BRUSSELS/LONDON The European Union's executive Commission has proposed banning from 2013 the most common types of carbon offsets, mostly from India and China, to help restore credibility to the disputed system.
The move introduces a new note of controversy into climate talks in Cancun, Mexico next week, but may help by boosting the flow of money to offset projects in the poorest countries.
The talks convene as evidence emerges that 2010 is among the hottest years on record.
Europe's main tool to combat climate change is its Emissions Trading Scheme (ETS).
The scheme caps planet-warming gases emitted by industry but also allows companies to offset emissions by paying for carbon cuts in developing countries, as a cheaper alternative to cutting their own, under a separate scheme run by the United Nations.
The Commission said 80 percent of the disputed HFC credits and 60 percent of the nitrous oxide credits come from China, with the bulk of the remainder coming from India.
The Commission wants to stop exploitation of the system by project developers who are suspected of adjusting refrigerant plants to produce more of potent greenhouse gas hydrofluorocarbon 23 (HFC 23) as a waste by product and then destroying it to claim the profitable carbon offsets.
It proposed that from January 1, 2013 the ETS should exclude offset credits from HFC 23 and nitrous oxide credits from adipic acid production.
The move was closely watched by carbon traders, although they were likely to have partly factored in the ban after Reuters reported the details of the decision on November 3, citing EU sources.
Several members of a U.N. panel that oversees the international offsetting scheme also said on Wednesday that the HFC 23 scheme should be revised.
GAMING THE SYSTEM
The Commission said that HFC credits from industrial projects were overvalued in Europe by a factor of 78, discouraging the flow of money to more credible projects in the least developed countries.
"The rates of return of these projects are excessive," it said in a statement.
"The EU considers that cheap emission reductions, such as those from industrial gas projects, should not be done through the carbon market, but instead should be the responsibility of developing countries as part of their appropriate own action to keep global warming below 2 degrees Celsius."
Moreover, the EU's top climate official has said that some companies have been "gaming the system" by increasing the production of industrial gases to maximize their credits.
The International Emissions Trading Association (IETA) questioned the EU's right to act alone.
"There must be some consistency between U.N. and EU rules," IETA President Henry Derwent told Reuters.
"There is a sense that the Commission thinks it doesn't matter what the United Nations rules are, and we are concerned about that."
The Commission said there would still be sufficient credits flowing from the 2,300 other carbon offset projects to ensure that ETS carbon prices would be "relatively unaffected."
Trevor Sikorski, a carbon analyst at Barclays Capital, said in a research note this week: "Even applying an outright ban on HFC 23 does leave something like 3 gigatonnes of total supply in the period 2008-2020."
UN carbon offsets called CERs dropped nearly 1 percent to an intra-day low of 12.33 euros a tonne following the announcement but were at 12.40 euros by 1243 GMT.
Sikorski said in his research note that such a ban could drive the price of eligible offset credits to around 20 euros per tonne in 2012.
Meanwhile, three European politicians have launched a push to start eliminating the disputed offsets even before 2013.
"We also call for action before 2013 in order to avoid spending another 3.5 billion euros ($4.7 billion) until then," said Greek Conservative politician Theodoros Skylakakis. "Member states could adopt unilateral restrictions."
(Editing by Anthony Barker)