Date: 25-Jan-10

Country: UK

Author: Michael Szabo

LONDON - Still reeling from disappointing UN climate talks in Copenhagen in December, clean energy project developers were dealt another blow this week when U.S. Democrats lost their Senate supermajority, potentially killing a federal cap-and-trade scheme for years to come.

Although the passage of a U.S. bill to cap greenhouse gas emissions in 2010 was far from certain, the election of a Republican in Massachusetts to the Senate on Tuesday derailed any momentum President Obama had following his healthcare push toward introducing a cap-and-trade scheme this year.

This, coupled with a disappointing UN climate summit in the Danish capital last month where leaders from over 190 countries failed to agree a legally-binding pact to succeed the Kyoto Protocol, is causing concern for some clean energy project developers and forcing them to reassess their game plan.

"I'm not as bullish as I was a year ago," said Sascha Lafeld, an executive board member at First Climate AG. "The U.S. pre-compliance market is cautiously developing, so our strategy is also one of caution ... We're on hold, we'll keep our two U.S. offices open but we're not expanding this year."

Frankfurt-based First Climate has a global project portfolio of some 250 projects, including around 20 projects in the U.S., that generate carbon offsets by cutting carbon dioxide.

Observers say the spotlight in the U.S. now shifts back to state and regional schemes launched by a handful of states during George W. Bush's presidency, when the prospect of a federal U.S. carbon market was a distant mirage.

"It's not ideal but we welcome this as a fallback solution," said Alexander Sarac of JP Morgan-owned EcoSecurities, one of the world's biggest aggregators of carbon offsets.

"Some states are prepared to address climate change rather than defer action, (but) we urge legislators to set up these regional schemes in a way that they can be easily linked to a national one."

Sarac, general counsel for EcoSecurities, said the company was confident about its U.S. approach. "Our strategy has been to get to know the market, work on our brand and develop a product that U.S. buyers like, so no reason to change that," he added.

CALIFORNIA OFFSETTIN'

Under these regional schemes, polluters like steel plants and power generators can outsource their carbon cuts by buying offsets, making it cheaper for them to meet emissions targets.

Lafeld said the most promising is California's Assembly Bill 32 (AB 32), which established statewide emissions reduction targets of 1990 levels by 2020, and cutting that by 80 percent by 2050. "AB 32 looks like the future. We believe California will be the U.S. hub for emissions trading," he said.

The bill recommends launching a cap-and-trade programme by 2012, covering 85 percent of the state's emissions, that would link to the Western Climate Initiative (WCI), a collaboration between seven U.S. states and four Canadian provinces.

Another scheme called the Regional Greenhouse Gas Initiative (RGGI) was launched in 2009 by 10 northeastern U.S. states, but critics say its loose emissions caps will keep carbon permit prices low and limit offset demand.

RGGI currently allows offsets from five different types of clean energy projects including capturing methane from landfills and livestock manure, while WCI is considering a similar list.

Developers said these two schemes have already sparked U.S. demand for offsets and, remembering the barren regulatory landscape under President Bush just over a year ago, said too much focus was suddenly put on the prospect of a federal bill.

"While some debate whether a federal market will exist or not, there's already a deep market for offsets," said Sindicatum Carbon Capital CEO Assaad Razzouk, adding that his firm gets strong interest for every offset its U.S. projects generate.

Sindicatum has a portfolio of 20 clean energy projects in the U.S. and Asia.

THE CDM, POST-COPENHAGEN

With so much uncertainty in the U.S., many developers have maintained a focus on the Kyoto Protocol's larger, more lucrative Clean Development Mechanism (CDM) offset market.

Worth $6.5 billion in 2008, the CDM is the main source of offsets for Europe's emissions trading scheme, allowing participants to procure from a wide range of carbon-cutting projects in countries like India, China and Brazil.

But that scheme's future was thrown into jeopardy following the Copenhagen talks' failure, meaning the CDM could expire along with Kyoto in January 2013.

Scott McGregor, CEO of Camco International, said although Copenhagen fell short of what he expected, there was no clear opposition to keeping the CDM, so Camco will continue to develop projects and originate offsets.

"There will be healthy demand for offsets from the EU and we see other countries like Australia being very keen on them as well, so in terms of developing CDM projects our strategy is still one of expansion," First Climate's Lafeld said.

(Editing by Sue Thomas)

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