Japan “in no hurry” to buy up cheap UN carbon credits

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TOKYO, Feb 10 (Reuters) - Japanese buyers are in no hurry to scoop up U.N. carbon offsets in the secondary market partly because they expect prices to fall further and think they would need less than previously thought.

This is despite the recent strength of the yen against the dollar and the euro making the offsets, called certified emissions reductions (CERs) even more attractive after plunging in recent months.

Japan, the world’s fifth largest greenhouse gas emitter, is a major buyer of CERs to meet its emissions targets under the Kyoto Protocol, the U.N.’s main pact to fight climate change.

Several market sources said Japanese utility and steel makers, the biggest industry sectors in need of the U.N. carbon offsets, prefer buying CERs in the primary market.

This is because big Japanese trading houses look for clean energy projects overseas and then transfer the rights for CERs from these projects to firms in these two sectors as part of their existing business relationship.

This circumvents the need for steel and power firms to buy the offsets on the secondary market.
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The steel industry has said the sector has secured 59 million of carbon offsets (equivalent to 59 million tonnes of CO2), above the originally planned 44 million tonnes, for delivery in 2008-2012. Given the sector’s cut in energy use, the sector might not need any more, the market sources said.

For the utility sector, it has said it would buy 190 million tonnes for delivery in 2008-2012, unchanged from the previous plan. The sector hasn’t unveiled how much it has bought so far.

Benchmark CERs were slow to trade in Europe on Tuesday at around 9 euros ($11.7) and are down more than 60 percent from their peak last year, driven lower in large part because of a sharp fall in European emissions allowances.

The global financial crisis has sapped business activity, cutting emissions from industry and therefore cutting the level of compliance demand for EU and UN offsets.

Japan’s greenhouse gas emissions rose to a record high in the year to March last year, putting the country at risk of an embarrassing failure to achieve its Kyoto target over the next four years during Kyoto’s first commitment period.

Traders in Japan are becoming worried that a further fall in CER prices would put some brokers in financial trouble.

Many of those who do day-to-day business have bought CERs at prices between 8 and 10 euros. So a further fall in CER prices would increase chances of a brokerage going under.

Traders said if it were a listed company, the impact would be felt not only in the CER market but also in U.N.-backed clean energy projects and other credits under the Kyoto mechanism as well.

The main part of the CER broking business in Japan is done by trading companies transferring CER forward contracts they initially made to their customers, namely steel and utility firms.

“Their business ties with trading firms is consistent, so buyers feel at ease. Even if prices are relatively high, they prefer making deals with someone who does business in other areas as well, such as LNG and coal,” a carbon market source said.