European Union plans to re-write the rules of a $6 billion scheme that pays developing nations to cut greenhouse gas emissions risks stalling climate investment, policymakers and industry leaders said on Wednesday.

The EU's executive Commission this week detailed plans to force industry in advanced emerging economies such as China to meet efficiency or other standards before they qualify for carbon offsets from cutting carbon emissions.

Commission officials want the new rules agreed at a major U.N.-led climate meeting this December in Copenhagen, meant to thrash out a new climate treaty to replace the Kyoto Protocol.

We should agree by the end of this year the basic architecture, EU Commission official Peter Zapfel said on Wednesday.

We're talking about a mechanism we want up and running by 2013, he added, speaking at a carbon market conference also held in Copenhagen.

That tight timetable and lack of any clear rules worried investors, especially given that December's climate meeting already faces huge challenges to get 190 countries to agree ambitious action to fight climate change.

I must admit I'm starting to get frightened about the Copenhagen meeting, said Nick Campbell, chair of the climate working group at Europe's biggest business lobby group BusinessEurope.

I wonder how this is going to come together, he said, referring to the lack of detail so far in the EU's plans.

I get a headache just thinking about it, said Seb Walhain, head of environmental markets at Fortis Bank Netherlands.

DEAD

At present under the clean development mechanism (CDM) of the Kyoto Protocol developing countries earn carbon offsets if they implement projects that avoid greenhouse gas emissions, for example by installing wind or hydro power.

Rich countries, and mostly the European Union, buy the offsets to help them meet their climate targets more cheaply.

The EU now wants entire industrial sectors in advanced developing countries such as China to meet certain efficiency or emissions standards first before earning credits.

The idea will probably get U.S. support as a way to impose more carbon costs on Chinese competitors.

But the plan has no formal developing country support yet. Some are likely to see the move as a back door to climate targets that they reject as their economies expand.

As China is home to so many CDM projects, undermining its role could be dangerous to the health of the entire scheme.

For me it's a jump in the dark with a negotiating position, to see what the pushback is, Campbell said. Is it time to cut the CDM off at its knees? Particularly in the current situation we really need the rules best understood by business.

China has so far earned most offsets under the CDM, and at present there is no certainty about how the proposed change would affect existing projects.

What happens to these projects if the CDM is dead? asked John Kilani, the U.N. official heading such market mechanisms under the Kyoto Protocol, speaking to Reuters on the fringes of the Point Carbon conference.

No private investor goes in on the basis of such uncertainty. The way it's packaged has to ensure that the implications for existing projects are considered.

Commission officials said that the EU had created most demand for carbon offsets so far and now wanted to increase that finance.

Are we killing the CDM? What we're looking for is how can we scale up, Zapfel said.

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