Elsevier

Research Policy

Volume 28, Issue 7, September 1999, Pages 719-749
Research Policy

Systems option for sustainable development—effect and limit of the Ministry of International Trade and Industry's efforts to substitute technology for energy

https://doi.org/10.1016/S0048-7333(99)00018-9Get rights and content

Abstract

The global environmental consequences of CO2 discharge resulting from energy use are causing increasing concern regarding the sustainability of our development future. Despite the fragile nature of its energy structure, Japan successfully overcame two energy crises in the 1970s and managed to maintain economic growth which resulted in a dramatic improvement in its industrial technology. The success of these efforts can be attributed to the substitution of an unconstrained production factor (technology) for a constrained production factor (energy), a process similar to that seen in an ecosystem. The Ministry of International Trade and Industry's (MITI) industrial technology policy functioned well in stimulating such substitution, thereby inducing the vitality of industry for this substitution. Given the two-sided nature of CO2 emissions and energy consumption, Japan's experience can provide informative suggestions for addressing current worldwide concern regarding global warming, particularly with respect to post Kyoto countermeasures. Nevertheless, following the relaxation of energy constraints and the succeeding `bubble economy' and its bursting, MITI's ability to induce substitution efforts by industry has weakened, leading to a fear that Japan may again face the prospect of energy and environmental constraints. This paper attempts to analyze a systems option for sustainable development by introducing a comprehensive systems approach with a detailed description of energy and non-energy technologies in an energy-economic model. By utilizing this approach, MITI's efforts to induce industry initiatives, and subsequent efforts to overcome the two energy crises by substituting technology for energy are reviewed. In addition, sources of the current fear concerning energy and environmental constraints and the effectiveness of MITI's industrial technology policy in view of this fear are analyzed.

Introduction

The global environmental consequences of environmental emissions resulting from energy use are causing mounting concern regarding the sustainability of our development future. The necessary response to this concern is to find a solution which can overcome energy and environmental constraints while also maintaining sustainable development. An equation leading to such a solution can be simply considered a dynamic game of `three Es': economy, energy and environment. Provided that these can be represented by production (Y), energy consumption (E) and CO2 emissions (C). First, Y can be represented by the following simple equation:Y=E∗(E/Y)−1where E/Y is the unit energy consumption or energy efficiency.

Thus, economic growth depends on changes in both energy consumption and energy efficiency as follows:ΔY/Y=ΔE/E−Δ(E/Y)/(E/Y)where ΔY=dY/dt.

Despite numerous handicaps, Japan's economy successfully achieved sustainable development by focusing on efforts to improve the productivity of relatively scarce resources (Economic Planning Agency, 1965–1995). This included capital stock up until the 1950s, followed by the supply of labor, environmental capacity constraints, and the energy supply after the first energy crisis in 1973 (Economic Planning Agency, 1965–1995; Meyer-Krahmer, 1992). The development of manufacturing industry proved to be the driving force behind this achievement. In addition, technology development played a key role in the rapid enhancement of productivity levels through its successful substitution for limited resources such as energy (Watanabe et al., 1991).

During the years 1955–1973, the period before the first energy crisis in late 1973, Japan's manufacturing industry enjoyed an average annual growth of 13.3% which was largely supported by a cheap and stable supply of energy. During this period, the average increase rate of energy dependency was 12.9% per year, while the annual change rate of energy efficiency was only −0.4%. Contrary to this, during the years 1974–1994, after the first energy crisis, Japan's manufacturing industry achieved a notable energy efficiency improvement of 3.4% per year. Therefore, it was able to enjoy an average 3.0% per year production increase (GDP growth was 4.1%) while minimizing energy dependency at a −0.4% as illustrated in Fig. 1.

As the global environmental consequences of environmental emissions resulting from energy use have become critical, dependency on energy has resulted in additional constraints as follows:C=E∗C/EΔC/C=ΔE/E+Δ(C/E)/(C/E)

Thus, production (Y) will be governed by C, E/Y and C/E as follows:ΔY/Y=ΔC/C−Δ(E/Y)/(E/Y)−Δ(C/E)/(C/E)where C/E represents fuel switching to minimize emissions of CO2.

