Japan Power Exchange to Start Carbon-Credit Trading in October

By Shigeru Sato and Michio Nakayama

Aug. 11 (Bloomberg) -- The Japan Electric Power Exchange will start trading carbon credits in October on a trial basis as part of Prime Minister Yasuo Fukuda's goal to cut greenhouse gases by more than half, officials said.

The trade ministry has directed the 39-member bourse in Tokyo to design a Web-based trading platform, a ministry official said under condition of anonymity because details haven't been completed. The credits will be traded in yen per metric ton.

Fukuda's cabinet last month endorsed a plan that includes carbon trading among measures to slash Japan's output of gases blamed for global warming by between 60 percent and 80 percent by 2050. Tokyo Electric Power Co., Merrill Lynch & Co. and a unit of trading house Mitsubishi Corp. are among exchange members expected to use the trading platform.

``The creation of a new marketplace is going to be a big step,'' said Itaru Shiraishi, an Amsterdam-based carbon trader with Fortis, Belgium's biggest investment bank. ``But liquidity is a key to developing the right kind of trading marketplace.''

Under the plan, the bourse will match the bids and offers placed on the exchange's trading platform. The exchange is unlikely to have a clearing function for the trades, said a senior bourse official, who declined to be named before details are worked out.

The UN's Clean Development Mechanism, or CDM, allows polluters in rich countries to buy credits from projects that cut emissions in poor nations. The certified emissions credits, granted by the UN, are already tradable on the European Climate Exchange.

European Exchange

The European climate exchange has more than 90 members including Lehman Brothers International, Morgan Stanley & Co. International and JP Morgan Securities, whereas no financial institutions are members of the Japanese power bourse except Merrill Lynch Commodities Inc.

``The Japanese market should be globally competitive and transparent, and the liquidity of its trading should grow,'' Yutaka Hayashi, an emission trader with Marubeni Corp., which has trading members both on the European Climate Exchange and the Japanese power exchange. ``The market must be the place where participants are all able to easily join.''

In the European Union, companies use the credits to meet compulsory caps on emissions set by the government. In Japan, they're used to meet voluntary targets.

``We see significant potential to provide liquidity in the Japanese carbon-credit market and to help counterparties with managing their combined power-fuel-emissions-weather cross commodity hedging and risk management,'' said Abyd Karmali, global head of carbon emissions at Merrill Lynch, the first overseas company to get a license to trade on the power exchange.

$1 Trillion by 2020

Karmali projects the global carbon market will increase more than 15-fold to $1 trillion by 2020 as more countries make commitments to reduce emissions.

Fukuda's plan calls for a comprehensive trading mechanism in which as many enterprises as possible can take part. The government will monitor the power exchange trial to determine what fine-tuning needs to be done before full-fledged trading can proceed, the ministry official said.

The power exchange enables utilities and new market entrants such as Nippon Oil Corp. to trade 1,000 kilowatt-hour lots of electricity for delivery the next day or as far ahead as a year. The exchange, which began trading in April 2005, was part of a government initiative started in 1995 to deregulate electricity wholesaling.

To contact the reporter on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net.