Carbon market could supply cheap debt -bankers

GOLD COAST, AUSTRALIA (Reuters) - European energy companies struggling to raise cash from banks to fund projects could turn to the European carbon market, say bankers.

Energy infrastructure projects are typically 70 or 80 percent debt-financed, but following the financial crisis many banks are closed for any new lending for the remainder of 2008 and possibly into 2009, developers say.

One tactic to raise cash could be for energy companies with installations participating in the Europoean Union's emissions trading scheme (ETS) to sell their carbon permits.

The EU ETS gives installations a certain quota of emissions permits and forces them to buy more to cover any carbon emissions surplus. Companies can use various trading techniques to sell those permits now and buy them back at a later date.

"With the credit crunch a lot of people are going to be focusing on what they can do to raise cash now and how they can reduce their borrowing costs," said Morgan Stanley's Olivia Hartridge.

In the EU trading scheme, affected companies can raise cash by selling their present quota and buying futures contracts for payment in the future.

That's an attractive deal at the moment because the higher price of allowances for future delivery does not fully reflect the cost of capital of borrowing from a bank.

"You can effectively shift your allowance allocation earlier and take advantage of the fact the carbon market offers the lowest rate of borrowing in the world at the moment," said Hartridge.

The global carbon market is growing year on year, and is tipped to exceed $100 billion this year versus a traded value of $64 billion last year.

That growth is stimulating mainstream investors to take a look, and banks to develop investment products.

For example, last week Credit Suisse said it would offer the largest deal yet of securitized carbon offsets from developing countries -- an approach which gives investors more clarity concerning delivery risk [ID:nLM279164].

Under the U.N.-led Kyoto Protocol, countries and companies in the developed world can buy carbon offsets to count against their greenhouse gas emissions targets, by investing in clean energy projects in developing countries.

On Thursday, ETF Securities launched a note listed on the London Stock Exchange which gives investors access to the European Union's emissions trading scheme without having to buy the underlying commodity [ID:nLS395467].

But strong carbon markets depend on tough emissions targets worldwide -- and that depends on precarious U.N.-led climate talks to replace or extend the Kyoto Protocol after 2012.

"The longer we have a period of uncertainty not knowing what the international community is going to put in place after 2012 ... then you'll see a tail-off in the products that are on offer," said Hartridge.