Options for increasing production can be considered a game involving the following variables: CO2 emissions (C), energy efficiency (E/Y) and fuel switching (C/E). Table 1 compares the development paths of Japan, the USA, western Europe, the former USSR and eastern Europe, and less-developed countries (LDCs) for the 10 years following the second energy crisis in 1979 (1979–1988). Looking at Table 1, we note that Japan recorded the highest economic growth with an average annual GDP growth rate of 3.97%. Such growth was possible due to a notable energy efficiency improvement of 3.44%, a 0.59% rise in fuel switching and a 0.06% decline in CO2 emissions. The LDCs followed Japan in terms of GDP growth with an average annual growth rate of 3.53%. During the 10-year period, fuel switching had a positive effect as it rose by 0.16%. However, energy efficiency fell by 0.85%, leading to a 4.22% increase in CO2 emissions. The USA attained 2.78% average annual GDP growth supported by a 2.62% energy efficiency improvement and a 0.11% rise in fuel switching. CO2 emissions increased by 0.05%. In western Europe, GDP growth measured 2.01% as energy efficiency improved by 1.78%, fuel switching increased by 1.33% and CO2 emissions decreased by 1.10%. Average annual GDP growth in the countries of the former USSR and eastern Europe was 1.72%. Energy efficiency declined by 0.45% while fuel switching rose 0.83%. Emissions of CO2 increased by 1.34%.

The relative advantages and disadvantages of energy efficiency improvement and fuel switching are generally governed by economic, industrial, geographical, social and cultural conditions of a country or region. Japan's notable achievement in realizing a conspicuous improvement in energy efficiency was, given that it is an energy importing trade and technology based nation, initiated by industry as part of its survival strategy so as to be free from the burden of energy cost. However, due to geological constraints and dependency on coal as an oil substituting energy, Japan's fuel switching ability was limited (Watanabe, 1995a). This was not the case in western Europe, where nations benefited from their geographical advantage of being able to rely on readily available natural gas and biofuels. However, contrary to Japan's economic and industrial structure, the efforts of industry in western Europe towards energy efficiency improvement were not so strong.

Thus, Japan's success in overcoming energy and environmental constraints while also maintaining sustainable growth can largely be attributed to industry's intensive efforts to improve energy efficiency. Technology played a key role in this achievement through its successful substitution for energy due to a combination of industry efforts and government, chiefly by the Ministry of International Trade and Industry (MITI),1 stimulate and induce change (Watanabe and Honda, 1991). This success suggests that substituting technology for energy may be a means of overcoming energy and environmental constraints while maintaining sustainable development, and that an appropriate combination of both efforts by industry and government can effectively stimulate such a substitution. However, since the relaxation of energy constraints (starting in 1983), the sharp appreciation of the yen (triggered by the Plaza Agreement in 1985) and the succeeding `bubble economy' (1987–1990)2 and its bursting (1991), Japan's technology substitution for energy has weakened leading to a fear that Japan may again face the prospect of energy and environmental constraints.

To date, a number of studies have identified the sources supporting Japanese industry's technological advancement (e.g., Mowery and Rosenberg, 1989; US Department of Commerce, 1990) and MITI's role in this achievement (see brief review in Watanabe and Honda, 1991Watanabe and Honda, 1992). Mansfield (1983), in his extensive study on the effects of government support on privately financed energy R&D, identified that federally supported R&D expenditures substituted for private expenditures from 3% to 20% and induced an additional 12% to 25% increase in private R&D investments. He concluded that while the direct returns from federally financed R&D projects might be lower, the projects seemed to expand the opportunities faced by firms and induced additional R&D investments by them. Scott (1983) demonstrated Mansfield's postulate by providing supportive results such as the fact that government-supported R&D encourages company-financed R&D. The author (e.g., Watanabe and Clark, 1991) identified similar functions in MITI's industrial technology policy.

