Kyoto carbon trade: market solution or illusion?

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."

INDIA

Project developers in India routinely fake documents to make more established plans appear as if they only happened because of Kyoto, says Axel Michaelowa, formerly an adviser to the U.N. climate change body and now a researcher at the University of Zurich.

"It's routine practice for Indian project developers to fake documents, for example back-dating board approval, that they considered a project on the basis of the Kyoto Protocol," he said.

Of a detailed analysis of 19 U.N.-approved CDM projects in India, five should have been rejected because of a failure to show additionality, said Michaelowa, who is also chief executive of Perspectives, a CDM consultancy.

Climate Change Capital's Cameron argues that using lack of additionality to fail Kyoto projects is misjudged.

The rule was only devised as a safeguard to stop rich countries using their overseas aid budgets to help them comply with Kyoto, instead of spending from a separate pot of climate change money, he says.