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.

Obama's support has added momentum for a global carbon market but a U.S. cap and trade scheme is not guaranteed.

By forcing companies to buy carbon permits, such schemes impose extra costs on industry and swell fuel bills. Republican opponents compare them to a tax which they say the U.S. economy and households cannot bear.


Obama's backing for a market approach adds to that of the United Nations, which wants to use carbon offset schemes to raise cash for climate action in developing countries.

But the U.N.'s climate chief Yvo de Boer said developing countries increasingly wanted public money, too.

Carbon markets will continue to play an essential role but the key to Copenhagen is significant public money on the table, he told Reuters. Otherwise they (developing countries) will not commit, to their own national emissions cuts, he said.

Given the scale of the climate threat, the initial carbon caps which both the United States and Europe had proposed for Copenhagen were too weak, cutting greenhouse gases by about 15 percent below current levels by 2020, de Boer added.


Like many traded commodities EU carbon permits have lost more than half their value since highs last July, as a result of falling industrial output and demand for emissions permits.

European carbon prices are now far below levels which can, on their own, make expensive, low-carbon energy technologies competitive with fossil fuels such as coal, gas and oil.

Energy companies say they are still investing in low-carbon research and development of technologies such as carbon capture and storage -- which buries underground greenhouse gases trapped from coal plants -- but the timing of projects may be delayed.

It may shift the timing, it'll be very project-specific, said David Hone, climate adviser at oil company Royal Dutch Shell.

The fundamentals aren't changing, Obama is saying 'bring me cap and trade, we're ready', that's what sets your strategy not the carbon price right at this moment.

The United States could introduce price controls to avoid EU-style volatility -- as much to escape high carbon prices, which swell fuel bills, as low ones.

You can have a price ceiling and a price floor ... there is increasing discussion of this in the U.S., said Harvard University's Stavins.

Carbon traders and EU regulators deplore such intervention, saying that the aim of the market is simply to put a cap on carbon emissions and leave the price to the market.

But extremely low EU prices may continue through 2010, and that coupled with volatility could undermine investment and the credibility of emissions trading, argues Michael Grubb, chief economist at the UK-funded Carbon Trust, which advises business on climate action.

The current (low price) situation could wreak huge damage on the credibility of emissions trading and undermine the EU's attempts to forge a platform of leadership in the Copenhagen negotiations, he said in a draft paper published next week.

He advocated a minimum carbon price in government-led auctions of permits, with immediate effect.