Photo/Illutration Toshiaki Higashihara, president of Hitachi Ltd., speaks at a meeting on the company's environmental policies in Tokyo on Sept. 24. (Taiki Koide)

An increasing number of Japanese companies are introducing “internal carbon pricing (ICP)” to promote investments in projects that can effectively reduce their greenhouse gas emissions.

Under the ICP system, companies put a financial value on measures to reduce carbon dioxide (CO2) emissions, making it easier for them to prioritize low-carbon investments while appealing to investors in a society increasingly aware of the effects of global warming.

According to the Environment Ministry, the number of companies that had introduced ICP reached 607 in 2017, up from 150 in 2014.

By 2018, 67 Japanese companies, including Kokuyo Co., Astellas Pharma Inc. and Tokyo Electric Power Company Holdings Inc., introduced ICP.

However, each company has a different way of setting the price, and the way they use ICP also varies. Depending on how the system is used, it may turn out that the companies are not actually reducing their CO2 emissions.

“There are unclear parts on how the IPC affects their actual investment decisions,” a ministry official said.

Hitachi Ltd., which builds nuclear power plants, held a meeting related to environmental, social and corporate governance on Sept. 24 and explained its ICP system introduced in fiscal 2019.

Hitachi puts a monetary value of 5,000 yen ($46.70) on 1 ton of CO2 emissions reduced. This value is factored in during decisions on capital outlays along with the prices and performances of plant and equipment.

The monetary value allows company officials to better visualize how much CO2 emissions certain equipment and alternative candidates can reduce. Until now, it had been difficult to gauge such effectiveness.

Energy-efficient equipment may be chosen even if other items are less expensive.

Hitachi plans to reduce its CO2 emissions by more than 20 percent by fiscal 2021, compared with the level of fiscal 2010.

The targeted CO2 includes emissions in the procurement and manufacturing processes, as well as use of products and services, disposal and recycling.

Hitachi said only 3.6 percent of its CO2 emissions are produced in the manufacturing stage.

“We want to achieve our goals by creating a situation in which employees in charge of capital investment decisions have to care about CO2 reduction,” Osamu Naito, vice president and executive officer of Hitachi, said.

Growing investor interest on climate change issues forms the backdrop of companies actively working on ICP.

The private sector-run Task Force on Climate-related Financial Disclosures under the Financial Stability Board, set up by the financial authorities of major countries, has called on companies to release financial information related to climate change so that potential investors can make proper judgments.

(Tthis article was written by Taiki Koide and Tsuneo Sasai.)