Chapter I. Introduction
Chapter 3. Critical Success Factors for the Japanese Top-runner and Other IssuesJapanese Top-runner and Other Issues
A s m entioned earlier in the previous chapter, the Japanese Top-runner system is evaluated as having greatly contributed to the energy efficiency im provem ent in Japan. In this chapter, w e w ill review som e critical success factors and related issues for the Japanese Top-runner regulation w hich is based on the relative perform ance evaluation regulating products on the basis of relative efficiencies of products.
Top-runner system has a characteristic of direct
"C om m and-and- Control" regulation. G enerally, under the regulation based on com m and-and-control, the regulators w ould set policy objectives in top-dow n approach, and the regulated com panies should just attain the objectives. B ut, Top-runner system has also a bottom -up type decision-m aking process in w hich stakeholders such as related academ ic circles, technicians, m arket experts, consum er groups, related com panies,
associations or trade associations representing the related industries are directly participating in the process.. In other w ords, Top-runner system em ployes harm oniously both the approaches in such a w ay that, for instance, the success or not of goal achievem ent is verified in a top-dow n approach w hile the details of the system are designed or determ ined in a bottom -up m anner.
U nder Top-runner, stakeholder's w illingness to take part in the program and their aw areness of the detailed policy objectives are likely to be very high, because the system is operated in a m anner that the top-dow n and bottom -up approaches are properly integrated(N ordqvist, 2006). It is also regarded as one of the m ost im portant success factors that stakeholders have been able to participate directly in principal decision-m aking processes such as selecting target products and deciding energy efficiency goals and target periods6).
Japanese style cooperation betw een the governm ent and the industry has also contributed m uch to the successful
establishm ent of Top-runner schem e in Japan. Especially, under a regulatory structure based on the bottom -up type approach in w hich stakeholders can take part in decision-m aking processes, it is very im portant that regulators have an intim ate relationship w ith regulated com panies. The intim ate relationship betw een the governm ent and the industry enables us to low er transaction costs w hich are inevitably involved in the bottom -up type decision m aking structure(for exam ple, costs incurred in the processes of negotiation for setting goals), and therefore m akes it possible to reduce adm inistration costs of policy im plem entation.
Japanese industries are traditionally accustom ed to the collaboration w ith governm ent regulators, and have been cooperative in im plem enting the policy objectives proposed by the governm ent. Such a long-lived cooperative relationship is regarded as one of the m ain factors w hich have enabled Top-runner to settle dow n in early stages(N ordqvist, 2006). O f course, on the other hand, this m ay m ean that regulations like Top-runner cannot settle dow n very successfully in a situation that the relationship betw een the governm ent and the industry is not m uch intim ate. So, before the introduction of Top-runner, it w ill be necessary to review sufficiently how the schem e can be in harm ony w ith our historical and environm ental background.
It is also regarded as one of the m ost im portant success factors that Japanese consum ers and related com panies have been highly aw are of energy efficiency issues. A ccording to a survey of energy experts and officials of the m ain m anufacturers and industrial associations, the second largest group of respondents regarded the com petitive advantage brought by energy efficiency im provem ent as the m ost im portant factor im proving the energy efficiency in the end user products stage(see Figure III-1). This exam ple show s very w ell that Japanese industry recognizes energy efficiency as a m ain source of com petitive advantage.
Japanese consum ers as w ell as m anufacturers have been m ore and m ore aw are of the im portance of energy efficiency.
A ccording to a survey conducted by an association of TV m anufacturers, Japanese consum ers' aw areness of the im portance of energy efficiency has highly increased enough for them to point out energy efficiency as one of the m ost im portant factors they w ill consider w hen they com pare com peting products(The Sw edish Environm ent Protection A gency, 2005).
Such a high aw areness of energy efficiency in the Japanese com panies and consum ers com es to be a driving force to attract extensive cooperation from the regulated com panies, so it acts as
an essential factor w hich enhances the effectiveness of Top-runner policy.
