TT-563 -- Who's Making Money Out of Carbon Credits? Ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, April 25, 2010 Issue No. 563

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

In 1997 a global warming troubleshooting initiative called
the Kyoto Protocol was held under the auspices of the
United Nations and subsequently there are now 187
countries who have signed and ratified the protocol. Pretty
much the only industrialized country which won't ratify the
agreement, is the USA, which produces about 20% of the
world's greenhouse gases. But we think that will change in
the next 10 years simply because there is too much money at
stake to ignore being part of this global initiative.

Broadly speaking, the 187 countries are divided into two
camps, those countries which have been industrialized for a
long period and who both previously and currently are
producing a high level of green house gases, and those
emerging economies which may or may not be major emitters
now, but who historically have not contributed to a great
extent to today's global warming. All the signees have been
allocated certain acceptable levels of pollution emitted
into the air, resulting in the industrialized countries
being given targets to cut their levels of pollution by
20%-40% while some of the emerging economies actually have
substantial room to pollute even more than they are now.

The basic idea behind the Protocol is to encourage
countries to cut their greenhouse gas emissions by the
agreed targets, or in failing to do so to pay significant
penalties or to have to trade the right to emit excessive
amounts with those nations that are still below their
allocated emission levels. Critics of the Kyoto Protocol
are saying that instead of leading to reduced carbon
emissions, the initiative is instead being debased into
a huge financial market which is simply moving pollution
blame from the industrialized nations to the emerging
ones.

They have a point. Certainly the swapping of carbon
emissions credits (also called Cap and Trade) has
developed into a massive global business. And it's one
that the Japanese are deeply involved in.

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[...Article continues]

Given that Japan was one of the original promoters of the
Protocol, it is perhaps no surprise that the country is
well advanced in emissions trading. Earlier this month
(April, 2010), the Tokyo Metropolitan Government launched
Asia's first Emissions Trading Scheme (ETS), which will
become mandatory for large office and retail buildings, and
factories in the city. The ETS will try allow companies to
buy and sell carbon emissions credits and in so doing try
to reduce the Tokyo's emissions levels by 25% from 2000
levels by 2020. In the 5-year first phase, the owners of
the 1,400 buildings covered by the ETS will have to cut
their CO2 emissions by 6-8% from 2002-2007 levels, and in
the 5-year second phase by 17%.

Actual trading of the Tokyo ETS will start next year, and
to comply, the participants -- being those owners of
buildings burning more than 1,500 kiloliters of crude oil
annually or having a floor space of more than 30,000 sq.
m., either have to reduce greenhouse gases or:
i) start buying credits from small- to medium-sized
companies that are low emitters,
ii) apply for credits from subsidiaries based outside Tokyo,
iii) buy renewable energy certificates from power
companies.
Those companies not hitting their emissions targets will
suffer real penalties, starting with their names being
published (public shaming) and fines.

The Nikkei ran a survey of 300 companies who would be
affected by the new legislation. About 70% of them said
that they would invest in energy reduction technologies
and materials, spending an estimated JPY750m over 5 years
to do so. 46% of companies said that they probably couldn't
comply with the new regulations and 26% said they would
have to start trading emissions credits on the ETS.

Sounds to us like the Tokyo Government is going to be
enjoying some brisk business handling the trades --
especially once the regulations start being applied to
smaller companies in the future. Given the state of tax
revenues, this is something we expect to happen sooner
rather than later.

Big business is something that quickly comes to mind with
ETS and carbon trading. The nation's trading companies are
deeply involved in both domestic and international trading
and systems. As an example, recently Sojitz announced that
it will start an online marketplace for trading carbon
credits. The market will handle credits issued by the
Ministry of Economy, Trade, and Industry (METI), the
Environment Ministry, and the Tokyo Metropolitan
Government, as well as several others. Interestingly,
Sojitz plans to charge 4%-5% of each transaction as a fee,
which, considering there will eventually be millions of
dollars a day traded, should be a tidy little business...

