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Oil Report

ANALYSIS-Japan ups CO2 offset buying as nuclear power slows

TOKYO, April 14 (Reuters) - Japan is stepping up efforts to meet its Kyoto Protocol targets by buying more greenhouse gas emissions offsets from abroad than previously planned as its own emissions rise and nuclear power production dwindles.

Japan has become a major emissions credit buyer, using the New Energy and Industrial Technology Development Organisation (NEDO) as its agent. Having already bought 23 million in the past two years, the government says it will buy at least 77 million more tonnes of carbon offset credits by 2012.

In addition, electric power firms, such as Tokyo Electric Power Co. (TEPCO) 9501.T, will have to invest in more clean energy projects abroad to make up for carbon emitted from their own plants, because emission-free nuclear power generation is lower than expected, analysts said on Monday.

TEPCO’s Kashiwazaki-Kariwa plant, the world’s biggest nuclear power station, has been shut since July after being damaged by an earthquake, forcing TEPCO to work its thermal plants harder and to buy electricity from other firms.

“Apart from the government’s planned purchase of offset credits, the private sector will have to buy double or more than that,” said Yoichi Kaya, director-general of Research Institute of Innovative Technology for Earth.

“Electric power companies are in a tough situation as the 120 million tonnes (of offsets) they have secured would not be enough given a halt of the Kashiwazaki-Kariwa plant,” said Kaya, who also chairs a newly-launched group investigating carbon trading for Japan’s trade ministry.

Japan has said it intends to meet its obligations under the Kyoto Protocol on climate change by purchasing around 100 million tonnes of credits to be delivered between 2008 and 2012.

These credits could come from privately-owned clean energy projects in developing countries or from countries like Russia which, under the Kyoto Protocol, have a surplus of governmental carbon credits, called AAUs.

GREEN INVESTMENT

NEDO said last week it bought a further 16.7 million tonnes of carbon offset credits, called CERs, from U.N.-approved green projects in developing countries in the year ended in March after buying 6.4 million in fiscal 2006/07. [ID:nL11877597]

The agency is allowed to buy up to 81.2 billion yen ($803 million) worth of CERs in the year to next March, said Shuichi Fukuda, deputy director at the agency’s Kyoto mechanism promotion department.

Fukuda declined to comment on the value CER purchases, but said NEDO consults a third-party committee on prices and ways to gauge country risk and project risk.

Benchmark CERs currently trade at around 16.20 euros a tonne, according to the Reuters CER Index <CER/RTR>.

Under the Kyoto Protocol, Japan must cut emissions to 1.19 billion tonnes in carbon dioxide equivalent a year on average between 2008 and 2012, or 6 percent below 1990 levels.

But rather than declining, Japan’s most recent figures show greenhouse gas emissions hit 1.34 billion tonnes in the fiscal year to March 2007. These figures do not reflect the effects of the July 2007 quake that hit nuclear production.

Experts said electric power firms may have to invest in extra green projects abroad to obtain up to 36 million tonnes of CERs annually to 2012. This figure is dependent on when the Kashiwazaki-Kariwa plant resumes operation.

In the year ended in March 2008, Japanese nuclear plants on average ran at 61 percent of their capacity compared to a government-estimated 80 percent required when Tokyo first detailed its plan to meet its Kyoto commitments in 2005.

Analysts say that a one percentage point fall in the running ratio of Japan’s nuclear power plants would result in an increase of around 3 million tonnes of CO2 emitted a year.

By October 2007, Japanese power firms had signed contracts securing some 120 million tonnes of project-related emission offsets abroad, although not all are U.N. approved.

The deals were a part of the industry’s voluntary agreement with the government to cut CO2 output per kilowatt hour of electricity by 20 percent.

VOLUNTARY TARGETS

Unlike the European Union, which imposes a mandatory cap-and-trade scheme on its major polluters, Japan has encouraged voluntary pledges from industries.

The pledges are not legally binding, but experts say they are far beyond what current technologies can achieve for the two major emitters -- electric power firms and steel makers -- and thus include purchases of carbon offset credits from abroad.

Missing the target would require a company to pay a penalty to the government in the form of CERs.

Japan was one of the first countries to connect to the U.N.’s global carbon trading system, called the International Transaction Log (ITL), which allows the tracking and trading of CERs.

Connection by the EU’s scheme, the world’s largest carbon market, to the ITL has been delayed for months due to technical problems, but is expected to be completed later this year.

Japan's ITL connection and the country's major presence in the carbon markets has lured several investment banks, including Lehman Brothers LEH.N, to trade emissions in Japan. [ID:nT960]

"The link to ITL means Japan's electric power market will be eventually connected to the world. People are preparing for the time when Europe joins in," said Yutaka Hayashi, in charge of carbon trading in trading firm Marubeni Corp 8002.T. ($1=101.09 Yen) (Editing by Michael Szabo and James Jukwey)

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