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Research Papers 10-18
Pro-competitive Measures
for ‘Top-runner’ System in Korea
Shim, Sung-Hee
Lee, Sang-Yul
Participants
Research Fellow Shim, Sung-Hee
Research Associate Lee, Sang-Yul
Abstract
As energy and resources become more and more important due to high oil price and the exhaustion of fossil fuels, energy security has been one of the critical policy goal all over the world.
Especially, "energy efficiency" is recognized as an essential measure for energy security as it attracts eyes as the fifth energy source with oil, coal, atomic energy and renewable energy. In this regards, Korea also prepares various energy efficiency plans such as energy and carbon emission target management and energy efficiency resource standard("EERS").
However, such measures mainly focus on industry sector and energy providers. Thus, they have their own limit because other important pivots of energy consumption such as residential-commercial and transportation sectors are excluded. In order to supplement these limits and promote energy efficiency in the residential-commercial and transportation sectors, the Korean government is now considering the introduction of a Japanese type of Top-Runner system.
Top-runner system is a regulatory scheme to heighten energy
efficiency of end user products, mostly appliances and automobiles.
Japan introduced and has implemented the scheme for the first time.
Top-Runner sets the most efficient product as the goal of energy efficiency and enforces other products to satisfy this standard for a given period of time.
In regulatory economics perspective, Top-Runner has a characteristic of yardstick competition which regulates the companies on the basis of their relative performances. Even though yardstick competition regulation scheme has many virtues, it has also some side effects. Therefore, we need to examine some problems of the scheme thoroughly, before the introduction of Top-Runner system.
For example, yard-stick competition has some weak points in the sense that it allows collusion among regulated companies.
Because the evaluation standard of Top-Runner is the performance of other companies in the same industry, the regulated companies has an incentive to restrain their effort for energy efficiency improvement. If the costs for achieving top-runner is bigger than the benefits, it is highly likely that the regulated companies will reduce investment in energy efficiency improvement through tacit collusion.
Therefore, in advance of the introduction of Top-Runner system, we need to examine various problems and explore pro-competitive and efficient ways for introducing the system. In this regard, the
purpose of this research is to provide some policy implications by investigating fundamental problems that Top-Runner system has.
This research overviews main arguments of theoretical studies on yardstick competition and elicits useful policy implications for designing Top-Runner system.
According to some theoretical studies on yardstick competition, investment incentives of individual companies can be more distorted than under individual regulation. In the dynamic regulatory setting, a regulator can extract future rents belonging to regulated companies on the basis of some information obtained from relative performance evaluation. If investment is irreversible and a regulator can not commit, investors may confront hold-up problem. Thus, companies expecting this situation has incentives to reduce their investments below social optimum level.
Next, investment having spillover effects across industry can be shrunken. Under the relative performance evaluation scheme such as yardstick competition, investments which gives positive externality to other companies' productivity can not have influence on the relative performance of the invested companies. This result suggests that government should support industry specific investments that induces
the improvement of energy efficiency of the whole industry.
Last, Chong and Huet(2009) shows the fact that yardstick competition regulation has a weakness in allowing tacit collusion.
Moreover, they proposes that a compensation scheme is more likely effective in lowering collusion than yardstick competition scheme based on punishments. This result provides some policy implications for us to design Top-Runner system in the future. In other words, in case of the introduction of Top-Runner system, it may be effective to design a scheme strengthening incentives to companies which could achieve the goal rather than a scheme reinforcing punishment to companies which could not achieve the goal.
In summary, the following should be paid attention in case of the introduction of Top-Runner system.
First, when selecting products regulated by Top-Runner system, we need to select products which has less possibility of tacit collusion. Especially, in the market where a small number of companies are participating and their market shares are high, a collusion may easily occur. Therefore, when we include these products under Top-Runner scheme, we should try to reduce the possibility of collusion by preparing various supplementary measures.
Second, an absolute energy efficiency evaluation can help deter tacit collusion among companies. In case that targeted companies mutually collude to restrain energy efficiency technology development, absolute efficiency index will decline. Thus, provided that an absolute efficiency standard such as "energy efficiency grade system" currently in force in Korea is complemented, the possibility of collusion can be reduced.
Third, an appropriate compensation scheme can decrease collusion among regulated companies. However, the further in-depth discussion is necessary on which one is better between the direct compensation to Top-Runner companies and the indirect compensation through incentives to consumers. If companies can extract most additional expenditures on improving energy efficiency by raising their prices, the indirect compensation plan providing additional incentive for consumers purchasing Top-Runner products is more desirable. Therefore, there is a need to lay out differentiated regulatory scheme by investigating market structure and product differentiation, etc.
Fourth, several theoretical models give an alarm that Top-Runner system may create hold-up problem and shrink industry-specific investments. Therefore, government should get rid of any concern about hold-up problem by the way of legislation on essential
regulatory values such as target products and target periods. In addition, government should provide support to R&D which influences energy efficiency of the whole industry in order to prevent the decrease of industry-specific investments.
Last but least, it is consumers that select products in the market. However, if energy price is distorted and avoided energy costs that consumers face are less than the benefits obtained when using more energy efficient products, consumers are reluctant to purchase energy efficient products. Therefore, above all, it should be done first to make conditions to let consumers realize that energy efficiency is an important factor in selecting products through clear energy price signal.
