Staff writer Until recently, trading in carbon dioxide emissions seemed destined for early introduction in Japan. The launch of such a system, however, is being put off as the government postpones key policy decisions to curb global-warming emissions.

News photoKan Araki, president of Natsource Japan, displays a carbon dioxide emissions reduction certificate for 1 metric ton of the greenhouse gas by an Argentine power company.

This, combined with reluctance from big business to embrace emissions trading, has put the plan on the back burner.

Trading of emission credits is a market-based tool that could help cut greenhouse gases cost-effectively.

The option is one of three "flexibility mechanisms" built into the 1997 Kyoto Protocol that countries can use to meet reduction pledges. The two others permit nations to undertake projects in other countries to offset their own emissions.

Emissions-trading systems typically cap a company's carbon dioxide emissions, allowing it to choose the cheapest way to stay under the mandated ceiling. Companies can reduce emissions independently through energy conservation, by buying and selling emission credits -- basically glorified carbon pollution rights -- or by other means.

This concept, however, has proved anathema to Japanese industry. In fact, the Japan Federation of Economic Organizations (Keidanren) has likened the idea of a government cap on emissions to a command-controlled economy.

Nonetheless, trading regimes are going online around the world. And some commentators worry that Japan is falling behind the curve.

Nascent trading efforts are afoot in Denmark, the United States, Canada and elsewhere. But indisputably at the cutting edge is Britain.

In April, Britain introduced a climate-change levy taxing energy-intensive consumers. To avoid the tax, these companies can negotiate agreements with the government to pare greenhouse-gas emissions. In return, they will be exempt from 80 percent of the levy.

Companies anticipating a windfall of emission credits when they beat their targets are already wheeling and dealing.

The British government has also woven a unique twist into the scheme for companies that do not negotiate agreements. It will auction off subsidy money to companies that "bid" to trim their emissions by a certain amount over five-year periods.

Without question, Britain's approach will greatly influence the European Union system, slated for launch in 2005. It could well become the de facto world standard, as the British government intended. The collective experience British businesses get under their belt could also give them a leg up on the competition when trading goes global.

"I think there is need for concern," said Naoki Matsuo, senior research fellow for the Climate Policy Project Institute for Global Environmental Strategies. "Britain and the rest of the EU are pushing ahead, and though it is not clear where the U.S. is heading right now, it already has (sulfur dioxide trading experience). While Japan has technology and finance-related knowledge, it has no (emissions)-trading experience."

But those in industrial circles advise caution.

"In emissions trading, there is a need to set (an emissions) standard value or cap. The question is, Who will set this?" asks Teruaki Masumoto, chairman of Keidanren's committee in charge of climate change. "We are opposed to the government setting any cap."

Masumoto lauds the concept of emissions trading. However, he thinks that pushing it now would be premature, adding that the launch of the system should wait until a national consensus is developed.

But proponents of emissions trading contend that opposition is rooted in a slanted take on the concept as well as the naturally contrarian inertia of industry.

Theoretically, emissions trading benefits companies and countries with high reduction costs -- Japan has the highest -- because they buy pollution rights from those that make the cuts for less.

Natsource Japan, an energy brokerage whose parent company is based in New York, is one company that is looking to put this theory into profitable practice.

"It is clear that a cap (on emissions) would push companies to meet emission goals. We know this. But at this stage, Japan wants to see how far it can go with technology," said Kan Araki, president of Natsource Japan.

"There is a do-it-yourself sentiment at work . . . a kind of perfectionism. (Companies) feel that they should make the cuts themselves . . . that there is something bad about buying credits from elsewhere."

Araki compares trading to bail, a sort of get-out-of-jail-free card. "You can spend a lot of money and time on (cutting emissions), but that is not necessarily what reductions are all about. It can be done more efficiently and save companies money."

He also takes issue with industry's criticism of caps and trading as a virtual controlled economy.

In a planned economy, a company might be given a predetermined allowance of, say, sugar to make its products. But under an emissions-trading regime, a company is given a choice to reduce carbon pollution -- buy it from somewhere else or somehow meet its target, Araki explained. "These are two different things."

Natsource Japan has brokered around 10 emission-rights transactions involving Japanese firms, while its U.S. headquarters has executed around three-quarters of the 150 or so deals that have been carried out globally, Araki said.

With no viable market in Japan, Natsource and a few others are conducting simulations with companies to keep them from being caught off guard when trading kicks off in earnest.

A government decision endorsing emissions trading would have fanned the flames of the domestic market.

But as things stand, it is unlikely anything new will be forthcoming from the government until 2004, Araki said.

In contrast to the British build-it-and-they-will-come posture, Japan is pursuing more of a wait-and-see bottom-up approach. But Araki is not concerned that the government's foot-dragging will stifle the market, saying it will only slow its development.

If the government does not push the market, then projects based on the two other Kyoto mechanisms -- some of which are under way -- will give it a nudge, Araki said.

When these projects designed to pare greenhouse-gas emissions, such as erecting a wind farm in lieu of a coal power plant, are certified, carbon credits will be created. Araki and others believe a market to trade them will naturally follow.

How big the market for carbon will be is anyone's guess. Japan's could reach a value of 7 trillion yen to 9 trillion yen, while the world market might grow to 20 trillion yen by 2010, Araki said.

For now, the government is biding its time watching emissions rise, and Araki and his company are biding their time watching the market slowly develop.