With Beijing's water demand during the Olympics expected to spike by up to 30 percent above average, reaching 2.75 million cubic metres a day, Hebei has been recruited to supply an extra 300 million cubic metres of "back-up" supplies.

But on Tuesday the official Hebei Daily said lack of winter rain and snow had intensified the drought, leaving some reservoirs dangerously low.

"Due to the lack of effective precipitation since the winter, Hebei province is experiencing severe drought," the newspaper said, citing officials in the provincial flood and drought office.

Since the start of winter which has been unusually cold in the south, average precipitation across Hebei had been 7 mm, 60 percent below the long-term average.

"The severe drought has created tense conditions for fighting drought and for water supplies in our province, and the conflict between water supply and demand has been dramatically exacerbated."

China is rushing to finish the canals from Hebei to Beijing for its "green" Games, ensuring a lush, sparkling host city greets the world in August. The 309 km (192 miles) of channels and pipes will draw on four Hebei dams.

But the report said the province's dams were in trouble. "Some dams are below stagnant levels, and some irrigation areas have no water to supply," it said.

It did not say whether the four dams tapped to supply the Olympics were among them.

While much of China's southern half endured freakish cold and snow in recent months, the north, including Beijing, has seen very little snow or rain, leaving much farmland parched.

Drought has affected 1.89 million head of livestock and left 2.43 million people without sufficient drinking water in Shandong, Heilongjiang and Hebei provinces, the State Flood Control and Drought Relief Headquarters said recently.

Now 250,000 Hebei residents faced "temporary hardship" with drinking water, and by March that number was expected to rise to 500,000, said the new report, which was republished on the official Xinhua news agency Web site (www.xinhuanet.com).

The report said 33,000 sq km (12,740 sq miles) of farmland across its total 190,000 sq km were drought-stricken. Aquifer water levels on the Hebei plains had fallen one to two metres since the same time last year. And 50,000 wells had been left useless.

(Reporting by Chris Buckley; Editing by Nick Macfie and Sanjeev Miglani)

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Lehman To Trade Kyoto Carbon Credits In Japan

[HPZGFQW]

TOKYO - Lehman Brothers said on Tuesday it would start trading UN-approved carbon credits in Japan, the first global investment bank to do so amid growing demand for companies to cut greenhouse gas emissions.

Japanese companies, including trading houses and utility firms, have been buying such credits for some time in return for funding clean-energy projects in developing countries under the Kyoto Protocol's Clean Development Mechanism.

Lehman Brothers is one of nearly 100 companies that have opened accounts at Japan's national registry for the United Nations' emission-trading system.

Lehman Brothers' global carbon trading operations are now based in London. In Europe a cap-and-trade system with mandatory emissions limits has encouraged trading of emission permits under the European Union's Emissions Trading Scheme.

In contrast, Japan has just a tiny voluntary market and a barely used Web-based matching system of UN certified emission reductions (CERs) through forward contracts.

"The global carbon market is rapidly taking shape as national markets are developing and connecting through the global CER market," Laurent Segalen, global head of carbon emission in London, said in a statement.

A CER is a carbon credit developed by carbon offset providers that is certified as the equivalent of one tonne of carbon dioxide under the Clean Development Mechanism.