LONDON - Extending the trade in sovereign emissions rights into a new global climate pact could deter investment in clean energy projects post-2012, Barclays Capital said on Tuesday, siding with the U.S. view on the matter.

Under the Kyoto Protocol, which expires in 2012, nations that are comfortably below their greenhouse gas emissions targets can sell excess emissions rights called Assigned Amount Units (AAUs) to countries struggling to meet their own targets.

U.N.-led climate talks in Bangkok last week made little progress in advancing global efforts to secure a successor to Kyoto or determine the AAU market's future, instead exposing wide divides in the expectations of key nations.

In a research note, BarCap, the investment arm of Barclays bank, summed up their negotiating positions as follows: 77 emerging economies including China want a continuation of Kyoto, the 27-nation European Union wants a new treaty borrowing heavily from Kyoto and the U.S. wants a new agreement that excludes AAU trading and bears little resemblance to Kyoto.

While there are merits to each of these positions, we are increasingly siding with the U.S. on this and do not think ... AAU trading is absolutely needed to make the future work, BarCap said.

Critics have derided AAUs as being hot air, citing a massive global surplus and arguing most were generated through restructuring in eastern Europe in the 1990s, when polluting industries in ex-communist countries were shutting anyway, rather than through new investment.

The $126 billion global carbon market, supported by private sector investment, is haunted by the specter of prolonged AAU trading, which threatens the long-term price stability companies need to make major investment decisions, BarCap said.


Such legacy issues represent a risk to the private mobilization of capital into emission-reduction projects as surplus AAUs hold out the risks that the carbon price could be collapsed by the monetization of hot air.

Up to now, the murky AAU market has consisted of a handful of deals, both confirmed and unofficial, totaling between 125 million and 320 million tonnes of carbon dioxide.

Most transactions are done at a substantial discount to the EU carbon price or Kyoto offset price, and feature eastern EU member states like Poland, Hungary and the Czech Republic as the sellers and Japan, its Kyoto emissions targets firmly out of reach, as the buyer.

The Czechs sold 3.5 million AAUs to Austria on Tuesday, disclosing no financial details.

There is certainly a good argument to be made that trading of excess AAUs ... has not been good for the carbon market in this period, BarCap said.

BarCap estimates Russia and the Ukraine, the two countries with the largest AAU inventory, could have around 6.5 billion tonnes available for sale from the 2008-2012 Kyoto period.

This is more than three times the annual CO2 emitted by all industry under the EU's Emissions Trading Scheme and nearly six times the estimated global demand for AAUs, and analysts say the sale of these volumes could dent carbon prices.

(Reporting by Michael Szabo; Editing by James Jukwey)