BRUSSELS — Carbon trading 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. But even supporters admit that the system, also known as cap and trade, is falling far short of that goal. Critics decry 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 for free.
This week, two disparate groups — one representing businesses, the other European regulators — 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, or I.E.T.A. — 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 E.U. commissioner for climate action, Connie Hedegaard, intends to outline moves that could dramatically 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 as much to make them cost-effective enough to build cleaner systems, like offshore wind farms and solar power plants.
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 global recession also has idled factories, leaving heavy polluters like the steel company ArcelorMittal and Lafarge, a cement maker, with a huge excess of carbon permits. Some have sold their permits for millions of euros.
In the United States, the cap-and-trade idea still is supported by the administration of President Barack Obama, but has stalled in Congress amid concern that U.S. industry would be hobbled if major countries in the developing world continue to resist cutting their emissions.
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, such as Kenya and Malaysia.
Under the system established under the Kyoto Protocol in 1997, banks and others are encouraged to finance carbon-reduction projects in countries in exchange for permits that can be sold on carbon markets in Europe.
But that system has been plagued with difficulties and the United Nations, which monitors it, has delayed a number of investments because of dubious emissions reductions. Currently, carbon trading under the U.N. mechanism is only worth about $4 billion annually, and Western banks are reluctant to increase their stakes because of the uncertainty, according to Henry Derwent, the president of I.E.T.A.
Under the proposed new system, banks and financiers would buy “green bonds” backed by guarantees from international lenders, possibly including the World Bank, the Asian Development Bank and the Inter-American Development Bank, according to Mr. Derwent.
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.
I.E.T.A. plans to formally propose the measure at a major three-day trade fair for carbon markets in Cologne that it has organized 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 I.F.C. works only with the private sector in emerging markets, but that such guarantees as proposed by I.E.T.A. 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 represent a huge boost for carbon markets.
The paper says the recession and subsequent fall in pollution made reaching the agreed-on target for emission reductions — 20 percent from 1990 levels — more manageable, and it says that surplus permits and other factors could even make cutting emissions by as much as 30 percent viable.
Among other things, she was to outline ways in which national governments could withhold large quantities of permits from the market to raise demand and increase their price, according to officials who had seen the latest draft. They asked not to be identified because the official announcement would be made on Wednesday and could still be modified.
Ms. Hedegaard also would leave the way open to recognizing future credits from reductions made overseas, including the existing U.N. system or from new projects like the green bonds.
If the European Commission agrees on the report Wednesday, it then would formally call on E.U. heads of state and governments to consider the proposals at a summit meeting on June 17.