Japan faces a rocky path to launching an emissions trading system after the government approved legislation on Friday that was vague on how the scheme would set limits on emissions.

The proposed climate bill, set to be enacted in parliament by mid-June, set a one-year deadline for the world's fifth-largest greenhouse gas emitter to draft legislation outlining details for a mandatory trading scheme.

A national scheme setting emissions targets could be a major boost for carbon trading in Japan, which only has a voluntary carbon market at the national level based on companies' pledged goals.

But designing the new market risks becoming complicated as the climate bill leaves room for the trading system to set caps on emissions per unit of production, which would allow rises in emissions when output grows.

While an early draft of the bill by the Environment Ministry proposed a cap-and-trade scheme that sets absolute volume caps on emissions, the bill was watered down after complaints from businesses that volume caps would stifle growth.

Environment Minister Sakihito Ozawa tried to play down worries on Friday that the bill risked doing little to lower emissions.

The important thing is that we achieve the 25 percent target and that we boost economic growth with environment (policies), he said, referring to Japan's target to cut greenhouse gas emissions by 25 percent by 2020 from 1990 levels on condition a global climate deal is reached.

Ozawa hinted on Thursday that he still envisioned a system based on volume caps, saying the government was likely to adopt a methodology that used industries' carbon efficiency to set absolute emission limits.

He added, however, that nothing had been decided and that details of the scheme would be worked out over the next year.


Cap-and-trade, which sets limits on emissions that becomes tougher over time, would force companies to invest in steps to cut their carbon pollution or face having to buy permits for every tonne of emissions that they are over their target.

Businesses, struggling with a fragile economic recovery and deflation, have instead favoured carbon intensity goals, which would encourage them to boost energy efficiency but still allow them to increase output.

Industry groups have put pressure on the Ministry of Economy, Trade and Industry (METI) in protest at volume caps, posing a dilemma for the government as it struggles with declining support ahead of an election for the upper house expected in July. [ID:nTOE62B04U]

METI denied on Friday that the climate bill, which calls for the government to set volume caps in principle but to also consider carbon intensity, restricted debate simply to using carbon intensity as a tool to determine volume caps.

We have checked and that is not the interpretation of the wording, a METI official told reporters.

The vagueness of the climate bill, along with uncertainties over the fate of climate legislation in the United States, could lead to a drawn-out process in designing the trading scheme, an analyst said.

Designing the emissions trading scheme will be complicated, because debate from now won't just involve cabinet ministers but other officials from various ministries, said Yasushi Setoguchi, deputy general manager of environment, natural resources and energy at Mizuho Information and Research Institute.

In the meantime, companies will find it harder to plan their strategies ahead. (Editing by Alex Richardson)