"It is necessary to set up systems to acquire credits by the government from the fiscal year (starting April) 2006 so that our country can secure necessary credit volumes for sure and with cost efficiency," a METI document said.

Projects to cut greenhouse gas emissions under the pact, such as investing in renewable power overseas, may take years and so Japan could fail to secure the necessary credits within the target period, the document said.

Government officials declined to specify how the government would start purchasing CO2 credits.

"But by pushing forward the stance that the government will buy credits, we need to encourage and speed up more CO2 reduction projects," one of the officials said.

Japan aims to cut emissions of CO2 and other greenhouse gases blamed for global warming by 6 percent from 1990 levels by 2008-2012. But METI figures showed Japan's CO2 emissions had increased 8.3 percent by March 2004.

Other signatories to Kyoto such as Spain and Greece have also seen emissions soar, but European Union countries have set mandatory targets from this year on heavy-emitting industries such as the power sector to cut CO2.

Japan has allowed industries to set their own targets. Analysts say the government's estimated purchase volumes look optimistic and the situation may be more urgent.

"The government should have done this much earlier," said an environmental analyst, who asked not to be named. "Japan will see credit shortages in around 2010 if immediate steps are not taken. Time is running out."

METI figures showed Japan's CO2 emission had climbed to 1.34 billion tonnes by March 2004, partly because of prolonged shutdowns of nuclear power plants in 2003 after safety document falsifications.

The government's policy not to impose emission limits on each company, as well as relatively high costs of CO2 reduction, should be blamed, industry officials said.

Reducing CO2 output costs a Japanese company $26 a tonne, government figures showed, more expensive than $6 to $7 a tonne from emissions-cutting projects in developing countries, allowed under Kyoto's clean development mechanism (CDM).

It is a dilemma for Kyoto-leader Japan, but one that also gives trading houses and financial institutions opportunities on the emerging CO2 market, which Barclays Capital has predicted could grow to 40 billion euros ($48.55 billion) a year.