Table of Contents
Chapter 1. Introduction ··· 1
Chapter 2. Operating Cases and Performances of Top-runner in Japan ··· 7
1. Characteristics of Top-runner and its current state in Japan ··· 7
1.1 Background and Objective ··· 9
1.2 Scope of application(Target products) ··· 10
1.3 Improvement objective setting ··· 12
1.4 Decision-making processes ··· 20
1.5 Providing informations for consumers ··· 22
1.6 Program Management ··· 29
1.7 Penalty for underachievement ··· 30
2. Performances of Top-runner regulation ··· 30
Chapter 3. Critical Success Factors for the Japanese Top-runner and Other Issues ··· 41
1. Critical Success Factors for the Japanese Top-runner ··· 41
1.1 Participation of stakeholders ··· 41
1.2 Cooperation between the government and the industry ··· 42
1.3 High awareness of energy efficiency issues ··· 44
1.4 A flexible structure with repetitive cycles ··· 46
1.5 A structure converting the free-riding problem to an advantage 47 1.6 Effectiveness of penalty system ··· 48
1.7 Intended only for the products not involving trade disputes ··· 49
1.8 Cost-effective policy in the view of financial integrity ··· 50
2. Some issues relating to Top-runner ··· 51
2.1 Little incentive for technological innovation ··· 51
2.2 Incompleteness of goal setting ··· 52
2.3 Price increases and reduction of consumer welfare ··· 54
2.4 Tacit collusion among regulated companies ··· 57
Chapter 4. A Theoretical Inquiry into Top-runner system ··· 59
1. Yard-stick competition and Investment incentives ··· 61
2. Yard-stick competition and the role of collusion and compensation ··· 64
2.1 Basic model of Chong and Huet(2009) ··· 65
2.2 Incentives to make a false report ··· 68
2.3 Introduction of Yard-stick competition and resolution of the problem of asymmetric information ··· 71
2.4 Repetitive games and collusive incentives of companies ··· 75
3. Policy implications ··· 80
Chapter 5. Policy proposals for the introduction of Top-runner system ··· 85
1. Selection of target products and target periods ··· 85
1.1 Selection of target products ··· 85
1.2 Determination of target periods ··· 89
2. Complementary systems ··· 91
2.1 Energy efficiency grade system ··· 91
2.2 Connection with proper incentive schemes ··· 93
2.3 Creating favorable conditions for green purchasing through the rationalization of energy prices ··· 100
Chapter 6. Summary and Conclusion ··· 103
References ··· 107
Appendix ··· 111
List of Tables
Table -1. Top-runner Items and their adoption time in Japan ··· 11 Table -2. Example: Differentiation of goals in the same group of
products (Electric Refrigerator) ··· 14 Table -3. Actual Energy Efficiency Improvement for the first year by
product category ··· 33 Table -4. Portion of products satisfying the Top-runner Standards in
main home appliances ··· 35 Table IV-1. Payoff matrix in case that the actual value= ··· 74 Table IV-2. Payoff matrix in case that the actual value=
··· 74
List of Figures
Figure -1. Example: Goal setting for the discretely classified products · 15 Figure -2. Example: Goal setting utilizing a functional formular in the
same category ··· 16 Figure -3. Products with different potentials for improvement in the
same category ··· 17 Figure -4. Classification of categories using separate functional formular
··· 18 Figure -5. A decision-making process for the introduction of newly
regulated products ··· 22 Figure -6. Example: Top-runner labelling ··· 24 Figure -7. Example: Labelling of multi-stage evaluation
products(Refrigerator) ··· 26 Figure -8. Example: Energy Efficiency Rating(LCD TV) ··· 28 Figure -9. Certification mark for the good retailers of energy efficient
products ··· 29 Figure -10. A virtuous circle in dissemination of energy efficient
products through Top-runner system ··· 31 Figure -11. Actual Energy Efficiency Improvement for the first target
year by product category ··· 34 Figure -12. Trends in improvement of air-conditioner's coefficient of
performance(CoP) ··· 37
Figure -13. Trends in improvement of air-conditioner's energy
efficiency(2.8 kW) ··· 39 Figure -14. Trends in the average fuel efficiency of new gasoline cars in
Japan ··· 40 Figure III-1. Main factors improving energy efficiency in the end user
products stage ··· 45 Figure III-2. Payback period of air-conditioner purchase cost ··· 56
Chapter I. Introduction
Energy and resources issues have becom e m ore and m ore im portant due to high energy prices and our concerns about the exhaustion of fossil fuels. A s energy security has been one of the critical policy goals all over the w orld, efficient use of energy as w ell as stable supply of energy attracts m ore attention than ever.
Especially, "energy efficiency" is recognized as an essential m easure for energy security as it is regarded as the fifth energy source after oil, coal, atom ic and renew able energies.
In addition, as fossil fuel consum ption has been designated as the m ost im portant cause of global clim ate change, energy efficiency is beginning to be considered as one of the m ajor m itigation options needed to tackle clim ate change, as w ell as a m ain m easure to strengthen our energy security. A ccording to the W orld Energy O utlook 2009 published by the IEA , global energy consum ption should be reduced by 57% through the enhancem ent of energy efficiency until 2030, in order to stabilize carbon dioxide concentration w ithin 450ppm . This reduction target is m uch higher than that of other options such as renew able energies or C C S(C arbon C apture and Storage) w hich have been recently draw ing m uch attention. This show s how m uch
im portant the im provem ent of energy efficiency is, com pared to any other reduction options.1)
A s the im portance of energy conservation and efficiency has increased, the K orean governm ent has recently introduced various policies for energy conservation and efficiency and considers now the introduction of som e other policies. First of all, the Energy and C arbon Em ission Target m anagem ent system w hose introduction is provided in the B asic Law for Low C arbon G reen G row th is expected to be introduced in the m ajor energy intensive businesses all over the country from next year. A nd the introduction of Energy Efficiency R esource Standard(EERS) for energy providers is also being pushed forw ard. H ow ever, such m easures m ainly focus on industry sector and energy providers.
