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World News

FACTBOX - What Bali means for carbon markets

(Reuters) - About 190 countries are meeting in Bali, Indonesia, aiming to kick-start two years of talks to agree a new global climate change deal to succeed the Kyoto Protocol from 2013.

Kyoto has created a carbon market whereby rich countries can meet their binding greenhouse gas emissions limits by funding emissions cuts in developing nations, through a trade in carbon offsets worth $5 billion last year.

That trade has attracted speculators including investment banks and specialised carbon project developers, and has cut the cost for rich countries of meeting their Kyoto targets.

Some supporters of carbon markets want these extended under a Kyoto successor to include huge emissions-cutting projects.

Following are carbon market issues under discussion at Bali:

REDUCED DEFORESTATION

Under Kyoto, rich countries can earn carbon offsets by investing in projects to plant trees, which soak up the commonest man-made greenhouse gas carbon dioxide (CO2).

Now some countries want to include forest protection, whereby rich nations earn offsets by paying countries not to chop trees down. Complicating issues include: calculating the CO2 saved; establishing whether these trees were really at risk; and whether the resulting offsets will make it too cheap for rich countries to offset their own emissions.

The Bali meeting will not decide whether avoided deforestation is included in carbon markets. The meeting may formally approve pilot projects to test inclusion from 2013.

CARBON CAPTURE AND STORAGE

Burying CO2 underground, also called carbon capture and storage (CCS), is widely believed to be a crucial weapon without which carbon emissions may pass dangerous limits.

The technology is supposed to trap CO2 emissions from coal-fired power plants, which are proliferating globally, and pump the gas underground. But there is no commercial-scale power plant project yet anywhere.

That is because of the extra expense to install CCS technology, estimated at some $1 billion per plant.

The Bali meeting will not decide whether to include CCS in the carbon market but may achieve such consensus that a decision at the next meeting in 2008 in Poland is a formality.

Because no new commercial-scale CCS projects are expected to be operational for several years, the technology is only relevant to carbon markets in a Kyoto successor deal after 2012.

HFC PLANTS

At present under Kyoto rich nations can earn carbon offsets by funding the destruction of potent greenhouse gases called hydrofluorocarbons (HFCs), a waste product from the manufacture of refrigerant gases for use in air conditioners.

Such projects have attracted criticism because chemical plants, for example in China, make more money under the scheme than from selling the refrigerant gas, removing any incentive not to produce the waste gas in the first place.

At present factories are not allowed to claim offsets for destroying the production of HFCs above a 2000-2004 baseline.

China wants to be able to sell offsets from subsequent, additional capacity. But the European Union is concerned that will encourage companies simply to manufacture the greenhouse gas in order to earn offsets, making those meaningless.

As a result the Bali meeting may not resolve this issue.

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