Tighter credit threatens Asia CO2 credit pipeline

By David Fogarty, Climate Change Correspondent - Analysis

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.