Thus, they have their ow n lim it because other im portant pivots of energy consum ption such as residential-com m ercial and transportation sectors are excluded. In order to supplem ent these lim it and prom ote energy efficiency in the residential-com m ercial and transportation sectors, the governm ent considers carrying forw ard the Top-Runner system w hich is currently in force in Japan.
Top-Runner system is a regulatory schem e to heighten energy efficiency in the end user products stage, m ostly
1) This shows, in other words, how difficult it is for mankind to discard his dependence on fossil fuels.
appliances and autom obiles. Japan has introduced the schem e for the first tim e in the w orld. Top-R unner sets the m ost efficient product as a standard for energy efficiency and enforces other products to satisfy this standard w ithin a given period of tim e.
This system is regarded as a successful m easure contributing to energy efficiency im provem ent of Japanese m anufactured products. N ow , K orea is also actively pushing ahead w ith this system to im prove energy efficiency in the end user products stage.
In the regulatory econom ics perspective, Top-R unner system has a characteristic of a regulatory schem e based on relative perform ance evaluation w hich regulates products on the basis of relative efficiencies betw een them . It is generally know n that the relative perform ance evaluation is effective only if the perform ances of regulated com panies are uncertain but the uncertainties applied to the regulated com panies have positive correlations w ith one another. The reason is that if the perform ance change of the regulated com panies due to a transitory shock com es along in the sam e direction, then the relative perform ance evaluation w ill be a useful w ay to distinguish the perform ance change due to a shock and the change due to their real efforts.
Especially, the Top-runner is very sim ilar to Y ardstick com petition, one of the various types of the relative perform ance
evaluation. Y ardstick com petition is a regulatory schem e in w hich the regulatory body evaluates the perform ance of a particular regulated com pany, using perform ances of other sim ilar com panies as a benchm ark, w hen the body is confronted w ith a situation of "asym m etric inform ation" vis-a-vis the regulated com pany. Top-runner has the sam e regulatory structure as the Y ardstick com petition in the sense that it is a regulatory schem e based on m axim um efficiency standard, taking as a standard the m ost efficient product am ong the sim ilar ones.
Even though yardstick com petition regulation schem e has m any virtues, it has also som e side effects. Therefore, it should be needed to exam ine som e problem s of the schem e thoroughly, in advance of the introduction of Top-R unner system . A s Shleifer(1985) points out, yardstick com petition has a w eak point in its structure, the possibility of collusion am ong regulated com panies. Because the evaluation standard of yardstick com petition is the perform ances of other com panies in the sam e industry, the regulated com panies have an incentive to restrain their efforts to enhance energy efficiency. Top-runner system m ay be confronted w ith the sam e problem . If the cost for achieving top-runner position is bigger than its benefits, regulated com panies w ill reduce investm ent for energy efficiency through tacit collusion.
W hen regulations are im posed over m ultiple periods, the
regulated com panies w ouldn't do the best enough to surpass the given objective for fear that the perform ance achieved in the current period should be a standard for the next period's perform ance objective. That is, regulator couldn't com e up w ith an expected result because of the ratchet effect. The possibility of such ratchet effect could aggravate the under-investm ent problem s, caused by tacit collusion, of the Top-runner related com panies.
Therefore, before the introduction of Top-R unner system , w e need to exam ine various problem s and explore pro-com petitive and efficient w ays for introducing the system . In this regard, the purpose of this research is to provide som e policy im plications by investigating fundam ental problem s w hich Top-Runner system has.
The com position of this study is as follow s. In C hapter 2, w e describe in detail the current situation and the m ain perform ances of Top-runner system in Japan. C hapter 3 deals w ith w hat factors have m ade it possible for Top-runner system to settle dow n successfully in Japan and w hat com ponents of the system have been still regarded as problem s. In C hapter 4, w e w ill try to find som e inbuilt problem s of Top-runner regulatory schem e, utilizing existing theories related to the relative perform ance evaluation and the yardstick com petition. In C hapter 5, based on our hitherto discussed issues, w e w ill suggest som e policy
proposals about the future plans for the introduction of Top-runner system in K orea. Finally, w e w ill w rap up the research, sum m arizing it in C hapter 6.
Chapter 2. Operating Cases and Performances of Top-runner in Japan
Three regulatory schem es as follow s are generally used by governm ents to im prove the energy efficiency of energy consum ing products or appliances. The first is to im pose the M inim um Efficiency Perform ance Standard(M EPS). This is the m ost w idely used standard in the w orld for im proving energy efficiency. K orea introduced this schem e for the first tim e in July 2009 and, from then on, has been enlarging its range of application. U nder the M EPS regulation, there is a m inim um efficiency objective w hich every product or appliance in each category m ust achieve. If the energy efficiency perform ance of som e products or appliances do not satisfy the standard, their production and sale are banned in principle.
The second schem e is to im plem ent the A verage Efficiency Perform ance Standard(A EPS). This urges m anufacturers to im prove the shipm ents-w eighted average energy efficiency of different products in the sam e category. The average efficiency should rem ain above a certain efficiency level im posed by
regulator. U nder this regulation, even though energy efficiency of som e products for w hich m arket dem and is high is som ew hat low er, m anufacturers m ay sell other products of very high energy efficiency to the extent that the average efficiency of their all products beats the efficiency objective.
