BANGKOK, Aug 31 (Reuters Point Carbon) - Nations most at risk from rising sea levels told U.N. climate talks in Thailand on Friday that they would not support any move to include emissions from destroying HFC-23 in carbon markets being negotiated under a new climate treaty, likely bringing an end to the biggest private-sector cash cow originated through the international negotiations.

The Alliance of Small Island States (AOSIS) said they would not support the inclusion of projects that cut emissions of the controversial gas in new markets, saying it was "inappropriate" to regulate emissions of highly potent greenhouse gases this way.

"We don't want to see HFC-23 under new market mechanisms. We think we should be careful using markets for cutting those emissions," said Hugh Sealy, a negotiator with Grenada who represents more than 40 low-lying and vulnerable nations at the talks.

Sealy added that while the alliance was opposed to including HFC-23 in new markets, it did not favor retroactive decisions that would affect the ability of existing projects to earn credits under the Clean Development Mechanism (CDM), the U.N.'s main offset market that sprung out of the Kyoto Protocol treaty to cut emissions.

Chinese and Indian chemical factories have made hundreds of millions of dollars by destroying HFC-23, a waste gas that is 12,000 times more potent than carbon dioxide and is emitted when producing refrigerants used in air-conditioning systems.

The cost of destroying the gas is often estimated at a few cents while the resulting Certified Emission Reductions (CERs) once fetched over 20 euros.

But the credits, which have accounted for almost half of all U.N.-issued offsets, are controversial and their exclusion from a new treaty will likely close the door on what was once a highly lucrative source of carbon revenue.

Demand for CDM credits has collapsed, and last year the EU banned its firms from using HFC-23 credits to meet carbon targets under its $148-billion cap-and-trade system.

CREDITS SHUNNED

Brussels-based regulators of the EU Emissions Trading Scheme said the offsets were environmentally unsustainable after the U.N. itself held a long investigation into whether the projects were viable.

Australia and New Zealand have since followed suit and banned companies using them, although some European states and China haven't yet ruled out using the credits to meet voluntary and legally binding pledges on cutting emissions.

Many analysts think HFC-sourced credits will now trade at a discount to non-HFC 23 CERs, which are priced at around 3 euros for delivery next year.

At the Bangkok talks, which are scheduled to run until Wednesday, more than 190 countries will try to make progress on a new global deal to cut emissions starting in 2020.

Delegates are discussing several ways to leverage private sector cash to cut emissions and help the world's poorest nations adapt to climate change, such as creating new carbon markets.

(Reporting by Andrew Allan)