By Risa Maeda and Emma Graham-Harrison
TOKYO/BEIJING, Feb 21 Japan, the world's fifth-biggest greenhouse gas emitter, moved closer on Thursday to adopting a cap-and-trade system with mandatory emissions limits after a powerful business lobby softened its staunch opposition.
Acquiescence from the Japan Business Federation, which has argued that quotas would be unfairly distributed and hurt growth, could allow Tokyo to push through a trading scheme as it seeks to become a global leader in tackling climate change.
Currently, it relies on voluntary pledges to cut emissions, but Japan's resistance to forcing stricter standards on its firms is leaving it increasingly isolated internationally.
"It is important to discuss the matter, taking into account global trends, particularly in Europe and the United States," the Nikkei newspaper quoted Keidanren Chairman Fujio Mitarai, also the chairman of Canon Inc (7751.T).
That comes the day after a government source said the Ministry of Economy, Trade and Industry was seriously studying a cap and trade system for the first time, although only as one of a range of options to tackle warming next decade. [ID:nT365467]
Both comments mark giant steps for a country where a senior industry official recently dismissed carbon trading as best suited for "communist" systems, and the government's top spokesman questioned if it was anything more than a money-making scheme.
A new system could be in place by 2013, the government source said, assuming that world governments agree on a successor to the Kyoto Protocal, which requires cuts be made by 2012.
The European Union already caps emissions from big polluters such as steel and power firms, and any companies that exceed their quota have to buy pollution permits from greener rivals. The United States is studying several similar schemes.
The U.N.'s top climate change official last week warned that the country faced being left behind as emissions trading boomed, while Japan has just a tiny voluntary market and a barely used Web-based matching system through forward contracts.
"After the elections in the United States, whoever wins those elections, every industrialised country in the world will be favouring a cap and trade approach," said Yvo de Boer, during a visit to Tokyo last week.
"So the challenge then I think will be whether Japan also decides to embrace a cap-and-trade regime or not."
Prime Minister Yasuo Fukuda is set to soon launch a committee of experts on environmental issues, nominating former federation Chairman Hiroshi Okuda to head the panel, the Nikkei said.
Analysts say Japan is pushing to reassert its leadership on climate change issues ahead of the Group of Eight industrialised nations meeting this summer that Fukuda will chair, and where global warming will be a key issue.
"Japan is hosting the G8 this July, and has to be the leader of this summit. So I think at least a cap and trade system or some kind of market system will have to be adapted by the Japanese government," said Tsuneo Takahashi, Japan director for U.S. emissions asset management firm Natsource.
"It is a matter of time," he added.
Because the current global deal for fighting climate change carries the name of Japan's ancient cultural capital, Kyoto, the prospect of failure is particularly embarrassing for Tokyo.
Nor would a country famous for its efficiency, and high-tech "green" products such as the Prius hybrid car, relish the idea of becoming an international emissions pariah.
But Japan has been lagging its Kyoto Protocol commitments to cut greenhouse gas emissions by an average 6 percent a year from 1990 levels over the 2008-2012 period.
Current industry targets, set and monitored by the companies themselves, fall far short of Japan's obligations for the period.
The government aims to make up the difference through energy conservation in homes and buying carbon credits overseas. But critics say firms must do more in their Japanese factories, and already efficient industries need strong incentives to invest in expensive technology to cut emissions further.
"Without introducing caps for industry and big emitters, it will be very hard to reach the target," said Kimiko Hirata, director of climate change pressure group Kikonet.
But some corporations appear to accept quotas as inevitable. Whether motivated by environmental concerns or just the desire for a stable investment climate, their stance could be key in a country where heavy industry has traditionally been king.
"How to relate CO2 reduction efforts to economic growth? Perhaps it might be better to tighten regulations," Nissan Motor Co (7201.T) Vice-President Mitsuhiko Yamashita told a forum on low carbon societies last week.
"In Europe I think that kind of effort has already begun, emissions incentives are already being generated, and in that sense Japan is already lagging behind." (Editing by Ramthan Hussain)