Washington (Platts)--2Oct2009/507 pm EDT/2107 GMT

Carbon market players on Friday said a US Senate cap-and-trade bill needs to be far more open to the use of international offsets in order to reduce the economic impact on emitters looking to reduce their greenhouse gas emissions and to spur investment in offset projects in high-emitting developing countries.

"The legislation is in need of significant improvement in order to fully tap the innovative power of American businesses and reduce emissions as cost-effectively as possible," International Emissions Trading Association President Henry Derwent said in a statement.

IETA said that after reviewing the bill unveiled Wednesday by Democratic Senators John Kerry of Massachusetts and Barbara Boxer of California, it is "deeply concerned" by language limiting international offsets to a maximum of one-quarter of the annual cap.

Provisions in a bill (H.R. 2454) approved in June by the House of Representatives that would set the the limit at one-half [of 2 billion metric tons CO2 equivalent annually] should be the minimum, it said.

"[T]he Senate bill moves in exactly the wrong direction on this issue, potentially creating an artificial scarcity that would unnecessarily raise prices for covered parties and the consumers they service,"

IETA said, noting that the domestic offset market may have trouble reaching 1 billion-mt mark as set in the House bill. IETA also recommended that the Senate remove a provision that 1.25 international offsets would be required to equal one domestic allowance or offset after 2018.

"Devaluing international credits by 20% will render uneconomic many otherwise cost-effective and environmentally sound offset projects," it said.

IETA also asked that the bill be changed to recognize offset projects established before a January 1, 2016, phase-out from project-based to sector-based crediting.

"IETA believes international offset projects under development at the time a sector is listed for transition to sectoral crediting should continue to receive offset credits for the project's full crediting period," the trade group said. "In order to ensure against double-counting, these credits should be accounted for in the sectoral baseline."

IETA also asked for a system to better attract capital to address deforestation in developing countries. It applauded language in the bill that would create an offset mechanism for reduced deforestation, and said the legislation should "explicitly recognize project-level activities 'nested' within sub-national and national frameworks, extend the phase-out of sub-national accounting and crediting from five to at least 10 years and provide explicitly for early action crediting from international reduced deforestation activities."

 --Christine Cordner, christine_cordner@platts.com