Finally, the third schem e is to regulate m anufacturers w ith the M axim um Efficiency Perform ance Standard. U nder this schem e, energy efficiency objectives are determ ined by the m ost efficient product (Top-runner) am ong the products of the sam e kind on the m arket. A ccording to the standard, w ithin a certain tim e lim it, the energy efficiency of all the products should reach the objectives regulators have set by product categories based on the highest energy efficient products. A s in the A EPS schem e, w hether they have achieved the goals or not is evaluated w ith the shipm ents-w eighted average energy efficiency of all products in the sam e category. This M axim um Efficiency Perform ance Standard schem e, called Top-runner system , is regarded as having the m ost pow erful incentive for m anufacturers to im prove the energy efficiency of their products, com pared to other schem es.
In this Chapter, w e w ill try to find w hat the achievem ents and the lim its of Top-runner are in Japan, the only country in the w orld w here the schem e has been im posed.
A fter the 1970s oil crisis, Japan enacted a law called
"R ational energy utilization A ct" in 1979. The law is a basis for the current Top-runner regulatory schem e. The objective of the legislation is to rationalize energy use through the im provem ent of energy efficiency in industrial plants, transportation, buildings, m achinery and equipm ent so that one m ay secure proper energy and resources even in the changing socio-econom ic environm ent at hom e and abroad.
The legislation w as significantly revised in 1998 after the K yoto Protocol w as adopted in the 3rd Conference of Parties in 1997. A ccording to the K yoto Protocol, Japan is obliged to reduce greenhouse gas em issions by 6% by 2008-2012, com pared to 1990 level.
B ut, in 1990s, the energy consum ption in the residential-com m ercial and transportation sectors increased rapidly and consistently. Especially, 80% of the increase of energy consum ption in the transportation sector w as due to the grow th of privately ow ned cars such as passenger car.
For this reason, Japan revised the R ational Energy U tilization A ct in 1998 and, based on it, introduced the so-called Top-runner regulation schem e to im prove the energy efficiency in the non-industrial sectors such as residential-com m ercial and
transportation sectors.
The objective of Top-runner system is to reduce energy consum ption in the residential and transportation(private car) sector through the rem arkable energy efficiency im provem ent of m ajor energy consum ing appliances and products.
The criteria adopted by the Japanese governm ent(A gency for N atural Resources and Energy, a division of the M inistry of Econom y, Trade and Industry) to decide w hich products Top-runner schem e should be applied to is as follow s.
1) Is the product concerned in extensive use in Japan?
2) Is considerable energy required in using the product?
3) Is it particularly necessary to im prove the energy efficiency of the product.
Even if an item (a group of products) is selected based on this criteria, w hether Top-runner schem e should be applied to it or not w ill be decided in consideration of the internal structure of the item . For instance, in the early stage of im plem entation, only diesel and gasoline cars am ong the passenger cars w ere regulated by the schem e w hile LPG , electric and hybrid cars w ere not subject to the regulations. In case of TV set, only C RT TV sets w ere regulated by the schem e in the beginning, w hile LCD TV exonerated from the regulation.
W hen Top-runner schem e w as introduced in 1998, the num ber of item s regulated by the schem e w ere 11. But 7 item s w ere added in 2002, 3 item s in 2005 and 2 item s in 2010. So 23 item s as a w hole w ere regulated by the schem e as of 2010. In Japan, the scope of application is review ed every tw o or three years.
year items
1998
o Passenger car(Gasoline, Diesel, LPG*) o Air-conditioner
o Lighting equipment o Copy machine o Computer
o Magnetic disk unit o Trucks(gasoline, Diesel) o VCR
o Refrigerator o Freezer
2002
o Stove(gas, oil) o Kitchen utensil(gas) o Water heater(gas, oil) o Electric Bidet
o Vending machine o Transformer 2005
o Electric rice cooker o Microwave
o DVD recorder
2009 o Router
o Switching unit total
(as of 2010) 23 items
Table II-1. Top-runner Items and their adoption time in Japan
* It was in 2003 that LPG cars were adopted as a regulated item.
Top-runner system is im plem ented through a circular process as follow s; to set energy efficiency goals by products to achieve the goals through technology innovation to reset (adjusting upw ard) the goals. O ne is to set the goals and the tim e table for achieving them in consideration of m arket situation and related technologies. W e w ill review the regulatory processes in m ore detail.
1) Energy efficiency goal setting
In Top-runner system , efficiency goals of regulated products are generally set based on the energy efficiency level achieved by the m ost efficient product(top-runner) of the day.
B ut one should consider not only the present efficiency levels of the products on the m arket, but also the potentials for im proving their efficiencies by technological innovation. For exam ple, one m ay set as a goal a higher efficiency level than that of the current top-runner, for the sector in w hich the potentials for energy efficiency im provem ent are huge, considering technological progress in recent days. W e can see it w ith the case of TV set or D V D of w hich the related technologies are rapidly developing. O ne should take into account the availability of energy efficiency technologies as w ell. If the product providers w ere obliged to spend too m uch m oney to achieve the top-runner
based energy efficiency level, one m ight set som e realistic goals for the products other than the top-runner based.