A number of studies have also identified a substitution mechanism of certain production factors for energy. Since the first energy crisis in 1973, with the introduction of the translog production function, there have been a number of attempts to identify the possible substitutability of energy to other production factors (e.g., Christensen et al., 1973; National Institute for Research Advancement, 1983). However, these works deal with labor, capital and energy (while other works also deal with materials) as production factors, and none have taken the technology factor into account. Although some pioneering work attempted to use a time trend or dummy variable as a proxy for technological change, such methodologies are hardly satisfactory for analyzing the nonlinear effects of R&D investment. Hogan and Jorgenson (1991) pointed out that change in technology might be the most important effect, possibly even dominating the simple substitution among input factors resulting from the scarcity of production resources. While attempting to describe technology as a linear function of time, they postulated the significance of expanded efforts for a nonlinear technology description. The author (Watanabe, 1992a, Watanabe, 1995b, Watanabe, 1995e), by measuring technology knowledge stock and incorporating it into a translog cost function, identified the sources of Japan's success in overcoming energy crises in the 1970s by means of technology substitution for energy. Attempts have also been made to apply this substitution mechanism for a solution to the global environment (Watanabe, 1993, Watanabe, 1995d). This work warned that the current stagnation in industry R&D might weaken the existing substitution leading to the rise of energy (and environmental) constraints (Watanabe, 1992b, Watanabe, 1995c). Although all of these studies contribute to proving the above hypothetical views, they have not taken a comprehensive systems perspective on the complementary role of government and industry by describing details of energy and non-energy technologies. Given the comprehensive and systematic nature of the global warming and policy relevance to this issue, particularly to technology options for sustainable growth centered on the allocation of R&D investment to energy R&D and non-energy R&D, a comprehensive systems approach seems to be essential.

This paper undertakes such an approach and by analyzing MITI's policy system, attempts to prove the hypothetical views that MITI's policy directed to the appropriate technology option, and functioned well in stimulating technology substitution for energy, thereby inducing the vitality of industry for this substitution. Secondly, it provides an assessment of MITI's industrial technology policy for mitigating global warming by stimulating substitution under the current R&D stagnation.

Section 2reviews MITI's efforts to induce industry's energy R&D. Section 3analyzes the mechanism of Japan's notable success in substituting technology for energy. Section 4provides an assessment of the effect and limit of existing policy. Section 5briefly summarizes implications for sustainable development.

Section snippets

Structure of Japan's energy R&D

R&D investment has various characteristics, including uncertainty, huge risk, high cost, and a long lead-time. In addition to these, energy R&D has a strong public nature, a close relationship with national security and is sensitive to such opaque factors as trends in international oil prices. Thus, strong government policy involvement based on a long-term and comprehensive perspective is required for energy R&D. This is particularly the case in Japan where the energy structure is extremely

Factors contributing to success in achieving environmentally friendly sustainable development

Despite many handicaps, Japan realized a notable improvement in its energy efficiency after the energy crises of the 1970s and was able to maintain sustainable economic development with a minimum increase in energy dependency and CO2 emissions. Fig. 3 demonstrates the dramatic path of Japan's manufacturing industry over the last four decades.

Looking at Fig. 3, we note that despite the damaging impact of the energy crises, industry was able to maintain steady development and increase production

Inducement of technology substitution for energy

The following recommendations arise from the analyses in 2 MITI's efforts to induce energy R&D, 3 Technology substitution for energy—Japan's notable achievement.

(i) Given that it is selected appropriately, the technology option can play a significant role in achieving a breakthrough for removing limitations on energy efficiency, and this process could be considered technology substitution for energy.

(ii) Energy efficiency improvement is a balance between changes in energy dependency and

Implications for sustainable development

Increasing energy and environment constraints, especially the global environmental consequences of energy use, are causing mounting concern around the world, and it is widely thought that such constraints may be `limits to sustain our development future'. Considering the two-sided nature of the global environmental issue and energy consumption, Japan's success in overcoming the energy crises while maintaining economic growth and attaining a dramatic improvement in technological level could

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