Japan's appetite for CO2 credits hits fever pitch

By MAYUMI NEGISHI

Staff writer

Carbon dioxide -- plants absorb it, we exhale it and millions of tons of it are being traded on markets worldwide.

And in those markets, Japan is looking to buy, buy, buy. Carbon dioxide is the hot commodity and futures are soaring.

As the Kyoto Protocol fetes its first anniversary Thursday, Japan's appetite and need for emissions credits are growing at a furious rate.

What worries Environment Ministry officials, however, is whether Japan will be able to find enough sellers, and if so, how high a price will have to be paid to get the credits it needs in time.

Prices now average $ 5.63 to $ 5.90 a ton, according to the World Bank and think tanks. Futures for 2010 worldwide are averaging between $ 10.96 and $ 23.30, with highs above $ 30.

"So many decisions still need to be made, it's hard to read future demand, but Japan could face a supply crunch by 2012" for emissions credits, said Makoto Katagiri, president of Natsource Japan Co., the Japanese branch of a global energy advisory services company.

A supply crunch would mean higher prices, he said. "The race is on around the world to cash in on expected demand."

Japan is a large contributor to that demand -- except that what the government and companies are looking for is a lack of carbon dioxide.

Reduced or unreleased carbon dioxide in one country translates into credits, or the right to emit the greenhouse gas, in another.

The credits are essential for Japan to meet its promise under the Kyoto Protocol to reduce emissions in 2012 by an equivalent of 6 percent of 1990 levels.

In the next fiscal year, the government plans to use 17.6 billion yen -- some of which comes from oil tax revenues -- to buy emissions reduction credits.

Economy and environment officials hope to get the same amount or more to buy credits next year as well.

The additional funds would further cement Japan's status as a huge buyer of emissions credits.

Already, Japan -- companies and government-affiliated banks -- buy roughly 20 percent of the booming Kyoto credit market, through the Clean Development Mechanism, according to the World Bank.

That is why the Singapore-based fund Asia Carbon is looking for a Japanese partner to set up an exchange in Japan by summer.

The fund would pool supplies of emissions reductions credits throughout Asia for Japanese companies to buy.

The problem, government and company officials half boast, is that Japan has the world's most energy-efficient economy. This makes lowering greenhouse emissions an even tougher challenge.

Japanese companies are snatching emission credits and credit futures, to reduce the risk of credit price surges as 2012 draws near, and to avoid being surprised by future regulations to reduce emissions further, Katagiri said.

The carbon credits business has boomed since the ratification of the Kyoto Protocol.

According to the International Emissions Trading Association, a U.N.-affiliated nongovernmental organization, and Oslo-based think tank Point Carbon, companies and governments will be hunting for rights to emit 788 million to 1.1 billion tons of carbon dioxide between now and 2012.

Demand could grow still more if rich countries, including Japan, fall further behind their schedules to meet their commitments.

The government's conservative estimate has Japan falling short of emission targets by 1.6 percent of the total emission values of 1990, which amounts to 100 million tons of carbon dioxide equivalents. Japan's emissions grew in 2004.

Demand for emissions credits is expected to rise worldwide through 2012.

Estimates by the World Bank and private think tanks say Western Europe, Japan and Canada together may need somewhere between 2.5 billion and 3.0 billion tons of credits in the five years through 2012 to meet their commitments under the Kyoto Protocol. That comes to between 300 million to 800 million tons per year.

"Even 40 percent of the amount needed is going to be hard to reach," said Hitoshi Kurihara, manager of the public-private emissions investment team Japan Carbon Finance.

He estimates that the Kyoto Protocol could cost Japan as much as 2 trillion yen in carbon credits.

In carbon markets worldwide, sellers sell their right to emit carbon dioxide to those that emit more than their allowance, either under the Kyoto Protocol or under a local framework, such as the European Emissions Trading Scheme or the Chicago Climate Exchange.

Sellers can also sell certificates representing emissions reduced through technology or energy efficiency and emissions offsets when they capture carbon in biomass.

The idea is to heighten incentives to reduce carbon dioxide emissions. One of the greenhouse gases, carbon dioxide warms the planet by trapping sunlight in the atmosphere.

About 390 million tons of carbon dioxide were traded worldwide in 2005, up from 9.65 million tons traded in 2004.

The Kyoto Protocol also is bringing Japan and the rest of Asia closer through projects aimed at reducing emissions, said Akira Kitazawa, head of business development at Mitsui & Co.

The Japanese government has so far approved about 30 projects throughout Asia, projected to reduce carbon dioxide emissions by 24 million tons per year.

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