In addition, even if a certain product on the m arket is top-runner, but it is not m ass-produced because it is only used for a specific purpose, then the product w on't be a standard. It is the sam e for the products w hich are sold below their cost for the purpose of advertisem ent or im age m aking, and for the products of w hich the safety is not totally verified (ECC J, 2005).
2) D ifferentiation of goals
Even though som e products belong to the sam e group of products(the sam e item ), one should set different goals for each product according to their functions, technologies used(ex.
cooling m ethods in refrigerators), sizes, w eights and fuels used.
A s the goal setting itself can m ake m anufacturers reduce or discontinue the production of som e particular products, it can restrict consum er choice. So, som etim es, regulators set a separate goal to avoid such an outcom e. In case of TV set, for exam ple, besides the differentiation based on the related technologies such as display m ethods, one assigns different goals betw een general screens and w ide screens. The reason is that if the sam e standard w ere applied to the different products, then m anufacturers w ould seek to reduce or discontinue the production of w ide screen TV sets w hich consum e m ore energy, causing confusion in the m arket place. In order to m ake up for such a w eakness, one
should divide the products into various categories and diversify the w ays of goal setting for the different categories.
Category Energy Efficiency
Goal setting Formula Item Cooling ***
method
Technology used
Cod e Refrige
rator
Cold air Natural Circulation*
a E1=0.427V1+178 b E1=0.427V1+178
Refrige rator.
Freezer
Forced
Circulation** c E1=0.433V1+320
Natural Circulation
including detailed technology
d E1=0.507V1+147 Force
Circulation
excluding detailed technology
e E1=0.433V1+340 Table II-2. Example: Differentiation of goals in the same group of products
(Electric Refrigerator)
Source : METI(2010), Top Runner Program revised edition/Mar.2010 Note: * Inner walls of refrigerator serve as a evaporator.
** A separate evaporator is equipped in the backside of refrigerator.
*** E1: Energy efficiency goal (unit: kWh/yr)
V1: Adjustment factor by products according to internal volumes
3) W ays of G oal setting
There are tw o w ays of goal setting in Top-runner for energy efficiency im provem ent.
Firstly, there is a basic w ay of setting, definitive objective setting, to propose the goal with a certain fixed value. This method
is generally used for the products which can be discretely classified according to their function and usage w ithin the sam e group of products. The "discretely classifiable products" m ean that they can be classified into discrete categories such as engine displacem ents(1,300cc, 1,500cc, 2,000cc, etc.) or types of fuel(gasoline, diesel, LPG , etc.).
Figure II-1. Example: Goal setting for the discretely classified
Source: METI(2010), Top Runner Program revised edition/Mar. 2010
The second w ay is to derive the efficiency goal for a group of hom ogeneous products from a functional form ular. This
m ethod is generally applied to the products w hich are continuously diversified in size as in case of TV screen. In case of TV sets, the energy efficiency and annual electricity consum ption are different according to the size of their screen. If one suggested uniform ly a fixed goal, based on the m ost efficient 15-inch screen TV , for a group of products w hich com prise both 15-inch and 21-inch screen TV sets but is classified as the sam e category only because of their sim ilar display m ethod and function, the 21-inch screen TV sets w ould be w ithdraw n from the m arket because they cannot satisfy the conditions. H ow ever, if w e establish efficiency goals w ith a functional form ular, w e can have m ore realistic goals because they w ill be m ore flexible according to screen size(Figure II-2).
Figure II-2. Example: Goal setting using a functional formular
N evertheless, if w e suggest efficiency goals for the products in the sam e category, based on only a single functional form ular, there w ill be a group of products w hich have difficulty in achieving the efficiency goals because of som e technological reason. Figure II-3 show s the case that w hile the energy efficiency of the products is very low ow ing to their large size, the technological potential for im proving their efficiency is also too low . In this case, as Figure II-4 show s, w e can use a functional form ular w ith different slopes. A nd the category w ill be subdivided into tw o parts at the point w here the slope is broken.
Figure II-3. Products with different potentials for improvement in the same category
Source: METI(2010), Top Runner Program revised edition/Mar. 2010
The classification review ed earlier betw een general screen and w ide screen TV sets is also based on this m ethod. G enerally, w ide screen TV sets are consum ing m ore energy than general screen and their potential for im proving the energy efficiency is m uch too low . B ut, as consum ers have preference for the w ide screen TV sets, one should classify them as a new category lest they should be w ithdraw n from the m arket, and one should apply a separate goal to them .
Figure II-4. Classification of category using separate functional formulars
Source: METI(2010), Top Runner Program revised edition/Mar. 2010
4) G oal achievem ent(Target period)
M anufacturers or sellers w ho produce or im port the regulated products should achieve the energy efficiency goal w ithin a given period(target period).
A s w e m entioned earlier, w hether the goal has been achieved or not w ill be evaluated based on the sales-w eighted average efficiency of all the products sold by the seller. In other w ords, even if a certain seller has som e products w hich have not attained the goal, he w ould be regarded as having succeed in achieving the goal as a w hole if he sold sufficiently the other products w hich are efficient enough to beat the goals,
The efficiency goals should be attained w ithin the target period. The target period varies am ong different products, ranging from 2 to 13 years. The target period should be determ ined w ith considering various factors such as a necessity to satisfy the conditions required by the K yoto Protocol, developm ent cycles of new products, prospects for technological advances in the future and sustainability of the products.
5) Revision of the goals
If a particular group of products have attained the assigned goal w ithin the target period, then a new goal w ill be im posed for the enhancem ent of energy efficiency. W ith the m ajority of the sellers attaining their goals before the target year, one could
discuss revising the goals and the target period even before the target year. For exam ple, the initial target year w as 2005 for com puters, m agnetic disk units, passenger cars, but new goals and target periods w ere im posed in 2003.
