Kyoto Doubts Prompt Japan to Hedge as CO2 Spreads Balloon: Energy Markets

Japan, the world’s fifth-biggest greenhouse-gas polluter, is building a new emissions market as the widest carbon-trading spreads in four months signal the 1997 Kyoto climate agreement will be scrapped.

Credits for 2012 in the United Nations market, set up after the Kyoto accord, traded at 3.95 euros ($5.50) less than those in the European Union’s cap-and-trade program as of Nov. 3. That’s the biggest difference since June 14 and compares with 2.39 euros at the start of the year.

Traders are selling UN credits on concern they will have little value after 2012, when the Kyoto targets expire, as they speculate the U.S. and China will fail to reach agreement on new limits being considered at this month’s climate summit in Cancun, Mexico. That’s prompting Japan to build an emissions- trading system independent of the UN, through individual agreements with other nations.

“If negotiations are going to be stuck in a quagmire, the best thing is for countries to set up bilateral agreements,” said Anthony Hobley, a partner and climate specialist at Norton Rose LLP, a London-based law firm. “Bilaterals are a lot easier to negotiate,” he said in an Oct. 22 interview.

Japan has earmarked about $4 billion for projects from saving forests in Brazil to building a nuclear plant in Vietnam in an attempt to offset its own emissions and fulfill a pledge to cut greenhouse gases by 25 percent in the 30 years through 2020, according to the trade ministry.

Biggest Emitters

UN credits for December 2012 have fallen 18 percent to 11.39 euros on London’s ICE Futures Europe since trading at their 2010 peak on May 3, leaving them little changed this year. Comparable EU futures are up 9 percent to 15.21 euros on ICE. The spread, traded as a separate contract on ICE, widened 3.2 percent today to 3.83 euros.

Talks to extend Kyoto’s emission targets to the U.S. and China, the world’s biggest emitters, failed at the 2008 summit in Poznan, Poland, and again a year later in Copenhagen. The Kyoto Protocol set emission caps for 38 countries through 2012, establishing the UN Clean Development Mechanism, or CDM, as a worldwide carbon market.

“There’s no reason to stick to the Clean Development Mechanism,” said Haji Watanabe, head of Mitsubishi UFJ Morgan Stanley Securities Co.’s emissions-reduction unit in Tokyo. The firm, which has 90 greenhouse-gas projects, may seek some credits under Japan’s program instead of the UN’s, he said.

Tapping Rich Countries

The UN market was designed to encourage developed countries to pay for emission reductions by awarding tradable offset credits known as Certified Emission Reductions, or CERs, to use against their targets.

While CERS can now be used for compliance in the EU, which runs the world’s largest carbon market, the 27-member bloc may exclude some of them from 2013. ICE Futures Europe doesn’t list UN credits beyond March 2013.

David Abbass, a Bonn-based spokesman for the CDM, says it’s too early to write off the UN system.

“Parties have said that the CDM should continue, but that it can be improved and scaled up,” he said in an interview on Nov. 3 “The fact that several countries, including Japan, recognize a need to establish domestic trading systems just reaffirms the importance of a market approach in combating climate change.”

Japan isn’t alone in seeking one-on-one agreements. The EU is considering importing credits under a deal with Chinese steelmakers, according to its website. California, the biggest U.S. state, also cleared the way last month to create its own offset credits starting in 2012, with proposed purchases from countries including Mexico and Canada.

Falling Emissions

Japan’s former Prime Minister Yukio Hatoyama pledged in September 2009 to provide $15 billion in climate aid for developing nations. The country has spent about $5.3 billion so far, Foreign Minister Seiji Maehara said on Sept. 25. Its current target is contingent on similar reductions from other developed nations, Hatoyama said.

Japan’s companies produced 17 percent less carbon dioxide in 2009 compared with 1990 levels, according to a report released today. The country’s 34 largest industries emitted 422 million tons of CO2 after taking into account carbon offsets, the country’s business lobby, Nippon Keidanren, said in the report. Corporate emissions are expected to average 8.2 percent lower than 1990 levels between 2008 and 2012, it said.

Japan agreed to start talks on possible bilateral offsets with India on Oct. 25 and Vietnam on Oct. 31, according to the foreign ministry. Negotiations have begun with Thailand, the Philippines, Indonesia and Laos.

‘Faster and Flexible’

“We’d like to create a scheme that can co-exist with the UN’s CDM but one that is faster and more flexible,” Keisuke Murakami, director of global environmental affairs at Japan’s trade ministry, said in a Nov. 1 interview.

Japan Bank for International Co-operation is overseeing about $4 billion of climate investments under a program called Green, which could feed into a bilateral market. The bank may also help finance some of the 33 projects under consideration in the nation’s bilateral programs, according to Takashi Hongo, head of environmental finance at the Tokyo-based lender.

“If there is no global regime, integration of the bilateral programs will be desirable,” Hongo said in an Oct. 29 interview. “We would like to keep a first right of refusal to get credits” as Japan starts spending, he said.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net; Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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