A dual system of both national emissions caps and carbon trading schemes should play a central role in cutting global greenhouse gas emissions, a report commissioned by the British government said on Monday.

At the government level, national caps on emissions should ensure countries take responsibility for limiting their own greenhouse gases. At the individual emitter level, trading schemes should cap emissions and allow trade in carbon permits, the report said.

The current framework for international carbon trading needs reform, said Mark Lazarowicz, the Prime Minister's representative for global carbon trading.

A single global emissions trading scheme would reduce governments' autonomy over their domestic policies and be difficult to put into place, the report said.

A dual system, however, would cover all emissions sectors, respect governments' wish to choose their own tools for reducing domestic emissions and maximize cost effectiveness.

If well-designed, a dual-level system of global carbon trading could reduce the costs of emissions by up to 70 percent, Lazarowicz said.

REFORM

Market experts say linking the EU's emissions trading scheme (EU ETS) with the United States is a crucial first step toward a global carbon market, which will help achieve real emissions cuts in planet warming greenhouse gases.

The United States plans to introduce a domestic cap-and-trade scheme but the Senate still has to approve it.

Linking the EU ETS with a federal U.S. system by 2015 was ambitious but should be a priority, the report said.

A linked system would increase the liquidity and stability of both schemes, cover between 13-27 percent of global emissions and reduce costs across both schemes by 30-50 percent.

It would also provide momentum for an eventual OECD-wide trading scheme, the report said.

To achieve real emissions cuts, the United Nation's Clean Development Mechanism (CDM) needs to be reformed and streamlined, the report said.

The CDM allows industrialized countries to meet mandatory carbon dioxide cuts by buying offsets generated from clean energy projects in countries such as India and China.

Instead, the report favors a sectoral trading approach, whereby a government would be responsible for meeting an emissions target specific to a particular sector of the economy using an emissions trading scheme, taxation, regulation and/or subsidies.

Under the Kyoto Protocol climate change pact, nations below their emissions targets can sell excess rights, called Assigned Amount Units (AAUs), to other governments that emit above their targets.

The system is expected to result in an AAU surplus of 7-10 gigatonnes tonnes in the period 2008-12. To deal with this problem, developed countries should cancel a substantial proportion of their excess AAUs, the report proposed.

The UK government has decided to cancel surplus AAUs equivalent to the difference between its Kyoto and domestic emissions cut targets, the report said.

(Reporting by Nina Chestney; Editing by Keiron Henderson)

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