Kyoto doubts prompt Japan to hedge carbon-trading bet

by Mathew Carr and Tsuyoshi Inajima

Bloomberg

Japan, the world’s fifth-biggest producer of greenhouse gases, is building a new emissions market as the widest carbon-trading spreads in four months signal that 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 euro (¥445) 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 euro at the start of the year.

Traders are selling U.N. 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 agree on new limits being considered at this month’s climate summit in Cancun, Mexico. That is prompting Japan to build an emissions-trading system independent of the U.N., 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 Ministry of Economy, Trade and Industry.

U.N. credits for December 2012 have fallen 18 percent to 11.39 euro 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 euro on ICE.

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 U.N. 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 U.N.’s, he said.

The U.N. market was designed to encourage developed countries to pay for emission cuts by awarding tradable offset credits known as Certified Emission Reductions 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 U.N. credits beyond March 2013.

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

“Parties have said that the CDM should continue, but that it can be improved and scaled up,” he said Nov. 3.