SINGAPORE (Reuters) - The deepening credit crisis in the Western world has slowed buying of secondary carbon offsets and threatens to stymie financing for emissions-reducing projects across Asia, putting in doubt the future flow of credits.

While the impact is thus far muted, thanks to the relative stability of major Asian lenders and expectations of unrelenting demand from European and Japanese firms who will need to meet mandated emissions limits, industry officials say the risks are growing and trading volumes have already suffered.

That's bad news for a market already jittery about the fate of global climate talks and the risk that a severe and prolonged downturn could lead to a drop in demand from rich nations for carbon offsets from the developing world.

"In terms of project development, it appears the ramifications of what's been going on in the U.S. and elsewhere has led to quite a tightening up of credit," said Wayne King of Carbon Market Solutions in New Zealand.

Asia relies on Western, and particularly European, demand for offsets from carbon-reduction projects under the U.N.'s Clean Development Mechanism (CDM).

The $13 billion CDM market allows rich nations to invest in clean energy projects in developing countries and in return receive offsets called CERs which they can sell for profit or use to meet emissions targets under the Kyoto Protocol.

Asia represents about 70 percent of the CDM market.

The majority of CDM projects are in Asia, particularly China and India, and there is a huge backlog of projects awaiting approval by the United Nations.

Sudhir Bhat, director of project finance at First Climate Group in Zurich, said domestic lending did not seem to be drastically affected for the moment.

In India, funding is still available for good projects," he said. India is the second-biggest source of CERs after China.

But a sharp downturn could skew demand for offsets, said a senior banker at an international investment bank.

"If the financial crisis leads to a longer-term recession, then industrial output, especially in wealthy countries, could decline, which will lead to a reduction in emissions and downward pressure on the carbon price," he said.

"However, the financial crisis might also lead to a drop in the amount of capital available for emissions-reduction projects, which would lead to higher emissions than would otherwise be the case," he said. This would lead to a decline in the supply of offset permits and therefore upward pressure on the carbon price.

DEMAND ROBUST?

Yuvaraj Dinesh Babu of Asia Carbon in Singapore said he had noticed a change in buying strategies of secondary market CERs by some buyers, who were now holding back and taking stock to see where the market was headed.

"This is a time where the traders and the big procurement companies are trying to confirm whether they have a firm strategy on the secondary market," he said. Secondary CERs are those issued from projects that have been approved under the CDM and proven to be effectively curbing greenhouse gas emissions.

We have noticed the active participation from the EU has slowed down as compared to the Japanese," he added.

Japan is looking to broaden its suppliers of carbon credits to meet its Kyoto Protocol obligations.

The volume of secondary CERs transacted on the European Climate Exchange reached a peak in July at 90 million metric tons, falling to 69 million metric tons in September.

Many analysts have said tumbling industrial output would not be enough to curb rising carbon emissions, expecting instead a stabilization in industrial output and emissions over the next few years, supporting demand for offsets.

For the moment, the prices of benchmark CERs are holding up around 19 euros a metric ton, off the July high above 23 euros but up from 14.43 euros at the start of February. Traders feel CER prices will remain firm.

But Tim Hanlin, managing director of the Australian Climate Exchange, the country's first carbon trading exchange, disagreed, saying a recession in the West could curtail carbon emissions enough to limit demand for new projects.

But, he added, this was not traders' biggest worry.

"The biggest issue for carbon financing at the moment is really what happens in Copenhagen in 2009 and the lead-up to that meeting," he said, referring to U.N.-led talks on a successor to the Kyoto Protocol, whose present phase expires end-2012.

Carbon credits issued under the CDM only run till the end of 2012 and the market is anxious to see Kyoto expanded and extended at talks in Copenhagen at the end of next year, although some fear the financial chaos is hurting the chances of a strong "Kyoto II" pact that binds all nations to curbs.

For the moment, industry officials said Asia's limited reliance on Western funding for CDM projects should mean the region would weather the credit turmoil for now."I don't think emissions trading is going to be immune to it but it's certainly not going to be crushed by it," said Hanlin.


Source:http://www.reuters.com/article/reutersEdge/idUSTRE4950MG20081006?pageNumber=4&virtualBrandChannel=0