Figure III-1. Main factors improving energy efficiency in the end user products stage
Source: The Swedish Environmental Protection Agency(2005), 'The Top Runner Program in Japan - its effectiveness and implications for the EU’
The Japanese Top-runner has a structure having a repeated cycle from selecting eligible products to setting efficiency goal and target period. N evertheless, the policy param eters for the first target period is not equally applied to the next period. The param eters should be flexibly adjusted through extensive consultations w ith stakeholders, based on the experiences of the previous periods. Such a policy design process, repetitive and flexible, enables its participants to adapt easily to environm ental changes. For instance, if a technical progress in energy efficiency for a specific product is rapid(or not), regulators m ay reduce(or increase) the duration for achieving the goal in the next period to m ake it possible for its m anufacturer to respond effectively and flexibly to the environm ental changes. It is also possible for the regulatory schem e to evolve based on a process of learning by doing, applying the experiences of previous periods to the schem e of next period by adjusting the policy param eters. Such a structure, repetitive and flexible, m akes it possible for regulators and regulated com panies to adapt flexibly to environm ental changes in the outside, so it plays an positive role in enhancing the effectiveness of Top-runner policy as w ell as the receptivity of stakeholders.
A nother advantage of Top-runner schem e lies in reducing the costs of achieving the energy efficiency goals in the present regulatory period for the regulated com panies w ho has exceeded their goals in the previous period. In other w ords, there is a structure in w hich the com panies w ho have becom e a Top-runner or have exceeded their goals in the previous period can afford to free-ride in the present regulatory period(N ordqvist, 2006).
Therefore, the com pany w ho has achieved an energy efficiency im provem ent w ith a lot of effort in the previous period can m ake an effort to realize other objectives than the energy efficiency.
The structure allow s the com panies to reduce the required effort to achieve the goals at each regulatory period, so it can give them a chance to low er their burden and to concentrate on the other factors than energy efficiency for com petitive advantage.
A nyhow , it should be also noted that such a possibility to utilize the free-riding cycles can give the com panies an incentive to em ploy anti-com petitive practices. There is, for exam ple, an incentive for the regulated com panies w ho produce a specific group of products, to collude in their R & D activities in order that they m ay becom e in turn a Top-runner over different periods.
Therefore, one should bear in m ind that the structure allow ing
the com panies an incentive to free-ride and to be able to concentrate on other factors for com petitive advantage m ight be, on the other hand, a source of inefficiency due to their anti-com petitive behavior.
A s m entioned earlier, the Japanese Top-runner schem e provides a series of prelim inary sanctions on under-achievem ent such as "correction order" or "nam ing and sham ing" w hich should be im plem ented before the im position of pecuniary penalties. It should be noted that, in Japan, the "nam e and sham e" policy seem s to be a rather effective penalty for underachieving com panies. It is w ell know n that Japanese m anufacturers have a tradition of m aking m uch of consum er's confidence in their products and honor. Thanks to the Japanese com pany culture, the penalty system based on reputation seem s to have been an effective m easure to coerce the com panies into follow ing the regulation(N ordqvist, 2006). G enerally, the nam e and sham e policy w ill be far m ore effective w hen it is used sim ultaneously w ith the labelling schem e w hich inform s consum ers of how m uch the product satisfies the efficiency standards.
A nother factor contributing to the successful settlem ent of Top runner in Japan is that the regulation has been intended only for the products w hich is little likely to involve trade disputes(N ordqvist, 2006). A s Top-runner is applied only to the products w hich are used in Japan, it w ill be also applied to the sam e group of products im ported from overseas. If the m arket share of the im ported products decreases considerably because of the regulation, Top-runner m ay be considered as a new trade barrier violating the W TO regulations by overseas com panies w ho export to Japan, so it can cause an international trade dispute. Especially, as there is no international standard for m easuring energy efficiency, if Top-runner has a considerable effect on the com petitive structure of the Japanese m arket, there w ill be m ore chance for international trade disputes to occur.