Looking further afield, Japan's major trading companies and
the government itself have been very active in buying up
unused carbon credits from developing countries,
particularly from former Russian satellite countries. For
example at the end of March 2010 it was announced that the
government had bought 41.5m tonnes of carbon credits from
the Czech Republic and Latvia. This brings the government's
holdings of such credits to around 96.6m tonnes -- almost
enough to cover its 5-year target of 100m tonnes.

At the same time, Sumitomo Mitsui Banking Corporation
has announced that it is setting up a joint venture in
Malaysia with the Federation of Malaysian Manufacturers,
so as to roll out emissions control solutions and (our
guess) trading systems for the Federation's 2,400 member
companies. Malaysia has pledged to reduce its carbon
levels by 40% from 2005 levels by 2020. It's no coincidence
that Sumitomo Mitsui was the first Japanese bank to start
carbon credit trading and it is running neck and neck with
Mitsubishi to see who can round up the most markets the
quickest. These guys think big, going after whole countries.

So why are the Japanese and particularly the trading
companies so interested in carbon trading? Well, it pays to
follow the money. It seems that when these companies buy
carbon credits, not only can the credits themselves can be
sold for commission to large companies back home, but also
the money used to pay for the credits is supposed to be
used by the sellers to implement clean energy measures in
their own country. This is a perfect opportunity for a trading
company to offer to help the seller spend that cash on a few
"in-the-family" clean-tech projects. Further, with appropriate
contracts, those trading companies investing into projects
which result in reduced carbon emissions can then claim
those reductions against other businesses in their far-flung
empires. It's a great eco-system.

This means that there is a chance that much of the hundreds
of millions of dollars spent by Japan on carbon credits will
come right back to her manufacturers and brokers, as well as
offsets for the conglomerates. This tie of cash to spending
reminds us very much of the successful way Japan used to
implement its development loans. Your government could get
huge loans, but only if you used the money to buy Japanese
goods and services.

There are announcements almost every day of new carbon
credits deals being done by major Japanese firms somewhere
in the world. Our impression is that other large companies
and world governments have not really woken up to the
potential in this sector, and until they do, the Japanese
are making hay -- the non-methane producing type of course!

*******

Lastly, there will be no Terrie's Take next week, due to it
being Golden Week. This is one of our 4 weeks off a year,
so we'll be back on May 9th. While you're still with us,
though, take a look at the interesting law response on the
Molex fraud we covered last week. In the FEEDBACK at the
end of this issue of Terrie's Take.

...The information janitors/

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+++ NEWS

- Geos language school bankrupts
- FSA clarifies IFRS rules
- Fitch warning on Japan credit rating
- iPhone takes 72% of smartphone sales
- iPhone boosts Softbank's profits

-> Geos language school bankrupts

The problems of the nation's English-language schools
continue, with the bankruptcy this last week of Geos -- one
of the biggest in the business. Geos leaves debts of
JPY7.5bn and throws the employment of 2,100 staff into
jeopardy. The company blamed the post-Nova slump in English
learning. The industry as a whole suffered a lot from the
negative publicity from Nova's pressure tactics to get
students to pay more.

The company that picked up the Nova assets,
G.communication, is apparently going to pick up the bulk of
Geos' operations and will continue providing students with
English learning services. ***Ed: One thing we found
surprising in the Geos/G.communications deal is that they
must have come to an arrangement before the bankruptcy.
While that may be good news for the students, we wonder
what the other creditors owed JPY7.5bn think about it?
Normally someone taking over assets like this has to go
through a bidding process with the receiver, to ensure the
creditors get as much money back as possible. That doesn't
seem to have happened with this inside deal and may open
both parties up to a law suit in a few weeks time. It's not
good enough for the G.communication CEO to say glibly, "Oh,
we're doing it to protect the students." Creditors have
rights as well.** (Source: TT commentary from
japantimes.co.jp, Apr 21, 2010)

