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U.N. climate talks struggle to overhaul carbon trade

By Gerard Wynn

CANCUN, Mexico (Reuters) - Countries differed sharply on Wednesday on the future of a $20 billion carbon market after 2012, casting doubt on any overhaul of the scheme at U.N. climate talks in Cancun.

The Kyoto Protocol allows rich countries to meet greenhouse gas emissions limits by paying for carbon cuts in developing countries, earning carbon offsets in return.

No new emissions limits have been agreed after the first phase of the protocol ends in 2012, stifling investment in the offset scheme, experts told the November 29-December 10 climate talks.

Some market participants and countries want a formal, U.N. decision in Cancun to commit to proceed with the market after 2012, regardless of whether any new targets are agreed.

"We want a clear indication in Cancun, we leave it to the parties to decide how," said Henry Derwent, chief executive of the International Emissions Trading Association, a lobbying group.

"A clear decision would be great. In the absence of that investors will look at intent. The more we hear people saying this must go on, it points in the right direction," he said.

The Kyoto carbon offsetting scheme, called the clean development mechanism (CDM), was worth $20 billion in 2009.

The 1997 Kyoto Protocol requires industrialized countries to cut greenhouse gases by about 5 percent by 2012, compared with 1990 levels, but no successor has yet been agreed.

Several countries on Wednesday told the U.N. Cancun conference that the CDM's survival was vital, including Algeria, Brazil, Mexico and Papua New Guinea.

But they differed on other issues, including whether to widen the scheme to include new carbon-cutting technologies such as carbon capture and storage (CCS), much favored by oil-exporting countries but opposed by Brazil.

CCS involves trapping the greenhouse gas carbon dioxide from power plants and pumping it into nearly depleted oil wells,

As well as stopping the greenhouse gas from reaching the atmosphere, it also has the advantage that it helps push out the last dregs of oil, a process called enhanced oil recovery.

Japan bemoaned the slow pace of progress to overhaul the CDM, and said that as a result it was pursuing bilateral deals with developing countries to promote low-carbon technologies.

"We find a lot of problems concerning the current CDM system," said Akira Yamada, a senior official at the Ministry for Foreign Affairs, referring to the slow pace of project approvals and the narrow scope of technologies.

"We have to address these problems ... However, judging from the current progress of that discussion we cannot expect a timely solution so therefore ... we are also eager to explore bilateral cooperation with certain countries."

(Editing by Steve Orlofsky)

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