B ut, in case of the products m ost of w hich are regulated by Top-runner schem e in Japan, it is know n that the m arket share of the im ported products is negligible and that the schem e has little effect on the m arket shares betw een dom estic and im ported products. Therefore, the Japanese Top-runner has not yet been recognized as a sort of "G reen Protectionism " by overseas com panies, w hich is regarded as a factor allow ing the schem e to
settle dow n easily in Japan. N evertheless, if the m arket share of the im ported products increases for som e reason or other in the future, there exists still the possibility that international trade disputes occur m ore frequently. So, it's necessary to note that the problem has not yet been resolved com pletely.
G enerally, policies for greenhouse gas reduction or energy efficiency im provem ent involve the cost. M oving into a green econom y m ust require enorm ous governm ent expenditures as w ell as com pany's large capital expenses. To reduce greenhouse gas em ission or im prove energy efficiency, the governm ent not only im poses regulations but also provides financial support for technological developm ent. O f course, the financial support w ill be a very effective m easure to secure the long-term effects of the governm ent policies, if the stable funding is available. B ut, program s increasing financial burden on the governm ent w ill not only im pede sustainable policies, but reduce their actual effectiveness by influencing people's expectation.
B asically, the Japanese Top-runner has a characteristic that it induce energy efficiency im provem ent through technological com petition betw een the regulated com panies. This m eans that there is a structure in w hich the com panies them selves becom e the m ain agent im proving the energy efficiency. In view of the
intrinsic nature, the system has a characteristic of shifting the governm ent's financial burden to com panies or consum ers, so the governm ent takes on only a sm all burden com pared to the system 's actual effectiveness. Such a characteristic ensures the system 's stability, in the view of financial integrity, and enhances its long-term sustainability7).
The Japanese Top-runner system is know n to have settled dow n successfully, thanks to the various positive factors stated earlier. N evertheless, there are som e issues relating to the system w hich have provoked considerable debate and criticism . In this section, w e w ill try to review them briefly.
Firstly, the Japanese Top-runner system has been criticized for the reason that it is not so helpful to encourage the
developm ent of innovative technologies surpassing the existing level. Top-runner is basically a "com m and-and-control" type of regulatory schem e in w hich the product should only achieve the efficiency objectives determ ined by consideration of the highest efficient of all the product of the sam e group. Though the system involves a few com petitive elem ents, only if the product satisfies a certain efficiency standard, there w on't be additional regulations. So, the system does not give an incentive for the regulated com panies to exceed the efficiency goal because even if the target has been exceeded they couldn't reaped m onetary and non-m onetary rew ard. That is to say, Top-runner has the sam e w eaknesses as com m and-and- control type of regulations have. Therefore, even if Top-runner can contribute to a gradual efficiency im provem ent, it can fail in inducing a innovative technological developm ent far exceeding the regulatory target.
The second criticism is that the com pany's technological potential cannot be sufficiently reflected in the regulatory targets.
A ccording to a survey conducted by the Sw edish Environm ent O ffice, Japanese experts think that one of the m ain problem s of Top-runner lies in the fact that it does not fully realize the technological potentiality of the com panies to im prove the energy efficiency(The Swedish Environm ent Protection Agency, 2005).
In the Japanese Top-runner system , the baseline for goal setting is the energy efficiency of highest efficient products, but actual regulatory targets are determ ined also w ith overall consideration of other factors such as product characteristics, technology levels of the regulated com panies and speed of technological developm ent. O n the other hand, the regulated com panies can participate directly in the decision processes, and such policy param eters as efficiency goals and target period are finally decided in consultation w ith various interest groups and stakeholders. In such a situation, if the com panies expose all of their technological potential, they are m ore likely to be confronted w ith severer regulation because all the potentials m ay be reflected in the actual regulatory targets. If they are im posed, on the other hand, a low er target than their potential, they w ill reach m ore easily the target and therefore can save their costs for efficiency im provem ents. In fact, the com panies them selves are m ost aw are of their true technological potential. In the end, asym m etry of inform ation like this provides an incentive for com panies to report their potential for efficiency im provem ent as being low er than their actual potential.
