Kyoto carbon trade: market solution or illusion?

By Gerard Wynn - Analysis

LONDON (Reuters) - Carbon trading is splitting opinions: for some it uses the profit motive and the ingenuity of markets to find the cheapest way to cut greenhouse gases. For others, it's just about smoke and thin air.

Just now, carbon trading under the Kyoto Protocol is giving a sharpened focus for the debate.

Much hope for fighting climate change is pinned on a Kyoto process whereby rich countries can meet tough greenhouse gas emissions limits by funding cuts in developing countries, for example by installing low-carbon energy like wind.

The rich country gets tradeable carbon credits in return.

The quality of those developing country projects, and just what they are contributing to the world's climate change fight, is now under intense scrutiny.

Supporters say that any developed world funding of projects that curb greenhouse gas emissions in poor countries has to be a good thing.

"Be pragmatic: what do you want? We're trying to effect an energy transformation, this is one of the levers," said James Cameron, vice-chairman of Climate Change Capital (CCC), referring to wind energy projects.

CCC has just raised $1 billion to invest in Kyoto projects.

Skeptics say that there has to be rigorous proof that projects are cutting emissions over and above what would have happened if Kyoto had never come along, or, in the jargon, that they have "additionality."

Otherwise, there is a danger that carbon markets will create the illusion of action, while the world carries on belching out more greenhouse gases every year, they say.

"We need to increase the burden of proof of emissions cuts," said WWF's Keith Allott.

In between are the carbon market administrators, who try to maintain both integrity and a functioning market. In the case of Kyoto's Clean Development Mechanism (CDM), that job falls to the U.N.'s climate change secretariat.

"'Additionality' has haunted the Clean Development Mechanism since its inception," said Yvo de Boer, who heads the secretariat.

"It requires you to judge what would have happened otherwise. Without a time machine that's rather complicated.

"To state with absolute certainty what would've happened in the absence of CDM is very difficult."