facilitate the “soft” technologytransfer and pave the way for Dutch private sector investments under the CDM.

Although yet to deliver concrete results on technology transfer the Dutch strategy incorporates importantingredients of an effective approach. Furthermore, the following aspects of the model need to be takeninto account as useful pointers by other developed countries wishing to develop their own strategies.

8 Memorandum of understanding.9 Runs from May 2000 to April 2001.

10 Information attained from Senter via e-mail.

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Fig. 1. The Dutch model.

1. Inter-Ministerial involvementwith clear delineation of powers can extend the requisite coordination ofefforts. The management committee provides the overall direction to the policy and handles issues suchas selecting target countries, prioritizing optimal technologies as well as determining acceptable rangefor credit pricing. This goes in tandem with specific expertise which the individual ministries bringto the committee. For instance, the Ministry of Foreign Affairs can extend useful support for settingoverall political direction to the resources flows, through signing of MOU and directing facilitativeODA flows, the Ministry of Economic Affairs can extend financial expertise in dealing with thecontracting of credits and, subsequent, financial flows and the Ministry of Environment can providethe necessary liaison and connectivity with the global environmental objective.

2. The government, in this case, has acentral promotional roleand is acting as themarket makerbybeing the initial direct buyer of credits, fermenting credible supply as well astaking up the risk11 of“Kyoto non-ratification”. It is, thus, leading the way by absorbing this major risk factor in CDM/JIprojects and facilitating the involvement of private sector.

3. The model depends on aninvolved public–private participatory approachin which the governmentis extending both domestic incentives, for spurring technological innovation and market penetration,as well as international support for facilitating technology transfer and diffusion. The industry on itspart is an involved and active stakeholder in the process responding to the above mentioned stimuli ofthe government.

4. In addition to leveraging domestic technological innovation and demonstrable application, the modelis also being utilized toidentify the optimal technology mixfor international transfer. The key techno-

11 Almost 80% of the “additional” financing for ERUs under the ERU-pt program is provided in advance by the Dutch govern-ment.

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logical areas, with Dutch expertise, have been identified through domestic projects as well as the AIJpilot phase and are being focused for dissemination in the CDM/JI phase.

5. Both the “soft” and “hard” aspectsof effective technology transfer are beingcomplemented through atemporally phased approach.The government is affecting the “soft” aspects of technology transfer, by“subsidizing” innovative technological development and application domestically and using ODA forfacilitating an enabling environment internationally, through capacity building and policy formulationsupport in developing countries. The subsequent non-ODA financed “hard” aspect of technologytransfer is, thus, being complemented and facilitated through this “soft” technology transfer as wellas the risk absorption that the government is undertaking in the initial phase of the ERU-pt program.

The next section investigates the Japanese situation to draw out a technology transfer model for Japanbased on capitalizing the domestic strengths as well as incorporating applicable elements of the Dutchstrategy.

6. Carving out a strategic model for Japan

At the onset, two factors of strength stand out vis-à-vis the technology transfer situation in Japan.Firstly, the Japanese have been the leading donor country in terms of absolute ODA flows over the pastfew years12 and secondly, the Japanese industry stands out, even amongst the developed countries, interms of its high level of efficiency.13 Both these factors combine to extend a unique situation for theJapanese government and private sector to contribute constructively to, as well as benefit from, exercisingappropriate technology transfer through the CDM.

Being a major ODA donor country has allowed the Japanese government to gain extremely usefulexperience of operating in developing countries and of, bilateral, dealing with their governments. More-over, this has resulted in the development and nurturing of specialized organizations within the Japanesegovernment dealing with ODA flows such as JICA,14 NEDO15 and JBIC.16

The high level of domestic industrial efficiency could, at first look, be viewed as a cause for concernfor future domestic emission reductions, owing to a constrained headroom for any further cost-effectiveefficiency enhancements. However, in terms of international technology transfer, it extends the Japaneseindustry with a definite competitive advantage in terms of already having developed and market tested thehigh efficiency technology domestically. This makes the situation ripe for exporting this high efficiencytechnological know-how, expertise as well as the “hard” technology to most developing countries thatare still at an early and nascent stage in terms of industrial technological efficiency. As already stated theCDM, provides a natural vehicle for this transfer of technology by allowing a “carbon subsidy” to theendeavor.

12 Japan became the largest ODA donor country in 1989 which, except for 1990, it has continued to be since then (JICAinformation document 2000).13 For instance, the production efficiency of Japanese steel industry is 10% higher than that of other major industrialized countries(MOFA document titled “The Kyoto Initiative”, 1997 at www.mofa.go.jp/policy/global/environment/warm/kyotoinit).14 Japan International Cooperation Agency.15 New Energy and Industrial Technology Organization, which is not totally ODA driven but does utilize and channelize aidflows for certain focussed objectives.16 Japan Bank for International Cooperation.

