Japan trading firms search for more CO2 credits

By Yuko Inoue

TOKYO, Aug 13 (Reuters) - Japanese trading houses are stepping up their investment in environmental projects around the globe, betting on tidy profits from selling carbon credits as rising emissions mean Tokyo faces missing its Kyoto target.

New entrants are looking to join the likes of top trading house Mitsubishi Corp. (8058.T: Quote, Profile, Research) in becoming buyers of carbon credits, as they see profit in selling to firms such as utilities or governments cutting emissions under the Kyoto Protocol.

"A carbon market worth 200 to 300 billion yen a year will likely emerge after 2008," said Takashi Murakami, analyst at Credit Suisse, which forecasts Japan will need to buy 180 million tonnes of credits a year, nine times government estimates.

Mitsubishi has a 10 million credit project to destroy potent HFC 23 gas in China, a joint project with Nippon Steel Corp. (5401.T: Quote, Profile, Research), and five projects in South Korea, Pakistan, the Philippines and China. It is planning to expand into Chile and other countries.

"We'll see the credits doubled if the 25 projects we are working on are approved," said Tsuyoshi Nakamura, Mitsubishi's deputy general manager.

Such U.N.-approved credits are worth around 16 euros ($21.91) a tonne.

Under Kyoto, countries can offset their carbon dioxide emissions by purchasing carbon credits in CO2-reducing projects in developing countries, but most lag targets. [ID:nL30131384]

Despite Japan's target of cutting its emissions to 6 percent below 1990 levels, a government advisory panel said on Friday the country's emissions are likely to increase 0.9-2.1 percent from 1990 in the year ending March 2011.

The indefinite shutdown of the world's largest nuclear plant after an earthquake last week is likely to lead to higher emissions from utilities like TEPCO (9501.T: Quote, Profile, Research) burning more oil and coal in the next year.

This has all helped renew interest from trading firms worried about an uncertain future to a business still lacking a framework for a U.N. carbon reduction scheme after 2012. Japan has no mandatory targets for industry but could impose them or other policy initiatives, which would generate more need for credits.

MORE COMPETITION

Mitsui & Co. (8031.T: Quote, Profile, Research), Japan's second-biggest trading house, is seeking to expand its business in credits from capturing greenhouse gas methane, and is also looking at methanol projects.

It has secured contracts for 6 million tonnes of credits a year, from projects to capture methane from landfills and coal beds from China and Indonesia to Chile, and has stakes in some.

"We believe in long-term commitments," said Takeshi Hokari, general manager in Mitsui's environmental business deparment. "By taking a risk and getting involved in projects at an early stage, we'll be able to cope better with a possible change in the market environment in future," he said.

It also sees increasing demand for small volumes of credits and is considering selling small volume trust certificates.

Trading companies are now seen reaping a margin of $2 to $3 per tonne from the sale of credits to Japanese power utilities and steel companies in bilateral deals, say industry sources.

A flood of new Japanese players has come into the market, including Mitsubishi UFJ Securities Co. (8615.T: Quote, Profile, Research) and NTT Data Corp. (9613.T: Quote, Profile, Research), which may squeeze current profit margins in a market dominated by niche developers like EcoSecurities (ECO.L: Quote, Profile, Research) and seeing greater interest from banks like Goldman Sachs (GS.N: Quote, Profile, Research). ($1=118.38 Yen) ($1=.7303 Euro)