ANALYSIS: Carbon tax or carbon market? The jury is out

By Gerard Wynn

LONDON (Reuters) - Maybe the best thing about a carbon market is that it is not a tax.

Meant to be a pivotal weapon in the fight against global warming, carbon markets still have much to prove ahead of a major United Nations report this Friday that will detail climate policy options.

Hitherto, the idea of a market has been widely acceptable while carbon taxes met opposition. But the market's own failings -- including a system which hands windfall profits to Europe's biggest polluters -- may yet swing the pendulum back.

The hub of the global carbon market is the European Union's emissions trading scheme, which has so far failed to deliver a steady carbon price while handing huge profits to the utilities which produce energy and emissions.

This curious reverse of the widely held "polluter pays" principle has seen some European airlines begging to join and U.S. utilities flocking to lobby for a similar scheme.

Under the Kyoto Protocol, Europe's flagship climate change policy will later this year link to carbon trading globally in a combined market that was worth $30 billion last year.

Some policy analysts and economists are wondering if it was all a mistake.

"My guess is the carbon market will be pretty volatile and economists will be sighing in a few years and saying 'I wish we'd gone for a carbon tax'," said Dennis Anderson, professor of energy and environmental studies at London's Imperial College.

"I think in a few years we'll revisit a tax."

The principle of a carbon market or tax is the same: to put a price on emissions of heat-trapping carbon dioxide and so force businesses and individuals to think more carefully about their greenhouse gas emissions.

A draft version of the forthcoming U.N. report, seen by Reuters, sits on the fence, referring to the merits of each: carbon markets set a definite outcome through emissions quotas, while taxes set a definite price.

The U.N. administers a carbon trade which allows rich countries to buy carbon emissions permits from poor ones by funding clean energy projects. It is upbeat about its role.

"The carbon market has the potential to green the world's economic growth," the U.N. climate chief Yvo de Boer said on Wednesday.

CLIMATE DEAL

Advocates point to public resistance to carbon taxes, and the political scars of past mooted carbon taxes in Britain, the European Union and elsewhere.