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Fig. 2. Existing CC infrastructure.

However, an effective model needs to be devised to ensure the smooth and successful transfer of thistechnology to developing countries. This stands to benefit the Japanese government and the Japaneseindustry, with cost-effective reductions as well as export of technologies, and the “host” developingcountries, with an opportunity for technological “leapfrogging” and sustainable development financing,while also significantly contributing to global climate change mitigation.

7. A Japanese technology transfer model under the CDM

In endeavoring to create a strategic resource flow model for facilitating technology transfer to developingcountries, under the CDM, the following working assumptions have been used:

• Under the CDM, the ODA flows would only be allowed for facilitating activities and not for directproject financing.

• A joint public–private collaboration model could be effectively applied in and readily accepted by theJapanese business environment.

• The existing domestic institutional infrastructure needs to be utilized to the maximum.

7.1. Existing framework for technology transfer

At the moment the technology transfer activities related to climate change are being executed throughtwo lead ministries, the Ministry of Foreign Affairs and the Ministry of Trade and Industry (MITI). Inthis framework, the activities under the Ministry of Foreign Affairs are primarily dictated by the Kyoto

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Initiative17 and driven by ODA flows (Fig. 2 ) which move through three pillars namely:

• Capacity building and awareness raising undertaken by JICA.• Provision ofconcessional18 ODA loansfor GHG mitigation projects in developing countries under-

taken through JBIC.• Transfer of Japanese technologiesand setting up of a technology information network through NEDO.

On the other hand, the activities under MITI are directed by the “Green Aid Plan”19 which is financedprimarily through non-ODA flows. The resources are tapped from a “special” government fund that hasbeen created with the aim of securing Japan’s energy future by carrying out international energy conserva-tion activities.20 The focus of this plan, as mentioned, is on promoting energy conservation, efficient useand alternate energy options internationally through the transfer and deployment of appropriate Japanesetechnologies. The aspects of the plan related to climate change are implemented through NEDO andinclude two central activities (NEDO, 2000):

• Research activities, which include basic sectoral data collection/compilation as well as financing ofpossible JI/CDM project feasibility studies. Since 1998, when the “JI/CDM feasibility” aspect of thescheme was initiated, about 45–50 project feasibilities have been executed every year which is evolvinginto a concrete pipeline and portfolio of JI/CDM projects. A unique aspect of the scheme is the directinvolvement of the private sector which is financed, through NEDO, to carry out the feasibility studies.

• Carrying out ofmodel demonstration projectsunder the AIJ scheme. The aim of this program is thedissemination of Japan’s advanced technologies for the efficient use of energy in energy intensivesectors such as iron–steel, oil refining, petrochemical and cement manufacturing.

Hence, as demonstrated by the existing active involvement, Japan is already committed to the issue andis implementing climate related technology transfer through an ODA/public sector financed framework.Moreover, this present system is also directly catering to both the “soft” and “hard” aspects of technologytransfer.

7.2. Re-aligning to shifting climate change paradigms

A re-alignment of this system is currently required to respond to the shifting paradigms of the inter-national climate change regime. In this regard, the primary shift required is away from an exclusivelyODA/public sector financed towards a more market driven orientation of the framework.

A possible amalgamation of the Japanese existing framework and the Dutch model can yield a veryeffective and market oriented system that is graphically outlined in Fig. 3 and consists of the followingcomponents:

1. An Inter-Ministerial Management Committee(IMC) comprising the Ministries of Foreign Affairs,Finance, MITI and Environment with the following delineation of responsibilities:

17 Presented at COP3 by the Japanese government as a part of the ISD or “International Sustainable Development” plan earlierframed at the UNCED+5 conference by Japan (www.mofa.go.jp/policy/global/environment/warm/kyotoinit).18 At an interest rate of 0.75% per annum and 40 year repayment period.19 A program initiated in 1992.20 Information attained from the “International Cooperation Center” at NEDO, Tokyo, Japan (2000).

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Fig. 3. Japanese TT model under CDM.

• Ministry of Foreign Affairs responsible for political oversight, the control of ODA flows as well asselection of target countries for technology transfer cooperation.

• MITI responsible for identification of the optimal technology mix based on Japanese industrialexpertise and competitive edge.

• Ministry of Economic Affairs for overseeing financial transactions through the “Technology Coop-eration Fund” and for handling CER related revenue flows.

