UPDATE 1-European Commission backs Kyoto CO2 trading reform

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By Michael Szabo

COLOGNE, Germany, May 9 (Reuters) - The European Commission says it is standing by a call to overhaul U.N.-led carbon trading rules to make it more difficult for developing nations to earn offset credits from cutting greenhouse gas emissions.

At present, rich countries can meet their own carbon emissions limits under the Kyoto Protocol by investing in clean energy projects in the developing world.

That scheme, called the Clean Development Mechanism, needs reform after 2012, when the first round of Kyoto expires, said Peter Zapfel, a senior official in the EU executive body's environment department.

"You have the CDM in one corner, which is voluntary, per project, with credits for everything you reduce," Zapfel said on the sidelines of a carbon markets conference in Germany.

"And then in the other corner, you have ... the EU carbon market, which has several sectors under one arrangement, they're all mandatorily covered, and they actually have to reduce emissions and respect the cap before they can have free allowances."

Zapfel said the reforms should include a sectoral approach to emissions reductions, setting varied quotas by industrial sector, and polluters should first have to make cuts against a minimum standard before they're awarded free credits for further reductions.

Yvo de Boer, head of the U.N.'s climate change secretariat, agreed that the CDM framework could be improved, but said it must be done gradually, with the aim of maintaining balance between business and environmental interests.