CER Market Wrap

The Certified Emission Reduction (CER) price ended the week down 1.2 per cent at €11.94 in a largely directionless trading week.

Due to the quiet news week with the European summer holidays continuing it seems pertinent to focus on the other, less-visible, major Kyoto compliance country, Japan.

Japan is the world's fifth-largest emitter and a major buyer of CERs as emissions exceed those allowed under the Kyoto Protocol.

The Japanese government, the Democratic Party of Japan (DPJ), have announced one of the most ambitious post-2012 targets, subject to their ability to pass legislation through the two houses of Japan's parliament. This makes following the opaque Japanese political process important to understanding future carbon offset appetite.

The current political upheaval in Japan, with a change in leader of the DPJ and the mass-resignation of Cabinet, resulted in the bill being placed on hold. The bill aimed to legislate the establishment of a mandatory Emission Trading Scheme (ETS) and cut emissions by 25 per cent below 1990 (Japan was ~27 per cent above 1990 in 2008). Though passed by the lower house, recent upper-house elections saw the DPJ hold power but lose its overwhelming majority, meaning that negotiations will now be key if the bill is to pass. A date is yet to be set for the re-tabling of the bill.

Japan has publicly expressed frustration with the UNFCCC process to generate carbon offsets and is exploring bilateral agreements and leveraging its significant aid program, particularly in south-east Asia. The outcome of a bill for Japan may be mixed for carbon offset markets, resulting in further market fragmentation which decreases efficiency, increases transaction costs and reduces liquidity, but sends a clear message to the UNFCCC to get its house in order.

The UNFCCC Executive Board (EB) meets this week with some welcome revisions proposed for a Programme of Activities (PoA) that will go part of the way to encouraging further scale-up of CDM (Clean Development Mechanism).