James Kanter

As cap and trade falls short of its goal of reducing greenhouse-gas emissions.

Two disparate groups, one representing businesses and one regulators, plan to propose new steps this week to revive Europe's carbon-trading market, a system that even supporters admit has fallen short of its goal of reducing greenhouse-gas emissions.

Carbon trading, also known as cap and trade, was meant to reduce greenhouse-gas emissions in the European Union by making polluting more expensive for heavy industries, encouraging them to invest in cleaner technology.

Some environmental advocates say it as just another form of financial profiteering with little environmental benefit.

Carbon traders, for example, have been arrested for tax fraud; evidence has emerged of lucrative projects that may do nothing to curb climate change; and steel and cement companies have booked huge profits selling surplus permits they received free.

The two groups proposing new measures this week are recommending potentially complementary steps to revive the system. Their goal also is to promote its adoption in such countries as the United States and Australia, where efforts have stalled amid economic concerns.

The International Emissions Trading Association, whose members include global banks and power companies, among others, is proposing the creation of a “green bond” to supplement a United Nations system that has failed to generate the levels of investment that bankers had hoped for.

“Estimates of the costs to reduce emissions keep rising, but the private sector is increasingly reluctant to invest in new projects,” said Imtiaz Ahmad, an executive director at Morgan Stanley in London, which is a member of the group.

A green bond would have “the potential to cut through the current impasse and stimulate clean technologies globally”.

Also on Wednesday, the European Union's commissioner for climate action, Connie Hedegaard, intends to outline moves that could greatly raise the price of polluting in Europe — if European governments go along.

Under carbon trading, governments place a “cap” on emissions from certain industries, issue a set amount of permits to companies and require them to purchase more if they exceed their limit. Companies that pollute less can “trade,” or sell their surplus permits.

The permits are traded on several exchanges throughout Europe, which dominates a global industry worth about $140 billion a year.

Each permit, representing a ton of carbon, currently costs around $19, but most experts agree that permits need to cost around four times that much to make them cost-effective enough to build cleaner systems.

So far, governments in the Union, which has operated the world's largest mandatory system since 2005, have repeatedly overestimated the amount of gases that companies emit, resulting in too many permits being issued.

The bankers' suggestion for a green bond would represent another way for Europeans and Americans to shift at least some of the burden for protecting the climate onto rising powers like China and India and other emerging markets, like Kenya and Malaysia.

Under the proposed new system, banks and financiers would buy “green bonds” backed by guarantees from international lenders, according to Henry Derwent, the president of IETA.

Developing nations would service debts on the low—interest bonds, partly by selling streams of carbon permits into international markets. And to ensure the carbon reductions were real, representatives from international lenders would punish countries that failed to make proper cuts in emissions by raising their future costs of borrowing for such programs.

The emissions-trading association plans to formally propose the measure at a major three-day trade fair for carbon markets in Cologne that it has organised in conjunction with the World Bank. The fair starts on Wednesday.

Vikram Widge, the global head for carbon finance at the International Finance Corporation, an affiliate of the World Bank, said his group issued a green bond of its own this year but without the prospect of the kind of penalties Mr. Derwent envisages. He noted that the finance corporation works only with the private sector in emerging markets, but that such guarantees as proposed by the emissions trading group might be considered by the World Bank, which works with governments.

For such a system to work, the European Union also would have to approve the use of carbon permits from the green bond system.

Ms Hedegaard's proposal, which is to be voted on Wednesday by the European Commission, also could be a huge help to carbon markets.

If the European Commission agrees on the report on Wednesday, it then would formally call on European Union heads of state and governments to consider the proposals at a summit meeting on June 17.