* Govt-level Kyoto CO2 rights market well despite recession
* Sources say Japanese want proceeds invested in own firms
LONDON, March 2 - The market for government-level emissions rights under the Kyoto Protocol is alive and well, mostly unfazed by the global economic downturn. Through the most opaque of the emissions trading schemes under the Kyoto climate change pact, nations comfortably below greenhouse gas targets can sell excess emissions rights to other countries in the form of credits called Assigned Amount Units (AAUs).
Critics call them "hot air", arguing that most were generated through restructuring in eastern Europe in the 1990s, when polluting industries in ex-communist countries were shutting anyway, rather than by new investment in clean energy.
Countries such as Austria and Japan are still hunting for these cheap AAU credits, despite the criticisms and the fact that United Nations clean energy project-based offsets, seen as having more environmental integrity, have also fallen in price.
"We started before the recession and we continue to negotiate with potential AAU sellers," said Sascha Eichberger of Kommunalkredit, which manages Austria's CO2 credit purchasing.
He said Austria plans to buy 5-10 million AAUs by 2012 but added that the dropping AAU price has prompted some countries to rethink sales. "The current price development is not what sellers expect to get for AAUs," he said.
The Czech Republic said earlier this month that it had again postponed an auction for 10 million AAUs as it needed to re-draw its sale strategy due to the drop in prices.
One broker told Reuters in January he had heard of AAU negotiations for as low as 3-5 euros a tonne ($3.81-$6.36), or around half the value of the largest deals signed in 2008.
Governments remain extremely guarded over AAU prices, despite the fact that the rights are bought with taxpayer money.
JAPANESE BUYERS SCOUR MARKET
While AAUs are not valid in most carbon trading schemes, Japanese companies can buy AAUs to meet voluntary emissions targets or sell them for profit to the Japanese government once an agreement is reached between Japan and the selling country.
"According to Tymoshenko, Ukraine has ... signed the first (AAU) agreements with public corporations in Japan," the Environmental (Green) Investments Fund, a climate change strategy consultant, said on its website on Feb. 12.
Two sources close to the talks said Japanese representatives are requesting proceeds be invested in projects to be built by Japanese companies.
"One government might say 'we're only going to buy AAUs if you can prove they're greened', whereas the Japanese are asking the seller to invest the money in a project developed by a Japanese company," one source said.
PROJECT-BASED OFFSETS FAVOURED
Critics argue that increased scrutiny surrounding the environmental integrity of the projects, built in countries like China and India, makes project-based offsets, called Certified Emissions Reductions (CERs), a better alternative than AAUs.
The option for governments to use either CERs or AAUs to meet Kyoto targets has caused a correlation in their prices.
Cheap CER prices, concerns over the integrity of AAUs and the lack of accountability and transparency over where proceeds are spent may see governments opt to buy CERs over AAUs.
But the economic downturn may see an erosion in rich nations' emissions and their subsequent emission offset demand.