Japan is the world’s fifth-largest emitter of carbon dioxide.  In an effort to reduce emissions and become a leader in the clean energy industry, Japan has increased its focus on clean energy technologies and climate change mitigation measures.

A plan to implement a nation-wide carbon trading program was scrapped by Parliament earlier this year.  In this new proposal, heavy emitting Japanese firms would be held to carbon emissions quotas, and any emissions above the set levels would require purchases of carbon credits from either domestic or overseas reductions projects.

Japan will hold an extraordinary Parliament session on Septmeber 14^th, where a party leadership challenge is expected; the outcome of which could influence the passing of this legislation.  It is in the interest of the Environment Ministry to “have it passed smoothly” so we will be “ready and accountable in international climate talks,” remarked one government official.

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One of the few proposals to achieve widespread support at the Copenhagen climate talks, REDD encourages developing nations to preserve their vulnerable forest land by linking conservation measures with carbon offsets which can then be traded on the global market.

REDD uses a complex accounting system to monitor the carbon offsets resulting from various forest projects and ensure standards around the world.  This system recently passed the first of two formal audits required by the Voluntary Carbon Standard (VCS), a Washington-based group charged with ensuring the legitimacy and transparency of REDD projects by imposing strict standards.

“The methodology is expected to be broadly applicable where mosaic patterns of deforestation occur throughout Southeast Asia and Africa,” says Leslie Durschinger, founder and managing director of Terra Global Capital, a finance and advisory firm specializing in REDD projects.  These “mosaic” projects include various plans to protect forests from logging, farmland conversion, fires and collection of fuel wood and thus reduce carbon emissions.

Deforestation is a major contributor to climate change,  which the U.N. says accounts for between 20-25% of total global emissions.  Many developed nations have lent support to help develop REDD, most notably Norway, which has signed a $ billion forest conservation deal with Indonesia.  REDD aims to become part of a broader global climate accord in 2013.

The International Energy Agency reports that China is the world’s largest energy consumer, although the Chinese government has denied these figures and claims it is still #2 behind the United States.  Regardless, Chinese power consumption is expected to continue to grow strongly, as its domestic power production.  By some estimates, Chinese power capacity could double to 1,600GW within the decade.

China has focused its efforts on energy efficiency and reducing the carbon intensity of its economy as it faces international pressure to keep its skyrocketing greenhouse gas emissions under control.  Introducing a carbon price, something the United States has thus far been unable to achieve, would help to increase efficiency without limiting capital flows to the renewable energy and cleantech space.

No firm details have been released yet, but it is expected that a commitment to carbon trading will be incorporated into China’s next 5-Year Plan.

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In order to implement a new round of emissions targets in the existing Kyoto framework, three-quarters of all parties to the Protocol, or 143 countries, must agree.  Before each country ratifies the treaty, extensive domestic negotiations and review commonly take place – “a process that may involve a considerable amount of time,” according to the U.N.  In light of these concerns, the United Nations has released for the first time a Kyoto “Plan B” set of contingency options should a new global climate deal fail to materialize.

A gap in coverage between Kyoto’s 2012 expiration date and when a replacement treaty might take effect could be very costly to the $20.6 billion global carbon trade.  The value of these traded emissions credits rests on stipulations as determined in the Kyoto Protocol.

To avoid this time gap, one facet of the U.N.’s “Plan B” would consider reducing the number of countries required to approve any proposals for new targets or proposals to extend the current caps through to 2013 or 2014, when climate negotiators hope to secure a more comprehensive update to the treaty.

After a disappointing showing in Copenhagen this past December, climate negotiators are looking forward to making progress in their third year of talks.  The next major conference will begin this November in Cancun, Mexico.

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The central trading platform will commence during the 2013 stage of the ETS, but individual nations will also have the freedom to opt-out and hold their own auctions.  The number of permits to be issued and dates of auction have yet to be determined.

During the first phase of the ETS trading scheme, most permits were distributed to industries for free.  However as phase 3 begins, the majority of emissions permits will be sold to companies through auctions.  This includes the aviation sector, which will be required to purchase 15% of their permits at auction when it joins the ETS in 2012.

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Experts from the Energy Research Institute under the National Development and Reform Commission – a Cabinet department focused on mid- and long- term domestic development – say if it is deemed beneficial, a carbon tax is likely to be levied during the 12th Five-year plan (2011-2015).

Jian Kejun, a senior researcher with the Institute, reaffirmed China’s commitment to reducing its carbon intensity 40-45% by 2020 in recent remarks to the newpaper China Daily.  To reach this target, the government is prepared to pursue “tougher measures” over the next five years, including subsidies and incentives for low-carbon technologies in addition to a potential tax.

Increasing support for scientific research is another top priority in China.  Right now, China’s investment in scientific clean energy research is only one-sixth that of the United States.  However by 2025, China’s investment in this area may overtake that of the United States.  ”If this comes true,” Jing said, “we can start to dream of becoming a low-carbon technology leader in the world.”

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“Since this year started we have seen a huge amount of interest – mostly from the U.S. – in carbon credits and it won’t be long before the voluntary market begins really to gain some momentum,” said Matthew Sullivan, CEO of carbon offset retailer the Carbon Advice Group.

The unregulated voluntary market is a mechanism for businesses to buy and sell credits – known as Voluntary Carbon Standard (VCS) or Gold Standards – for self-imposed and self-regulated emission reductions schemes.  It operates separately from the United Nation’s Clean Development Mechanism (CDM), and the European Union’s Emissions Trading Scheme (ETS), which together comprise the vast majority of the global carbon market.

Interest in both the CDM and the ETS has wavered since Copenhagen, as analysts and traders try to make sense of how the Copenhagen Accord, the non-binding agreement produced at the conference, will affect future demand and prices across the market.

The Copenhagen Accord which resulted from the talks did not include legally binding targets for carbon dioxide emissions, which may hurt prices for European Union carbon allowances (EUAs), which are traded on the EU’s Emissions Trading Scheme.  Certified Emissions Reductions (CERs), allowances traded under the U.N.’s Clean Development Mechanism (CDM), may also take a price hit.

Lack of political direction and and expected drop in the number of projects entering the CDM pipeline have made many analysts bearish for the short term.  However, with the addition of a possible U.S. cap and trade scheme, others are not so quick to write off the sector.

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Carbon traders are anxiously waiting on the Copenhagen climate summit to send a clear signal of support for the growing industry, but many traders believe that regardless of the summit’s outcome, carbon markets like the EUETS will inevitably expand across the globe.

Admittedly, carbon prices have fallen as a result of the recession, and some critics say current trading levels are too low to provide any meaningful boost to clean energy industries like wind and solar.  The UN’s Clean Development Mechanism program has also faced criticism as of late.  Despite the problems, analysts believe the market has come a long way from its humble beginnings, and will continue to progress in the future.

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