UK: September 22, 2008


LONDON - Tumbling factory output following an economic slowdown will not be enough to curb rising industrial carbon emissions in Europe, analysts said on Friday.


That means no bright lining to a credit crisis which at the same time has pressured political commitment to fighting climate change.

And in the medium term, a combination of higher-priced debt plus investor nervousness could cut the supply of renewable energy projects in both developed and developing countries, potentially denting the response to global warming.

Carbon dioxide, the commonest greenhouse gas, is produced from burning fossil fuels to run industry. But power plants also are a big source of emissions and European demand is up this year largely because of a very mild winter in 2007.

"Electricity demand is up and I think that will outweigh the lower industrial production," UBS analyst Per Lekander said.

Carbon emissions from large installations would be 1 or 2 percent lower than expected as a result of the slowdown, but still higher than last year because of higher power demand, Lekander added.

"You'd expect a stabilisation, rather than rises, in industrial sector output and emissions over the next few years. The broader economic picture is still quite gloomy," said Merrill Lynch's global head of carbon emissions Abyd Karmali.

Industrial output in the Euro zone fell in July. Cement is a major source of carbon emissions, and the Spanish construction boom stalled earlier this year.

Pockets of strength remain -- European Union crude steel production rose 1.8 percent last month, year on year, the International Iron and Steel Institute (IISI) said.


COMMITTED?

Rising carbon emissions imply continuing demand for permits in the EU's emissions trading scheme (ETS). The scheme distributes carbon allowances among industry and power generators, and accounts for about half the EU's emissions.

A surplus of such allowances would trigger a carbon price collapse, but there was no prospect of that.

"I would still expect a deficit of at least 100 million tonnes of EU allowances this year," Deutsche Bank carbon analyst Mark Lewis said.

The scheme is an example of climate policies which set legally binding targets, to underpin the climate fight and give comfort to investors.

But the credit crisis could weaken that commitment. For example, horsetrading among EU lawmakers, industry and governments over agreement on the EU's 2020 climate targets has coincided with the flaring up of financial turmoil.

An influential EU committee of lawmakers wants to ease carbon caps in the 27-nation bloc by allowing nations to pay developing countries to make emissions cuts, through carbon offsetting, a document seen by Reuters showed on Thursday.

But the credit crisis could undermine that offset market by drying up debt finance for smaller developers of projects including renewable energy, causing a "significant slowdown" in deal flow in the medium term, UBS's Lekander said.

"The credit crunch will exacerbate a slowdown already happening because of increased... policy uncertainty," Karmali said, referring to a slowdown in project development.

But Guy Turner at New Carbon Finance said debt finance was not such a major constraint.

"All project finance comes under scrutiny at these times because of cash constraints, but a lot of carbon projects are hosted on industrial sites ... and (their costs) come out of corporate budgets," Turner said.


Story by Gerard Wynn


REUTERS NEWS SERVICE