Brazil blocking expansion of carbon finance: source

People walk past a globe with an interactive display, as Danish police officer stand guard, at the townhall square in central Copenhagen December 15, 2009. Copenhagen is the host city for the United Nations Climate Change Conference 2009, which lasts from December 7 until December 18.

COPENHAGEN (Reuters) - Brazil is blocking calls to expand carbon finance for emerging nations at U.N. talks, and a spat with Saudi Arabia over forestry and carbon-burying projects could impede a new climate deal, a source close to the talks said.

Several reforms to the $6.5 billion carbon offset market under the Kyoto Protocol, called the Clean Development Mechanism (CDM), have been proposed at climate talks this week in Copenhagen, but few have been agreed so far.

"All the measures that would allow this mechanism to scale up, including standardized baselines, more due process and more transparency are being blocked by Brazil," said an adviser to negotiators who asked not to be named.

"The Brazilian forestry proposal and the Saudi Arabian carbon capture and storage (CCS) proposal have been contested by each other since day one ... This could be a deal-breaker at every level and could hold up a final agreement."

With deforestation contributing around one fifth of global emissions, Brazil is lobbying rich nations to pay for the preservation of the country's vast rainforests.

Under the CDM, companies can invest in cutting carbon dioxide in emerging countries, and in return receive offsets which can be used toward emissions targets or sold for profit.

The source said Brazil is keen to make avoided deforestation eligible under the CDM, but oil-rich Saudi Arabia opposed the proposal over concerns that forestry offsets would dilute the value of those from carbon capture and storage projects.

Saudi Arabia, keen to bury carbon emissions in its disused oil fields, put forward a plan to recognize CCS technology under the CDM, but Brazil countered with a objection of its own.

A decision on CCS funding has been delayed for years and will likely not be agreed in Copenhagen.

Brazil is home to 165 projects, or 8.5 percent, of the 1,952 registered so far under the CDM. Saudi Arabia has none.

REFORMS AGREED, BLOCKED

The source said agreement was reached on proposals to streamline project registration and offset issuance processes, as well as a process to allow developers to appeal against CDM executive board decisions.

"It was a surprise to everyone, but it shows there's pressure on Brazil's negotiators not to come across as blocking everything," he said.

The source said Brazil objected to a scaling-up of standardized emissions baselines across sectors, which would reward entire industries like power or steel if they exceed energy efficiency benchmarks, and to a proposal to limit closed session meetings by the CDM executive board.

"This would have forced the board make more of their decisions in public, but it failed. If a country adopted this system, it would be considered unconstitutional," he added.

Brazil also rejected a Chinese proposal urging more communication between the board and developers, and for the board to refrain from passing judgment on host country policies.

China tabled the amendment after the board rejected 10 Chinese wind farms over a noted a drop in government support.

"This is key for China. They're really upset about it," the source said.

Most of the stalled reforms will now be escalated to high level ministerial meetings on Friday.

"We're concerned as the financial sector won't be present to explain the pros and cons of the nuanced areas," said Abyd Karmali, head of carbon emissions at BofA-Merrill Lynch.

(Reporting by Michael Szabo; Editing by Dominic Evans)