April 8 (Reuters) - Ukraine, battling political crisis, is having to find ways to finish spending $800 million it earned through Kyoto Protocol emissions rights sales, after Japanese officials warned Kiev it had a year before Tokyo would demand its money back.
Andriy Mokhnyk, Ukraine's incoming environment minister, said the country was in a "difficult situation" as it had not yet spent all the money earned through selling Kyoto carbon credits called Assigned Amount Units (AAUs) to buyers including Japan, Spain and the World Bank.
Under several AAU deals agreed with buyers, Ukraine was to have funded more than 500 clean energy and energy efficiency projects by the end of 2012, but the country missed the deadline and Mokhnyk said spending had ground to a halt in late 2013.
Since then Ukraine has been in turmoil, with the overthrow in February of former President Viktor Yanukovich, followed by Moscow's annexation of Crimea and mounting tensions in the east of the country as well as uncertainty over Russian gas supply.
"Japan has stated that they are ready to break the agreement and cease cooperation. If that happens, Ukraine ... would have to return all funds that the country received," Mokhnyk told reporters in Kiev on Monday.
"Therefore, the ministry has prepared amendments ... that could resolve these issues and allow activity to continue."
A diplomatic source at the Japan's embassy in Kiev, who asked not to be named, said a delegation from Japanese government agency New Energy and Industrial Technology Development Organization (NEDO) visited Ukraine in March.
"They urged Ukraine to implement the projects without delay, by the end of March 2015," he said, adding that Japan had provided a "huge amount of money" and that it has a right to end the agreement if Ukraine fails to fulfil its obligations.
The source declined to say how much had been invested so far because the information was confidential under the deal.
But Masami Tamura, director of climate change at Japan's Ministry of Foreign Affairs, denied that Japan is about to annul the agreement and demand the money back now.
"We know Ukraine is in a difficult situation with recent developments with Russia," he said.
"Even before that the political situation was difficult, and we understand that the utilisation of the carbon credit revenue is slow. What we have told Ukraine is to use it appropriately, like we agreed," he added, speaking by phone from Tokyo.
Under Kyoto's first period (2008-2012), countries that had overshot their greenhouse gas targets were able to sell their spare pollution rights in the form of AAUs to other governments that were struggling to meet their own national goals.
Many eastern European countries were left with large surpluses of AAUs after industry withered in the wake of the Soviet Union's collapse.
Ukraine sold Japan's government some 30 million AAUs in 2009, promising to use the revenue to buy low-carbon technology from Japanese companies, for example hybrid cars, energy efficient domestic heating systems and electric metro carriages.
Kiev later that year signed smaller deals with Spain and the World Bank.
Former Ukrainian Prime Minister Yulia Tymoshenko was later accused by Yanukovich of misappropriating at least 200 million euros in AAU sale proceeds that went missing in 2010.
Tymoshenko's spokesperson denied the charge, calling it "an unsubstantiated smear campaign".
State prosecutors in December 2010 said the funds had been spent on pensions.
Green groups have criticised the AAU sales, which were subject to little oversight, saying they will result in annual savings of only 117,000 tonnes of carbon dioxide. This is below government estimates of 250,000 tonnes per year - equivalent to the emissions of one small gas-fired power station. (Reporting by Natalia Zinets in Kiev, Michael Szabo in London and Stian Reklev in Beijing, writing by Michael Szabo; Editing by Anthony Barker)