Ukraine close to emissions deal with Japan: source

Japan has negotiated with about 10 eastern and central European countries over the emission rights, called Assigned Amount Units, in the past two years to help it meet its greenhouse gas emissions target under Kyoto.

"I understand Ukraine is the closest," the source told Reuters in a telephone interview, referring to which country Japan was most likely to purchase its first AAUs.

The source declined to comment on the deals size or value, or if there were any other similar deals nearing completion.

Japan said in December it was at odds with Hungary on the price of one such deal.

When asked if the gap with Hungary had narrowed, a second source said the situation had since little changed.

Now that a global recession has hit energy use, falling demand for emissions credits has dampened market prices.

European emissions permits, seen as the market's benchmark, are currently valued around 8.40 euros ($10.72) per metric ton of carbon dioxide.

AAUs are often cheaper than EU permits and other project-based offsets due to estimates that global AAU supplies may be several times larger than demand forecasts.

The environmental integrity of AAUs is also in question as the bulk of them are the result of economic restructuring in eastern European countries rather than investment in clean energy.

Japan is expected to complete the first set of AAU deals based on its past negotiations, market sources said.

According to an industry publication report, Japan has made an agreement to buy 30 million tons AAUs from Ukraine at 10 euros per metric ton, with delivery of 15 million tons each this year and next.

Both sources declined to comment on the report and said Japan would not finalize any AAU contract before April.

"Japan is ready to buy AAUs. But it's hard to make judgments now that the circumstances surrounding the prices are changing," the second source said.

Japan has pledged to buy a total of 100 million tons in carbon offsets from abroad between Kyoto's 2008-2012 period.

In two years, Japan has bought the equivalent of 23.1 million metric tons, all of which CERs, or offsets generated by clean energy projects in developing countries under Kyoto's Clean Development Mechanism scheme.

(Editing by Michael Szabo and James Jukwey)