http://search.japantimes.co.jp/cgi-bin/nn20100421x1.html

-> FSA clarifies IFRS rules

The Financial Services Agency has clarified its position
on the introduction of International Accounting Rules (per
the International Financial Reporting Standards) in 2015.
The FSA said that the new rules will only become mandatory
for listed companies. Unlisted companies will not be
required to use IFRS and nor will they be compelled to do
so in the future. The FSA decided to issue the
clarification after rumors abounded that the rules would be
forced on to every company in Japan. (Source: TT commentary
from nikkei.co.jp, Apr 24, 2010)

http://e.nikkei.com/e/ac/tnks/Nni20100423D23JFA23.htm

-> Fitch warning on Japan credit rating

While Japan's politicians fiddle and cook up more ways to
spend the massive budget recently approved, various
agencies abroad grow increasingly worried about a coming
debt crisis. This time it is Fitch Ratings, which issued a
warning saying that it is concerned about the public debt
and how it hurts the nation's creditworthiness. Fitch said
that Japan has the highest public debt burden amongst
industrialized countries, moving to around 200% of GDP this
year. (Source: TT commentary from bernama.com, Apr 23,
2010)

http://www.bernama.com/bernama/v5/newsworld.php?id=492880

-> iPhone takes 72% of smartphone sales

Stats from Tokyo-based research firm MM Research Institutes
says that Apple has taken a commanding lead in the smart
phone market, with 72.2% of all sales. iPhone sales have
doubled in the last 12 months, reaching 1.69m handsets, out
of the smartphone segment total sales of 2.3m units.
Trailing a long way behind the iPhone is HTC with 11% of
the market, then Toshiba with 6.8%. ***Ed: With the
introduction of the first serious HTC Android (named the
Desire) and Windows (Xperia) phones as an alternative to
the iPhone, from this week onwards, it will be interesting
to see how they fare against the iPhone.** (Source: TT
commentary from pocketgamer.biz, Apr 23, 2010)

http://www.pocketgamer.biz/r/PG.Biz/iPhone+news/news.asp?c=20189

-> iPhone boosts Softbank's profits

And of course, it's not just Apple that is doing well from
the iPhone. Carrier Softbank is equally benefiting, as
iPhone users turn out to be heavy data users and are maxing
out their capped price plans. Softbank Mobile income will
rise about 30% year-on-year, to approximately JPY450bn,
about JPY30bn more than forecast. Sales will be around
JPY2.75trn. (Source: TT commentary from nikkei.co.jp, Apr
24, 2010)

http://e.nikkei.com/e/ac/tnks/Nni20100423D23JFF01.htm

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors@terrie.com.

=> In TT562 we discussed the implications of the Molex
fraud case and how it was possible for the company to have
such a large amount of money be stolen without detection.
We invited readers who might be lawyers to respond, and
several did. The best response was the following:

*** Reader Comment. Molex is an interesting case,
especially for a company that has been in Japan as long as
they have which one would imagine should have had better
procedures in place.

As to their culpability, they may well have some
defense against the bank, on the basis that for this large
amount of money, which seems out of the ordinary course of
financial transactions for Molex in Japan, the borrowing of
that large amount would normally have required at the very
least a resolution of the Board of Directors of Molex
Japan. One would have thought that the bank should have
been getting some form of acknowledgment letter or support
letter from Molex US to support the legitimacy and full
approval of this borrowing.

There have been some cases in Japan where courts have
punished banks and invalidated loans (with no payback) on
the basis that large banks did not obtain copies of such
specific Board resolutions authorizing the issuance of
guarantees to subsidiary company loans overseas, which
would be the equivalent here in that they did not get this
Board's resolution approving the entering into of this loan
and the use of the company hanko for that purpose,

On the other hand, how long this senior employee had been
in his/her position would also undermine the Molex position
and give the employee more apparent legitimate authority on
which the bank may argue it was justified to rely.

I have also seen probably 5-7 similar level frauds in my
career in Japan and you are absolutely correct that people
cannot be lulled into thinking that this does not happen in
Japan. There are no perfect protections and only ongoing
audits of the subsidiary and vigilance by the parent
company can ensure control of such problems.

***********************************************************
END

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