Japanese banks join carbon market

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Japanese banks have been cleared to trade carbon credits from 12 December, a move expected by market players to have little short-term – but significant long-term – impact on the country’s fledgling domestic carbon market.

Previously, only bank subsidiaries, trading companies and end-users were allowed to buy and sell Kyoto-compatible carbon credits, but a securities regulation revision effective last week allows commercial and trust banks to take part in the market.

Despite the recent launch of a pilot emissions trading scheme (ETS), the Japanese carbon market consists primarily of compliance buyers and intermediaries investing in Clean Development Mechanism (CDM) projects. However, the domestic market is expected to expand late in 2009, when allowances are issued to ETS participants.

“The carbon market has two hubs – London and Tokyo,” said Laurent Segalen, managing director at Nomura International. “It’s really early days, but it’s always positive to see that there is a political will to develop these markets. And once you have a market that is properly designed, liquidity comes, and also thinner margins, so for the client base that is very positive. And each market provides transparency.”

However, Japanese banks have been hit by the financial crisis harder than suspected several months ago. Consequently, said a Japanese carbon trader, “banks are coming to market to raise funds by stock issuance, so this means they cannot add long positions on carbon credits to their books.”

The effects of the crisis, as well as the narrowing window to develop CDM projects during the first commitment period of the Kyoto Protocol, will likely limit the immediate impact of banks coming into the market.

“The timing is bad, in relation to the financial crisis, as the carbon market is not booming anyway,” said an officer at a Japanese trading house. “Globally, it’s sluggish, but domestically nonexistent or limited, so there will be no immediate reaction.”

“But for the long run,” he added, “it could be epoch making. And this depends on how the carbon markets come up in Japan, which in turn depends on the economic recovery and how the ETS system is established.”