GOLD COAST, Australia - Asian cities are likely to beat Australia in the race to become a carbon-trading hub, despite Australian plans to set up the region's first cap-and-trade market, industry experts said on Wednesday.

Sydney believes it is on pole position to become a hub, but the experts said Australia's most populous city was likely to be brushed aside as Hong Kong, Beijing and Singapore also staked claims to be Asia's main center for carbon trading.

So far, Europe is home to the world's only major carbon exchange and it dominates the $118 billion annual trade in carbon. Australia aims to become the second market, provided its lawmakers approve plans to usher in carbon-trading by mid-2011.

But China is likely to overtake Sydney as a base for trading carbon futures and other environmental products, as Beijing moves to greener policies, according to industry executives and experts attending a carbon-trading conference on Australia's Gold Coast.

Even Australian carbon banker John Marlow, global head of environmental financial products for Macquarie Group, said many firms would prefer to put staff into China rather than Sydney.

The question is, where would my headcount be? Sydney has an advantage for me as Macquarie is headquartered there, but if I was coming in blind I would be scratching my head to set up there, Marlow told Reuters on the sidelines of the conference.

I think in another two or three years you will probably see Hong Kong or Beijing as a hub.

China is already a major international source of carbon offsets -- tradeable credits that are used as a hedge by carbon polluters -- and is destined to play an even bigger role as more and more countries force their polluters to pay for emissions.

Typically, foreign investors plough money into green projects in China, then sell off the carbon offsets that are produced.

Singapore is also seen as a contender to become an Asian hub as it is near and has easy access to these Clean Development Mechanism projects, the main source of Certified Emission Reduction certificates that can used as carbon credits.

It is already a top Asian financial and oil trading hub, which offers complementary infrastructure to carbon trading.

Martijn Wilder, a partner in legal firm Baker & McKenzie, said Australia might use tax incentives to attract firms to set up carbon-trading businesses, but this was unlikely to succeed.

The European Climate Exchange, the world's dominant carbon market, voiced some skepticism on Wednesday about Asian ambitions to develop an international hub, saying the region was an important source of supply for carbon credits but not demand.

Asian centers would continue in Europe's shadow until they developed major cap-and-trade markets in their own right, which was still a way off, European Climate Exchange Chief Executive Patrick Birley told Reuters on the conference sidelines.

Markets exist where the buyers are, not where the supply side is. Farmers always take their produce to market, the market doesn't come to them, he said.

In terms of cap-and-trade systems, Sydney might even find itself overtaken by Japan if Australia's planned scheme continued to suffer delays and political opposition, Birley added.
Japan's new government wants to introduce a compulsory cap-and-trade system for greenhouse gas emissions as early as the year to March 2012, the Nikkei business daily said last month.

Prime Minister Yukio Hatoyama has outlined a goal to cut such emissions by 25 percent from 1990 levels by 2020.

(Editing by Mark Bendeich)