TOKYO (Reuters) - Japan on Tuesday launched a voluntary carbon market based on companies’ pledged emissions cuts and hopes thousands of firms will sign up to what could become a forerunner of a mandatory cap-and-trade scheme.

A farmer works near 100-metre-tall (328-foot-tall) wind turbine at the Electric Power Development Co., Ltd's Nunobiki Plateau Wind Farm in Koriyama, north of Tokyo November 8, 2007. REUTERS/Toru Hanai

The scheme, once it’s up and running by next year, is expected to be the nation’s broadest emissions market. But some said the scheme still fell short of what Japan needed to make deep emissions cuts and could backfire.

The trial over-the-counter market is aimed at accelerating further cuts in the private sector via new technologies to save energy and reduce or remove emissions from the atmosphere, Environment Minister Tetsuo Saito told reporters.

“It’s based on a voluntary (cap) because we’d like to see as many companies as possible joining in as we start. But we’re aiming to make it a cap-and-trade scheme eventually,” he said.

“We’re hoping to accept applications from thousands or even tens of thousands of companies, ranging from big companies to medium to small ones as well as mainstay companies in each region,” he added.

Japan, the world’s fifth-largest greenhouse gas emitter, has been reluctant to impose a mandatory cap on companies’ emissions because of past efforts by industry to clean up and become more efficient.

Japan is one of the world’s most energy-efficient countries. But like all rich nations, it has come under increasing pressure from developing nations to pledge deeper cuts to its emissions as part of a broader U.N.-led fight against climate change.

ABOVE ITS TARGET

Japan is obliged to cut greenhouse gas emissions by 6 percent in 2008-2012 from the 1990 levels under the U.N.’s Kyoto Protocol climate pact. But as of 2006, Japan’s emissions were 6 percent above 1990 levels.

In the trial market, a target can limit either the total volume of CO2 a company emits or the amount of CO2 per unit of production. The latter would allow emissions to rise along with economic growth as long as energy efficiency improves, one factor overshadowing the efficiency of the scheme.

Another risk is that caps based on an industrial sector could restrain individual companies’ efforts to take advantage of carbon pricing.

“To make a trial meaningful one, it should be able to help a company to make its own tactics and decide its own strategy for business management,” said Tadashi Otsuka, professor of law at Waseda University, a member of a government climate panel.

A present, each industrial sector under the powerful industry body Keidanren voluntarily sets a target to meet over the five years until 2012.

But electric power and steel companies, Japan’s two top emitters, have resisted mandatory targets as well as emissions trading akin to that already in place in the European Union.

“It’s a step forward, albeit a minor one,” said Naoyuki Yamagishi, head of climate change program at WWF Japan, said of the trial scheme.

But he said it fails to address two key issues if the government were to try to implement deeper cuts --- how to set absolute volume caps on different industrial sectors and how to allocate them to each company.

“There is risk that insufficient results from an insufficient trial market would make people consider any scheme is useless,” Yamagishi said.

OPEN FOR APPLICATIONS

The government starts accepting applications on Tuesday for the trial scheme and the closing date is December 12, 2008 for companies to set a voluntary emission cut target for the year to March 2009. No pricing details have been announced.

Actual trading is to start at any time after the government approves applicants’ targets. More participants are likely to join late next year because authorities are due to verify companies’ emissions in the first Kyoto year by mid-October.

Japan is only one of 37 industrialized nations bound under Kyoto to meet emissions curbs from 2008 to 2012, when the pact’s first phase ends.

The Japanese government and big corporates have been active in buying U.N. carbon offsets called CERs to try to help the nation meet its Kyoto target.

The government has also been buying large amounts of a cheaper Kyoto offset called AAUs from former Soviet bloc countries. But many of these emissions are less directly linked to verifiable emissions reductions projects in Eastern Europe and are therefore less credible.

Japan’s existing, and much smaller voluntary scheme, called J-VETS, offers small companies subsidies to become more energy efficient. But the scheme is ending a piloting role because the government is cutting subsidies it pays only once for a company.