W hen the efficiency goals and the target periods are revised, the new target periods are generally getting shorter than the initial target periods. The initial target period, for exam ple, for com puters and m agnetic disk units w as 7 years, but the duration w as shortened to 5 years after the revision.
In Japan, there are 3 com m ittees to im plem ent the Top-runner system , each of w hich is com posed of experts in the governm ent, related industries and consum er advocacy groups.
These com m ittees are concerned w ith the selection of target products and the establishm ent of policy goals for the regulation.
It is the A dvisory C om m ittee for N atural R esources and Energy that is responsible to m anage the proper use of energy.
A nd the Energy Efficiency Standards Subcom m ittee plays an im portant role in review ing the plans concerning the target products and the effective policy m easures for Top-runner schem e w hich are proposed by the governm ent((A gency for N atural Resources and Energy, a division of the M inistry of Econom y, Trade and Industry).
O nce the products w hich w ill be new ly regulated by Top-runner schem e are determ ined, an Evaluation Standard Subcom m ittee is form ed for each group of products. A nd then, these subcom m ittees w ill m ake a draft for specific standards about the scope of target products, evaluation m ethods, classification of categories, efficiency im provem ent goals and target period, etc. These w orks are generally carried out w ith cooperation betw een the governm ent and experts in the related industries, universities and research institutes. Figure II-5 show s a general decision-m aking process in Top-runner schem e. This process takes one to tw o and a half years in general.
Figure II-5. A decision-making process for the introduction of new target products
Source: The Swedish Environment Protection Agency(2006), The Top Runner Program in Japan
M anufacturers are now providing their custom ers w ith inform ations on the energy efficiency levels of their products in various w ays.
Firstly, every m anufacturer producing the target products,
including sm all producers w ho are exonerated from the legal obligation to achieve the energy efficiency goals, should legally provide their consum ers w ith proper inform ations on the energy efficiency levels of their products (A rticle20 of the Energy C onservation A ct).
In addition, the Energy Efficiency Labelling schem e w as introduced in 2000 to provide consum ers w ith inform ations about w hether a certain product satisfies the energy efficiency standards im posed by the Top-runner system based on the JIS(Japanese Industrial Standards). That is, if a certain product satisfies the efficiency standard, a green label identifying its achievem ent rate w ill be put on it. O therw ise, a orange label w ill be put on it.. This labelling schem e is m ainly applied to m ajor appliances such as air-conditioner, refrigerator, gas w ater heater and com puter equipm ent.
Figure II-6. Example: Top-runner labelling
Source: METI(2010), Top Runner Program revised edition/Mar. 2010
Note: The label at the top of the figure is an example of green label showing that the product has achieved the goal, but the label below is an orange label showing that the product has failed to achieved the goal.
In addition to the labelling, m ulti-stage evaluation should be m ade for 5 item s such as air-conditioner, TV set, refrigerator, bidet-toilet seat and lighting fixtures2).
A t the top of the Figure II-7, the year w hen the inform ation w as produced is identified. The m ulti-stage evaluation is m ade on the basis of the distribution of Top-runner achievem ent rates of the sam e group of products on the m arket. The evaluation is identified w ith the num ber of stars from 5 to one, in descending order of energy efficiencies. So, the num ber of stars of a certain product having achieved the Top-runner goal can change according to the m arket situation and the distribution of Top-runner achievem ent rates of the sam e group of products on the m arket.
Figure II-7 show s that the product concerned(refrigerator) not only has achieved the Top-runner goal but also has been evaluated as the highest efficient (5-star m ark). The Figure show s also w ith the arrow m ark that, in this group of refrigerators, three stars out of five are sufficient to identify that a certain product has achieved the goal. The m ulti-stage evaluation inform ation expressed by the num ber of star m arkss is follow ed by the label for the Top-runner labelling schem e. A nd, at the bottom of the Figure, the expected annual cost of electricity in using the product is inscribed in order to m ake it easy for the consum er to recognize the energy efficiency of the product.
Figure II-7. Example: Labelling of multi-stage evaluation products(Refrigerator)
Source: ECCJ(2010), Catalog on energy conservation performances, edition/Summer 2010
The EC C J(Energy C onservation C enter, a bureau of the A gency for N ational R esources and Energy, Japan) has also provided since 1977 a catalog called "Energy Conservation Perform ances" w hich contains inform ations about the energy efficiency perform ances of the appliances regulated by
Top-runner schem e and allow s consum ers to m ake a brief com parison betw een the energy efficiencies of different products.
The EC CJ's catalog provides inform ation about the energy efficiencies and the annual energy consum ptions of different products, based on the product catalogs published by the m anufacturers. The sem iannually published catalog gives also rankings to all the products on the m arket according to their energy efficiencies. In Figure II-8 w hich turns up in the catalog published in sum m er 2010, w e can find an exam ple that gives energy efficiency rating to LCD TV (16" or less). O n the left side of the table appears the brand of m anufacturer, product nam e, m ulti-stage evaluation result and Top-runner label. O n the right side, w e can find inform ations about pow er consum ption and standby pow er by products, and other inform ations about the functions of the product.
B esides, there are various m easures in force to encourage retailers to sell energy efficient products m ore actively by giving a prize according to their sales results.
