U.S. gives cap and trade boost for climate treaty

By Gerard Wynn - Analysis

LONDON (Reuters) - President Barack Obama's support on Thursday for a U.S. cap and trade scheme boosted expectations of a global carbon market under a new climate treaty, to be agreed this year to replace the Kyoto Protocol.

But crashing European carbon prices have underlined the volatility of market approaches and hardened concerns that these may drive a stop-start fight against climate change.

Trading approaches penalize carbon emissions and fight climate change by forcing energy companies, for example, to buy an allowance or permit for every ton of carbon emissions.

Obama backed a "market-based cap on carbon" and his budget detailed plans to raise $80 billion annually from selling carbon allowances from 2012. Europe's four-year-old scheme had a traded value of $90 billion last year.

A linked U.S.-European Union carbon market is the grand vision of EU regulators who want to create a broad, low-cost carbon regime for business.

That could be a big plank of a new international climate treaty to replace the Kyoto Protocol after 2012, which faces a tight deadline for agreement in Copenhagen in December.

"That kind of linkage is actually emerging as the potential de facto post-Kyoto architecture," said Harvard University's Robert Stavins, referring to links between possible cap and trade schemes in Australia, Canada, Japan and the United States.

Systems could link through globally traded carbon offsets which allow companies to meet domestic carbon caps by paying for emissions-cutting projects in developing countries.