Friday, November 23, 2007

"Carbon Credits": Japan to buy from just about anybody

Today's FT reports that Japan is looking to hoover up shed loads of carbon credits on the cheap to meet its Kyoto agreements.

Such a move, whilst entirely legal is not entirely politically desirable. This article explains why.

This issue of course is that Japan promised to reduce its emissions 6% below its 1990 figure and it is now 8% above. The problem with buying carbon credits is that it does not necessarily reduce emissions by a single tonne of CO2. What then is the point exactly?

The collapse in eastern European heavy industry means they have an excess of credits to sell (and is one reason why Russia signed up in the first place despite dragging its heals for many years).

Japan to start buying cheap carbon credits[FT]
Japan will announce as early as next week that it intends to buy carbon credits from Hungary, a move that could foreshadow a much larger purchase from Russia - and one that would provoke criticism as a means of meeting its obligations under the Kyoto protocol.

Japan could become the world's biggest buyer of -carbon credits because, under Kyoto, it has pledged to cut emissions to 6 per cent below 1990 levels but is currently 8 per cent above.

The memorandum of understanding with Hungary could lead to similar deals with Poland and the Czech Republic, officials from Japan's trade ministry said, and would test the waters for a contract with Russia.

Buying carbon credits from Russia and Hungary would provoke criticism because the credits do not result in cuts in emissions. Under the Kyoto protocol, negotiated in 1997, targets to cut emissions were set relative to 1990 levels but eastern European countries, including Russia, lost much of their industry following the collapse of the Soviet Union, so their emissions today are much lower than in 1990. This means they have large numbers of -carbon credits, known as "assigned amount units" or AAUs, for sale.

Japan is interested in Hungarian and Russian credits because they are much cheaper than the alternative, which do result in emissions cuts. These "certified emissions reductions" are awarded by the United Nations to emissions-cutting projects in developing countries, such as wind farms or methane capture.

Japan has so far contracted to buy an estimated 350m tonnes of certified emission reductions (CERs). If Tokyo decides to buy from Hungary and Russia, that could hurt the market for CERs as the country is likely to be such a big buyer of credits.

Toshihiro Mitsuhashi, director of the trade ministry's office for the promotion of the Kyoto mechanism, said Japan was reluctant to pay what he said were the "crazy prices" being fetched by CERs. These had recently climbed to about €17 a tonne, he said.

"There's some criticism that buying AAUs somehow doesn't help the earth," said Mr Mitsuhashi. "We have promised to meet our Kyoto obligation but we will use any means necessary. These AAUs exist. There's no reason we can't use them."

Mr Mitsuhashi said that, to forestall criticism, Japan would insist that countries selling carbon credits set aside the proceeds for green projects. But he acknowledged that any deal with Russia would invite suspicion that the money would not be spent on the environment, but instead "go into the pocket of [Russian] bureaucrats".

Gavin Raftery, senior associate at law firm Baker & McKenzie's Tokyo office, said Japan was struggling to balance the cost of buying credits with its wish to be an environmental leader.

"I find it hard to believe that Japan would just cash out by only buying from Russia's big balloon of hot air despite inevitable environmental criticism," he said.

Mark Partington, a consultant to EEA Fund Management, a carbon asset manager, said threatening to buy from Hungary and Russia was Japan's way of signalling it was not prepared to "comply at any price".

Japan is reluctant to spend vast amounts to comply with Kyoto as the US has never ratified the treaty and India and China have no obligation to cut emissions. Mr Mitsuhashi said Japan had to think about its own taxpayers as well as the environment.

The issue is becoming increasingly sensitive in Japan because Tokyo is hosting the G8 meeting of advanced economies next year at which climate change is expected to be a key issue.



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