The Japanese governm ent has introduced the "Energy efficient product retailer assessm ent program " to prom ote the sales of energy efficient products, and has given "A gency for N atural R esources and Energy M inister's A w ard" and
"Environm ent M inister's A w ard" to the retailers w ho provided
inform ations about energy conservation and m arketed energy efficient products actively.
Figure II-8. Example: Energy Efficiency Rating(LCD TV)
Source: ECCJ(2010), Catalog on energy conservation performances, edition/Summer 2010
It's the good retailers3) w hose sales of energy efficient products exceed 50% of their total sales that the M inister's A w ards are given to.
Figure II-9. Certification mark for the good retailers of energy efficient products
Source: METI(2010), Top Runner Program, revised edition/Mar.2010
O nce a certain product has reached the Top-runner target year, the m anufacturers of the product should report to the governm ent(A gency for N atural R esources and Energy) how m uch they have achieved the goals. B efore the target year, how ever, they don't have to report officially w hat's happening in their im provem ent efforts. B ut, they should periodically provide statistical inform ations about the energy efficiency of their products, according to the related regulations. For instance, in case of car industry, the regulations provide that m anufactures
should annually publish their outlook for efficiency im provem ent and so on, based on the goal achievem ent rates and their evaluation of each vehicle m odel,
Each industry also, at the level of its association, encourages its m em ber producers to be able to achieve their efficiency im provem ent goals by the target year, w ith unofficially researching w eighted average efficiency im provem ent records.
Top-runner schem e im poses in principle a penalty of "nam e and sham e"4) on the m anufacturers w ho have failed to satisfy the energy efficiency standards and to provide sufficiently related inform ations by the target year. The Energy C onservation A ct provides4 stages of penalty - recommendation, public announcement, order and paym ent of a fine up to one m illion JPY .
A s of 2008, after 10 years had passed since the introduction of Top-runner, the system w as evaluated as having considerably contributed to energy efficiency im provem ent and draw ing attention from the public.
The im provem ent of energy efficiency and the dissem ination of efficient products through Top-runner system are ow ing to a virtuous circle betw een consum ers, producers and retailers, based on various incentive regulations.
Figure II-10. A virtuous cycle in dissemination of energy efficient products through Top-runner system
Source: METI(2007), Japan's Top Runner Program: The Race for the Top
Firstly, it is the governm ent and the producers w ho encourage the use of energy efficient products by providing consum ers w ith related inform ations about the energy saving effect of the products. They also encourage retailers to sell efficient products w ith the "Energy efficient product retailer assessm ent program ". In addition, under Top-runner regulation, the producers w ill develop com petitively efficient products to achieve the energy efficiency goal for each product. O n the other
hand, the increase itself in the sales of efficient products w ill m ake producers im prove m ore actively the energy efficiency of their products.
So, the essence of the Japanese Top-runner system is not only concerned w ith players like consum er or producer, but also lies in a proper com bination of regulations and incentives w hich can m ake the players act voluntarily in all aspects of production, distribution and consum ption of the products. Therefore, in this section, w e w ill try to review som e specific results of Top-runner regulation, focusing on som e m ain products w hich have passed the first target year since the introduction of Top-runner system in 1988.
Since Top-runner system w as introduced in Japan, m ain target products such as TV set, V C R , air-conditioner have already passed their first target period. A s Figure II-3 and Figure II-11 show , they have attained in all categories to an efficiency level w hich goes beyond their initial objectives. It's copy m achines w hich have experienced the greatest energy efficiency im provem ent. The initial objective w as to enhance their efficiency by 30.8% until 2007. B ut their actual rate of im provem ent obtained at the target year w as 72.5% , a level of 41.7% p higher than the initial objective.
B esides, the m ajority of appliances, including refrigerators (24.7% p), lighting fixtures(19.1% p), V CR (14.9% p), have also
surpassed their efficiency goals. In case of passenger cars, they attained their objective in 2005, 5 years earlier than the initial target year(2010). The target for trucks w as also exceeded and their actual im provem ent rate reached a level 15.2% p higher than their initial objective.
Product Category Actual Energy Efficiency Improvement(A)
Initial Objective(B)
Excess Rate(A-B) TV set(CRT TV set) 25.7% (1997 2003) 16.4% 9.3%p
VCR 73.6% (1997 2003) 58.7% 14.9%p
Air-conditioner(Room
air-conditioner) 67.8% (1997 2004) 66.1% 1.7%p
Refrigerator 55.2% (1998 2004) 30.5% 24.7%p
Freezer 29.6% (1998 2004) 22.9% 6.7%p
Gasoline car 22.8% (1995 2005) 22.8%
(1995 2010) 0%p
Diesel car 21.7% (1995 2005) 6.5% 15.2%p
Vending machine 37.3% (2000 2005) 33.9% 3.4%p Lighting fixture 35.7% (1997 2005) 16.6% 19.1%p
Copy machine 72.5% (2001 2007) 30.8% 41.7%p
Computer 80.8% (2001 2007) 69.2% 11.6%p
Magnetic disk 85.7% (2001 2007) 71.4% 14.3%p
Electric Bidet 14.6% (2000 2006) 10.0% 4.6%p
Table II-3. Actual Energy Efficiency Improvement for the first target period by product category
Source: METI(2010), Top Runner Program revised edition/Mar.2010
Note: Actual efficiency improvements are rated with energy efficiencies(e.g:
km/L) for the asterisked products, and with energy consumption(e.g:
kWh/year) for the non-asterisked products.
