Report questions value of carbon-offset deals

NEW YORK (Reuters) - Europe's greenhouse gas market has shown that investments by rich countries into clean-energy projects in poor nations are not always the best way to cut emissions blamed for global warming, the investigative arm of the U.S. Congress reported on Tuesday.

In the European Union's greenhouse gas market, the world's largest, many polluters have sought to meet government-imposed emissions limits by investing in projects through the U.N.'s Clean Development Mechanism.

The mechanism allows polluters in rich countries to claim credits back home by investing in projects such as hydropower in Brazil or destruction of refrigerant gases in China. Such projects are called carbon offsets by players in the $100 billion carbon market because they aim to reduce a polluter's carbon footprint by cutting emissions elsewhere.

The projects have provided flexibility to rich countries and have involved developing countries in efforts to limit greenhouse gas emissions, the General Accountability Office (GAO) report said. "But the program's effects on emissions are uncertain, and its effects on sustainable development have been limited," it said.

The GAO report said carbon offsets "involve fundamental trade-offs and may not be a reliable long-term approach to climate change mitigation." It did say that proposed reforms may make the U.N.'s Clean Development Mechanism more effective.

The report comes as the United States, the world's top greenhouse gas polluter after China, expects to form its own carbon market. President-elect Barack Obama hopes to form a market by putting limits on greenhouse gas emissions and tightening those limits over time. The aim is to cut U.S. emissions to 1990 levels by 2020, then reduce them 80 percent from the same level by 2050.

The GAO report said some carbon offset investments went toward projects that probably would have happened otherwise. A key tenet of emissions markets is that such offsets help fight global warming only if they would not have occurred.

"Some offset credits were awarded for projects that would have occurred even in the absence of the CDM, despite a rigorous screening process," the report said.

The GAO report urged Congress to consider that carbon offsets can undermine the integrity of a cap-and-trade system, "given that it is not possible to ensure that every credit represents a real, measurable and long-term reduction in emissions."

The report also recommended that politicians forming a cap-and-trade market try their best to discover historical levels of pollution from emitters, which would aids in forming a valid baseline and in the effective distribution of initial permits to pollute.

In carbon markets companies can get rewards for cutting their own emissions or meet requirements by buying credits from a company in a developed country that has cut emissions already.

(Reporting by Timothy Gardner; Editing by David Gregorio)