UPDATE 1-EU sees limit on industrial projects in CO2 scheme

By Michael Szabo and Gerard Wynn

LONDON, Aug 25 (Reuters) - The European Union's top climate official proposed on Wednesday new limits on the use of carbon offsets from industrial gas projects in the EU's emissions trading scheme after 2012.

'The Clean Development Mechanism (CDM) has been successful in some aspects but has also given rise to criticism, e.g. with regard to environmental integrity,' said Connie Hedegaard, Commissioner for Climate Action, in a statement.

'As a first step towards a more advanced carbon market the CDM therefore needs a major overhaul.'

Under the 27-nation bloc's $100 billion trading scheme, participants can use cheaper offsets from carbon cutting projects in emerging countries approved under the United Nations' CDM towards their emissions goals.

Hedegaard said she had been asked by market participants to clarify what offsets will be accepted in the scheme's third phase (2013-2020), as rules surrounding possible qualitatitive or quantitative restrictions remain undecided.

'I have asked my services to prepare a proposal for a measure to introduce further quality restrictions on the use of credits from industrial gas projects in the post-2012 EU ETS,' Hedegaard added.

An emissions trading lobby group on Tuesday sent an open letter to Hedegaard urging her to clarify rules for the sake of the regulatory certainty required by investors.

'At last (the European Commission) takes a position on the proposed restrictions, which is good, but it remains vague because it's not clear exactly what types of industrial gas offsets would be restricted,' said Emmanuel Fages, an emissions analyst at French bank Societe Generale/orbeo.

Orbeo, a joint venture between Societe Generale and chemicals maker Rhodia, profits from CDM projects that destroy N2O, a potent industrial greenhouse gas.

Other lucrative CDM projects that inexpensively destroy another potent gas called HFC-23 are under fire after a UN panel said it would investigate allegations that their owners were gaming the system by intentionally boosting their production in order to claim more offsets.

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