Japan called to expand CO2 credits in trial trade

TOKYO (Reuters) - Japan should expand the number of carbon credits tradable in a national emissions market to include those derived from avoided deforestation and from voluntary cuts made by industry, Japan's Ministry of Environment said on Thursday.

Earlier this month Prime Minister Yasuo Fukuda said Japan will trial an emissions trading scheme in autumn to put a price on CO2, the main greenhouse gas blamed for global warming, and help drive Japan towards a low carbon society.

Expanding the use of domestic credits in the scheme could reduce participants' need to import U.N.-approved carbon offsets from green projects in other major polluting countries like China and India, which do not have targets under Kyoto.

Japan has said it plans to meet its reduction obligations under the Kyoto Protocol climate pact mainly through voluntary pledges from individual industries, but also through purchasing offsets from developing countries.

Japan is expected to import some 100 million tons of CO2 equivalent during the 2008-2012 Kyoto period.

In a draft proposal, the Ministry of Environment said the trial carbon trading system should also incorporate Japan's existing Voluntary Emissions Trading Scheme (J-VETS).

Currently, only 86 companies are taking part in J-VETS in its third phase this year. Participants receive subsidies from the environment ministry to invest in energy conservation technology in order to meet their mandatory reduction targets on verified emissions.

But the ministry budget for these subsidies has already run dry for the fiscal year to next April.

Under Thursday's proposals, participants in the new scheme would include, if they wish, all major polluters with voluntary reduction targets for the 2008-2012 Kyoto period, smaller firms voluntarily seeking to cut emissions, and companies involved in avoided deforestation and other biomass installations.

TRIAL TRADE

"How to break down industry-wide targets to that of an individual company is among several issues to be solved," said a deputy director at the environment ministry's market mechanism division.

Separately, the Ministry of International Trade and Industry plans to launch a funding mechanism in autumn whereby big companies help small-sized firms cut emissions by providing them with technology and cash in exchange for carbon credits only valid domestically.

In both schemes, a third party must validate emissions reductions. Currently, industries under the voluntary scheme do not have to verify their emissions cuts.

A voluntary scheme will likely be replaced in coming years by a mandatory one, like the European Union's Emissions Trading Scheme, Tadashi Otsuka, chair of a government panel and a professor of law at Waseda University, said in an interview on Wednesday.

The ministries concerned are expected to come up with a road map of measures by the end of July to achieve the prime minister's climate policy initiative unveiled on June 9.

(Reporting by Risa Maeda, Editing by Michael Szabo)