Figure II-11. Actual Energy Efficiency Improvemenst for the first target period by product category
If w e look at the portions of each hom e appliances w hich are satisfying the Top-runner standards as of sum m er of 2010, those of electric rice cooker and m icrow ave are 97.9% and 96.3%
respectively. This m eans that alm ost all of electric rice cookers and m icrow aves sold in the m arket are satisfying the Top-runner standards.
Besides, w e can notice that m ost of hom e appliances, including air-conditioners(93.3% ) and refrigerators(91.7% ), becom e also high efficient products satisfying the Top-runner standards.
B ut, in case of TV sets, the portion of the efficient products w hich have achieved the efficiency goals is very low . If w e look
at the portions by sub-categories of TV sets5), w e can find the portion of LC D TV sets w hich are not satisfying the Top-runner standards is relatively high. This m eans there is plenty of room for energy efficiency im provem ent for LC D TV , so m ore efforts w ill be needed by the second target year.
Items Number of sub-categories
Total number of
products sold
Number of products satisfying the standards
Portion of products satisfying the standards
Air-conditioner 14 386 360 93.3%
Television 19 324 163 50.3%
DVD Recorder 7 17 12 70.6%
Refrigerator 10 169 155 91.7%
Electric Rice
Cooker 7 140 137 97.9%
Microwave 5 81 78 96.3%
Lighting Fixture 5 197 177 89.8%
Electric Bidet 2 105 79 75.2%
Table II-4. Portion of products satisfying the Top-runner Standards in main home appliances
Source: ECCJ(2010), Catalog on energy conservation performances, edition/Summer 2010
Note: The total number of products sold and that of products satisfying the standards are the sum of the number of products by sub-categories. See the Appendix for the details by categories
Though the energy efficiency of m ost products have been considerably im proved since the introduction of Top-runner system , it is also true that other factors like increase in m arket dem and for energy efficient products and natural technological progress have had an effect on the energy efficiency im provem ents together.
B ut, w e can identify the usefulness of Top-runner schem e by an em pirical test of som e products. A ir-conditioner w ill be a good exam ple. It w as in the 1970s that room air-conditioners for cooling began to spread in Japan and, from then on, m ulti-system air-conditioners for heating and cooling have been w idely dissem inated.
Throughout the 1980s, with popularization of air-conditioner, technical im provem ents in the m ain parts of air-conditioner like inverter and heat exchanger had m ade it possible to im prove the coefficient of performance(COP) of the multi system air-conditioners until the m id 1990s.
Figure II-12. Trends in improvement of air-conditioner's coefficient of performance(CoP)
Source: Kimura(2010), "Japanese Top Runner Approach for energy efficiency standards"
B ut, as Figure II-12 show s, there w as little im provem ent in energy efficiency in the m id 1990s, w ith the C O P of air-conditioner being stagnant. W hen Top-runner schem e w as introduced in 1998, air-conditioner w as also designated as a regulated item and assigned an energy efficiency objective. The initial objective for air-conditioner w as to enhance its energy efficiency by 66.1% , com pared to 1997, until 2004. The application of Top-runner had a considerable im pact on the m arket. In a situation w here the m arket dem and for air-conditioner for heating w as expected to increase rapidly, the
initial efficiency im provem ent goal for the air-conditioner for heating w as set in a higher level than for cooling. A s Figure II-12 show s, there has been a considerable im provem ent in CO P of air-conditioner for heating as w ell as for cooling. From this Figure, w e can also see that the efficiency of air-conditioners for heating had been low er than for cooling, but becam e higher.
If w e look at the graph w hich show s sim ultaneously the trends of both high and low efficient products, w e can see m ore definitely the influence w hich Top-runner schem e has had on the efficiency of products.
In Figure II-13, we can identify that, until 2004, the COP of the highest efficient products had greatly improved, but the COP of low efficient products had increased twofold. That is, under Top- runner scheme, the existing low efficient products have been naturally withdrawn from the market or their efficiency has greatly improved.
W e can also take the automobile industry as an example where the energy efficiency was improved by Top-runner regulation. In Japan, the fuel-efficiency of cars had been rapidly im proved in the 1970s and 1980s, but it stood still or even deteriorated in the 1990s due to the gasoline prices and the grow th in car sizes.
B ut, since the introduction of Top-runner regulation, the im provem ent of the energy efficiency of vehicles has been accelerated so far as to achieve their Top-runner objective 5 years earlier than their initial target year(2010).
Figure II-13. Trends in improvement of air-conditioner's energy efficiency(2.8 kW)
Source: Kimura(2010), "Japanese Top Runner Approach for energy efficiency standards".
N evertheless, as w e m entioned earlier, w e cannot insist that all of this im provem ent in fuel efficiency should be attributable to Top-runner regulation. The fuel efficiency of cars has already begun to be am eliorated since 1997, even before the introduction of Top-runner regulation. In addition, it is evident that the consum er's increasing aw areness of energy conservation and environm ent as w ell as the m anufacturer's reaction to it have been also affecting the trends.
It w ill be difficult to differentiate betw een the effects on fuel-efficiency im provem ent by factors. B ut, w hat is clear is that, under Top-runner regulation, car m anufacturers have becom e
m ore aggressive in developing energy efficient m odels because they have felt it less risky than before, so that the fuel efficiency im provem ent has been m ade very rapidly.
Figure II-14. Trends in the average fuel efficiency of new gasoline cars in Japan
Source: Kimura(2010), "Japanese Top Runner Approach for energy efficiency standards".
Chapter 3. Critical Success Factors for the Japanese 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).
