FIRST CARBON SPOT TRADE IN JAPAN

The Bali talks opening next week, a momentous summit on climate change out of which is expected to come the basis for world action after the Kyoto Protocol’s Phase 2 ends in 2012, will have much to say about Certified Emissions Reductions (CERs) and emissions markets.

First, Australia’s recent election of Labor’s Kevin Rudd leaves US President George W. Bush as the only significant industrial nation leader who will not comply with the Kyoto Protocols. That will make the US claim that it dare not put itself at an economic disadvantage to developing nations like China and India tougher to maintain.

Second, emissions-trading has become more advanced and is ready to take on some tougher questions. The trade described here is noteworthy not just because it is a spot trade. It also exchanges carbon dioxide-equivalents for the neutralization not of CO2 but of Hydrofluorocarbons (HFCs).

With the enormous experience developed through successes and failures from its handling of CERs (still not perfected), the UNFCCC's Clean Development Mechanism is expected to tackle bigger difficulties, like how best to use CERs to prevent deforestation.

Meanwhile, the successes and failures of the EU ETS will apparently lead into the complexities of spot trading.

Japan firm announces first carbon spot trade
Shaun Tandon, November 30, 2007 (AFP via Yahoo News)

WHO
Japanese trading house Marubeni Corp.

A Marubeni corporate image symbolizing "for the natural environment" seems appropriate for a company leading the way in the struggle against climate change. (click to enlarge)

WHAT
Predicting the spot market for CERs will grow to match the soaring futures market, Marubeni made the first spot trade, selling credits for 10,000 tons of carbon dioxide-equivalents to a Japanese power company. Marubeni earned the credits by financing the decomposition of hydrofluorocarbon-23, a greenhouse gas (GHG).

WHEN
- Unlike futures contracts, spot trades are settled immediately.
- The futures trading market covers credits to be delivered in the 2008-2012 Phase 2 Kyoto Protocols period.

WHERE
- The trade was made by Marubeni via an Internet bulletin board style platform set up by Japan Bank for International Cooperation which allows companies with emissions credits to connect with companies seeking to buy.
- Vertis Environmental Finance’s EUA operates something similar alongside the European futures market overseen by the EU.

WHY
- Under the Kyoto Protocol, industrial countries must cut greenhouse gas emissions by 2012 but industries and power companies who need to generate more than their allotment can buy credits from those who can do their business without using their allotted emissions or from United Nations-certified emissions-cutting projects.
- A recent World Bank study estimated the 2006 carbon market value was 30 billion dollars, three times higher than the previous year. (See EMISSIONS TRADING TO DOUBLE)
- The impetus for increased emissions trading is in the hope the market can help Japan reach its Kyoto Protocol goal. The Protocols were the product of a world gathering in Kyoto, Japan, but the country’s emissions are up 8% from 1990 levels despite its Kyoto pledge to reduce from 1990 levels by 6%. The government is reluctant to take strong measures to enforce more emissions cutting because it does not want to intrude on the current economic expansion, a relief from Japan’s long 1990s recession.

The United Nations Clean Development Mechanism has projects covering a wide range of activities and greenhouse gases. Spot trading will eventually emerge, especially on CERs already CDM-certified. (click to enlarge)

QUOTES
Marubeni statement: “[This is] the world's first small-lot and spot deal of issued carbon credit defined by the Kyoto Protocol…Concern about the global warming issue is growing…[Many] will consider contributing to the global environment by using carbon credits. Therefore, the carbon credit demand for small-lot and spot will grow…"