China should be praised for its lead role in a U.N.-backed scheme to cut carbon emissions and efforts to cap its flow of credits should be resisted, a leading British-based clean-energy project development firm said.

China and its big state-owned firms have been accused of exploiting the United Nations' Clean Development Mechanism (CDM) to boost earnings from clean-energy projects that were already viable, thus flooding the market with cheap and dubious carbon credits.

Proposals have been made in Europe to cap the volume of offsets supplied from China.

But China is effectively being singled out for the successful way it has adapted to the CDM, Anders Brendstrup, managing director for China for Camco, told Reuters.

They should be praised, not criticized, for this success, he said. Camco is one of the larger CDM project developers and advisers in China.

The CDM, part of the Kyoto Protocol, was set up to allow rich countries meet mandated U.N. emissions targets by investing in clean-energy projects in the developing world in return for tradable offsets called certified emission reductions (CERs).

Projects in China have produced more than 40 percent of all CERs issued under the scheme to date.

Each CER represents a ton of greenhouse gas emissions saved from being emitted and the offsets are given by the United Nations to projects provided they meet strict criteria and pass a rigorous verification process.

China has a third of the 1,593 CDM projects registered by the United Nations to date and hundreds more Chinese projects are in the CDM pipeline. Only registered projects can eventually be issued with CERs.

Several thousand other CDM projects from developing nations are in the process of being validated or seeking registration. Not all applications will succeed and earn CERs, leading to fears that the total flow of U.N. offsets will be less than the official forecast of 2.9 billion by 2012.

TURMOIL

The flow of credits has been hit by turmoil on financial markets along with worries about whether the CDM will even exist after 2012, when the first phase of the Kyoto Protocol ends, Brendstrup said.

It is clear project developers are finding it very difficult to finance their projects, and therefore there are many that are not being built, he said.

Only eight months ago now, they had initial agreements with banks but many of these agreements are not being re-evaluated or even withdrawn and this is when they stop happening. There will be a huge slowdown in the supply of credits.

CERs, currently trading around 11 euros ($14.3) a ton on the European Climate Exchange, are mostly bought by European companies such as power firms, steel and cement makers to meet emissions targets under the EU's emissions trading scheme. Japanese firms are also buyers.

Brendstrup noted that most of the projects now getting underway are the ones backed by state-owned or big private firms, and the smaller companies are the ones struggling the most.

Critics of the CDM have focused on the key concept of additionality, which ensures that carbon trading revenues are allocated only to projects that would otherwise have been unprofitable.

The brutal impact of the financial crisis showed that the principle has been applied with rigor, he said.

Negotiations are now underway to draw up a broader replacement for the Kyoto Protocol. World leaders gather in Copenhagen in December to try to agree the outline of what a post-Kyoto pact might look like.

If the talks stall, that will throw the CDM into uncertainty since the scheme only runs up to 2012, although a number of projects will continue to issue CERs well beyond that.

We do believe that all the projects that have been started before will continue to receive CDM revenue after 2012, and most investors expect them to continue. But of course, it is an uncertainty for both the developers and the financiers, he said.

(Reporting by Beijing newsroom; Editing by David Fogarty)

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