• Ministry of Environment to cater to the international environmental agreements, i.e. FCCC/KP aswell as liaison the activities related to project validation and certification of credits.

2. TheODA flowswould be governed by the Ministry of Foreign Affairs and disbursed in the targetcountries through JICA and NEDO. The objective would be to build up “host” country capacity atboth the policy and the project levels, raise awareness, transfer Japanese technological know-how aswell as solicit developing country input for domestic adaptation of new technologies. The existing“Green Fund” activities such as the financing of JI/CDM feasibility’s and cooperative research withdeveloping countries would become a natural part of this framework. This would foster the enablingenvironment in developing countries, which is a prime requisite for the “hard” technology transfer totake place.

3. A “Technology Cooperation Fund” with joint equity participation of JBIC (25%) and other interestedprivate sector parties (75%) which could include interested stakeholders such as technology vendors,power utility companies, transport companies, insurance agents and trading houses all of whom mighthave a “Carbon” liability in the future or who may stand to gain from the carbon market. The EXIM21

21 Export Import Arm which is driven primarily by non-ODA flows. JBIC was formed by integrating two previous officialorganizations: The Export Import Bank of Japan (non-ODA) and the Overseas Economic Cooperation Fund (ODA driven).

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operation arm of JBIC would be used to mobilize and generate the non-ODA resource flows for thisfund. This fund would have the following attributes:• Non-ODA equity fund which should harness and leverage commercial “debt” financing at a larger

scale. The JBIC/private sector equity in the fund could change over time with changing circum-stances.

• Have the mandate of identifying, developing, financing and implementing out possible CDM projectopportunities in developing countries or directly buying the CERs from the carbon market forbanking or future use.

• Operate within the country/technology framework laid out by the IMC but aim for a diversifiedproject portfolio both in geographic as well as technological terms.

• Directly negotiate with the government for “host country” approval and the sharing of credits.JBIC officials with prior experience of such “government to government” negotiations would be avaluable asset for these negotiations.

• Have the option of distributing the CERs among the shareholders in proportion to the equity, bankingthem for future use or auctioning them in the open market to generate direct revenues.

• Extend risk guarantees for private sector investments through the fund. This role would be primarilyundertaken by JBIC that would develop a package for covering the risk of Kyoto non-ratificationas well as country risk guarantees for facilitating the flow of commercial project financing.

• Act as a conduit for export of optimal Japanese GHG abatement technologies to the developingcountries through the CDM operational umbrella.

In construing the above described model, the option of routing the private sector financing through afund operated by a foreign multilateral agency such as the World Bank or ADB has not been consideredprimarily as that would entail a highly bureaucratic and constrained operation. The objective of theintroduction of Kyoto mechanisms such as the CDM is to search for market driven and private sector ledsolutions and to move away from the traditional bureaucratic models of resource flow. Furthermore, mostof the agency led funds could easily get laden with historical political/economic baggage while dealingwith developing countries which could distort and deleteriously bias resource flow considerations ina nascent and developing carbon credit market. Finally, such a routing also constrains the flexibilityof directing resource flows towards selected countries with time tested bilateral relations as well aschoosing optimal export technologies, both options that could be exercised through a domestic Japanesemodel.

8. Concluding remarks

The above paper has outlined the latent potential that the CDM possesses for the appropriate as wellas sustainable transfer of technologies from the north to the south. However, the realization of this latentpotential would require facilitation of a conducive environment in developing countries as well as effectiveframeworks in developed countries for harnessing private sector investments and technological expertisefor global climate change mitigation.

The Dutch strategy has been analyzed to bringforth certain lessons that can be applied in Japan to com-plement and capitalize on its domestic strengths such as a wide and varied ODA experience, availabilityof resource flow infrastructure as well as high technological prowess of the private sector. A Japanese

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model built upon ODA facilitation as well as non-ODA mutual fund operation has been recommendedwhich can extend a low risk pathway for business to transfer and deploy high efficiency technologiesthrough the CDM.

References

Bernstein, M., et al., 1999. Developing Countries and Global Climate Change: Electric Power Options for Growth. PEW CenterReport, Arlington, USA.

Chupka, M., 1997. RFF discussion paper.NEDO, 2000. International Cooperation Center Information Brochure.Srinivas, H., 1998. Global Development Research Center at http://www.gdrc.org/techtran/index.html.Vrolijk, C., 1999. The potential size of the CDM. Paper presented at meeting of IWG on CDM. Buenos Aires, Argentina.

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Technology transfer under the CDM Materializing the myth in the Japanese context?

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