TOKYO (Reuters) - Japan said on Wednesday reaching a legally binding climate agreement in Mexico by the end of the year could be tough given uncertainties over the fate of U.S. legislation but it had not lost hope for a global deal.

Environment Minister Sakihito Ozawa also told Reuters in an interview he was still aiming to launch a domestic emissions trading market with compulsory volume caps next year, although more time may be needed to discuss its design with industry.

Japan, the world's fifth-largest emitter of greenhouse gases, has pledged to cut emissions by 25 percent by 2020 from 1990 levels on condition of an ambitious deal being agreed on by all major emitters.

But analysts say hopes for a strong deal this year have dimmed after the U.S. Democrats lost a key Senate seat last week to a Republican opposed to capping emissions, derailing any momentum President Barack Obama had for passing a climate bill.

"We are basically hearing that the U.S. will submit (to negotiations) what is being deliberated on in the Senate, so if that is not implemented, a deal will be tough," Ozawa said.

"It won't be easy but there is no need to give up now."

U.N. climate talks in Mexico in November will try to build on a weak "Copenhagen Accord" worked out last month in the Danish capital that sets a goal of limiting warming to no more than 2 degrees Celsius (3.6 F) above pre-industrial times.

The Mexico meeting, however, will be undermined if the United States, the top emitter behind China, has not set caps on carbon emissions.

Ozawa also said changes were needed with United Nations rules for negotiations to proceed more smoothly.

U.N. decisions need to be made unanimously, meaning developing countries at the Copenhagen talks insisted any text be reviewed in a plenary session of 193 nations. The meeting also merely "took note" of the accord because several countries had opposed it.

"There needs to be a reform of the U.N. consensus system, its system for proceedings," Ozawa said, adding that countries which opposed the accord had been against any deal from the start.

"There was no problem with the content, but it was a problem of procedure," he said.


Despite the weak accord, Ozawa said Japan would press ahead with domestic policies to cut emissions, with the government set to pass a climate bill in parliament during the current session running until mid-June.

The bill, to be submitted in March, is expected to include Japan's emissions reduction goal for 2020, along with its target to cut emissions by 80 percent by 2050.

The environment ministry has also proposed the bill include the launch of a cap-and-trade domestic emissions trading system, although it is not clear yet if the legislation would specify the year in which the market would start.

Ozawa hoped the trading system would start next year, when Japan is also considering the introduction of a carbon tax. But with details for the trading scheme still sketchy, the kick-off could be in 2012, he said.

Companies, which now trade based on voluntary targets, have resisted a mandatory scheme and have been slow to cooperate with the government on designing rules for the new system.

"It's been difficult because on the one hand, the system needs to accommodate companies for them to embrace it, but if the rules are too easy on them, it won't be effective," he said.