Cheap govt deals may undermine carbon market

By Michael Szabo

LONDON (Reuters) - Recession could fuel a scramble from rich nations to buy cheap emissions rights to help them meet climate targets under the Kyoto Protocol, analysts say.

That would displace trade in wider emissions permits and especially a market in carbon offsets which could be worth $25-30 billion (16 to 20 billion pounds) to developing countries by 2012.

The climate may also suffer unless revenues from the emerging trade in sovereign emissions rights, called assigned amount units (AAUs), are spent on good environmental causes.

"Now with the financial crisis ... governments could be more inclined to go for AAUs," said Kris Voorspools, head of energy market analysis at GDF-Suez.

The Kyoto Protocol caps the planet-warming greenhouse gases of 37 industrialised countries by issuing them a fixed quota of emissions rights from 2008-12.

These countries can meet their targets either through domestic emissions cuts, or by earning carbon offsets from clean energy investments in developing countries.

They can also meet their quotas by buying permits from other industrialised countries which are under-cutting their targets.

Russia, Ukraine and east Europe have enough AAUs to spare to cover the entire shortfall of all other Kyoto countries combined, because of the collapse of their polluting industries and carbon emissions during the economic transition from communism after 1989.