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* Early hopes for carbon markets disappointed
* Big polluters welcome predictability of emissions trading
* Activist say flawed EU scheme has let industry off thehook
* Poorer countries still hoping for real benefit
By Barbara Lewis and Susanna Twidale
BRUSSELS/LONDON, Nov 27 (Reuters) - It was supposed to bethe way the market would cut greenhouse gases by itself:governments selling companies permits-to-pollute, which theycould trade among themselves. Over time, the number of permitswould be reduced, and the cost to companies of failing to cutemissions would rise.
Yet, 10 years after the EU launched the world's biggestcarbon trading scheme, the effectiveness of the concept is inquestion and climate activists are disenchanted or hostile.
While there is still support for national or regionalmarkets, not least in China, which plans to launch the world'sbiggest scheme in 2017, any hopes of creating a global carbonmarket at next week's U.N. climate conference in Paris lookwildly optimistic.
Major corporations, in particular, back the concept becauseits costs are more predictable than those of prospective futureregulations.
In June, a group of European energy companies led by RoyalDutch Shell wrote to the United Nations to call for aglobal carbon price that would "discourage high carbon optionsand reduce uncertainty".
U.N. climate chief Christiana Figueres told them to do moreand to spell out price levels, something they have yet to do.
Climate activists say the corporations' enthusiasm can beexplained as a desire to dodge more aggressive measures, such astargets for renewable energy.
"The call for a carbon price is a shield with which todefend themselves from calls for faster change," says Tom Burke,chairman of the environmental campaign group E3G.
TEST CASE
Even with the jury out, nearly half of the more than 170national pledges for reducing greenhouse gas emissions includesome form of carbon pricing to meet their targets, officialssay.
They range from the top emitter, China, to the tiny Pacificnation of Kiribati, imperilled by rising sea levels.
The best test case, for now, is the EU's Emissions TradingScheme, which raised 8.9 billion euros ($9.4 billion) in thethree years to June 2015, according to European Commissionfigures.
Jos Delbeke, director general of the Commission's climateaction department and one of the chief architects of the ETS,says it has shown, crucially, that reducing carbon emissions iscompatible with economic growth.
He says the EU's gross domestic product has risen 46 percentsince 1990, while greenhouse gas emissions have fallen by 23percent, and that the ETS is still central to EU efforts totackle climate change.
The scheme sets a cap on how much big emitters, chieflypower plants and factories, can pollute.
Mostly they have to buy the emissions credits at auction.Those who emit less than their cap can sell the surplus creditsto companies that exceed their limits, which are progressivelyreduced over time.
So far, from the more than 11,000 industrial and energyplants covered by the EU ETS, emissions have fallen by almost 15percent since 2008, Thomson Reuters Point Carbon figures show.
But critics say it is unclear how much of this was a directresult of the ETS, as opposed to Europe's economic slowdown.
"LOOPHOLES AND VESTED INTERESTS"
They also say the revenues generated have merely boostedgeneral government coffers rather than being spent on theenvironment, let alone on the poorer countries that polluteleast but are set to suffer most from climate change.
"The carbon market promised the world lots of things it hasfailed to deliver. The ETS is riddled with loopholes and inthrall to vested interest," said Tim Gore, Oxfam's internationalpolicy adviser on climate change.
Most critically, the activists say the polluters have beengiven an easy ride.
Point Carbon figures show that industry, which lobbied hardfor help in dealing with extra energy costs, was given freecarbon permits with a tradable value of 77 billion euros in theyears to 2014.
Alongside this, the market price of EU ETS permits, andtherefore the cost of pollution, has at times fallen to nearzero as economic recession and miscalculations led to a surplusof credits.
The allocation system has now been reformed, but the totalof free permits is still expected to hit 325 billion euros by2030.
At the same time, in the absence of a global carbon pricingsystem, industry continues to complain that the cost of permitsis driving it to leave Europe for cheaper regulatoryenvironments.
ETS prices have risen back to 8.5 euros per tonne of CO2produced, but are still far below peaks of above 30 euros, andtoo low to encourage investment in lower-carbon fuel. EUregulators are working on further reforms.
POORER COUNTRIES
There is a similar story of flawed execution behind anothertrading scheme, the United Nations' Clean Development Mechanism.
This was supposed to allow Western industries andgovernments to contribute to green projects in developingcountries too small to support their own domestic or regionaltrading schemes, "offsetting" rather than cutting their ownemissions.
The United Nations says the scheme has provided more than$315 billion for environmental projects.
However, the value of these certificates also fell from ahigh of more than 23 euros per tonne of CO2 avoided to near zeroin 2014 as the scheme's credibility was called into doubt andthe value of the EU's permits crashed.
Environment campaigners say the funds were concentrated in ahandful of industrial gas projects rather than filtering down tothe poorest nations, known as the Least Developed Countries(LDCs), who found the scheme hard to access.
"By the time the LDCs were ready to take advantage ... theprices had collapsed," Giza Gaspar Martins, Angola's climatenegotiator for the U.N. talks, told Reuters.
U.N. carbon credit prices still languish around 0.60 euros atonne, but Martins still backs the scheme in the hope that richnations can push up prices to a level where they can providesignificant funds to help the poorest nations adapt to climatechange.
As for a true global carbon market - a draft of theagreement to be finalised in Paris, intended as the first everpact to unite rich and developing nations against climatechange, contains only a small, oblique reference to"internationally transferred mitigation outcomes".
Hardly a ringing endorsement.($1 = 0.9434 euros)
(Editing by Jonathan Leff and Kevin Liffey)