R atchet effect in the goal setting stage is also a factor w hich m akes the regulated com panies hide their ow n actual potential.
The ratchet effect m eans that in a situation w here repetitive regulations occur w ith asym m etric inform ation, if regulators are
inform ed of the regulated com pany's private inform ation, the regulators in the next regulatory period w ill extract, utilizing the inform ation, the inform ational rents w hich the regulated com pany has enjoyed in the previous period ow ing to its inform ation superiority. For instance, if a certain com pany produced 120 units of product, utilizing its ow n full capacity of production, even though it had been assigned only a production of 100 units as a regulatory goal, the goal w ould be adjusted to 120 unit in the next period by the regulators, based on the production inform ation of the previous period8). In a situation w here a ratchet effect is expected, rational econom ic agents w ill have an incentive to m ake less effort than their ow n potential.
Sim ilarly, the com panies regulated by Top-runner w ould not w ant to expose their ow n technological potential because if the potential w ere fully exposed in the present period, the efficiency goal for the next period w ould be higher and the cost for achieving the goal w ould increase.
A nother criticism on Top-runner is that the reduction of consum er w elfare due to price increases follow ing the
investm ent for energy efficiency im provem ent has not been properly considered in the evaluation of the system . The increase of investm ent cost for energy efficiency im provem ent leads to the increase of product prices, even though the effect w ill be different by product and m arket structure the com panies are confronted w ith. So, to m easure correctly Top-runner's net effect on social w elfare, one m ust consider the reduction of consum er w elfare due to the price increases as w ell as the increase in social w elfare due to the energy efficiency im provem ent at the sam e tim e. In fact, the actual Top-runner system provides the efficiency goals and target year, but it does not provides criteria for dealing w ith the resulting price increases.
W ith pointing out the reduction of consum er w elfare resulting from price increases, K im ura(2010) insists that a life-cycle analysis should be involved in the process of deciding efficiency standards and target period in Top-runner, like in the process of M inim um Energy Perform ance Standards.
In this regard, K im ura(2010) has estim ated payback period of the air-conditioners sold in W inter 2006. A ccording to this estim ation, as Figure III-2 show s, it takes generally 10 to 15 years to recover the purchase costs in the case of highly energy efficient products. This m eans that the m ore efficient the product is, the m ore expensive it is, and therefore the m ore difficult it is to recover the purchase cost w ithin the product's length of life.
So, to avoid such a situation w here energy saving leads to a loss of consum er w elfare, it is necessary to consider the energy saving effect and the price effect at the sam e tim e.
Figure III-2. Payback period of air-conditioner purchase cost
Source: Kimura(2010), 'Japanese Top Runner Approach for energy efficiency standards'
Note: The dots mean prices and energy efficiencies of the products (2.8kW) sold in 2006. Each line means upper boundary line of payback period
considering annual average energy saving effect.
Finally, it is also necessary to consider the 'rebound effect' follow ing the energy efficiency im provem ent in testing the net effects of Top-runner policy. The rebound effect m eans that the related energy consum ption has been all the greater than it w as
before because the energy efficiency im provem ent itself allow ed the unit price of the energy consum ed to decrease. The rebound effect resulting from Top-runner has not yet been em pirically proven. But, considering the rebound effect, the net social w elfare effect of Top-runner is likely to be a little reduced.
Therefore, it w ill be necessary to exam ine in great detail the w elfare effect follow ing the rebound effect.
A s m entioned earlier, Top-runner system has a characteristic of yardstick com petition, a regulatory schem e based on relative perform ance evaluation of the related com panies. A s earlier studies indicate, one of the m ain w eaknesses of yardstick com petition is a possibility of tacit collusion am ong regulated com panies, and so is the m ain w eakness of Top-runner9). A s technological developm ents for the im provem ent of energy efficiency w ill need a considerable am ount of m oney, the regulated com panies have an incentive to collude tacitly w ith one another, looking to save costs by abstaining from technical innovation. So, under the yardstick com petition type of regulation, the regulators are likely to fail to induce the regulated com panies to m ake a social optim um investm ent in technological