Companies and governments are turning to emissions trading as a tool for fighting climate change, with the European Union by far the most active since its cap-and-trade scheme began in 2005.

A record number of emissions products were traded in 2011, even though prices of EU carbon permits and international offsets plumbed new depths well below $10 a metric ton (1.1023 tons) late in the year, the bank said in its annual report on carbon markets.

Worldwide emissions trading volume rose 17 percent year on year to 10.3 billion metric tons of carbon dioxide equivalent, with permits in the EU Emissions Trading Scheme (ETS) accounting for more than three quarters of the total.

The rise in volume lifted the value of the EU market to $148 billion from a revised $134 billion in 2010, despite average EU carbon prices falling 4 percent year on year to $18.8 a metric ton.

"Carbon markets were not immune to the economic volatility," the World Bank report said, citing events such as the Arab Spring, Japan's Fukushima disaster and the euro zone debt crisis.

"A considerable portion of the trades is primarily motivated by hedging, portfolio adjustments, profit taking and arbitrage."

Other national and regional carbon schemes showed mixed results. New Zealand's carbon market value grew threefold to $351 million, while the Regional Greenhouse Gas Initiative in North America was nearly halved to $249 million, the bank said.

INTERNATIONAL OFFSETS

Secondary trading volumes for international offsets regulated by the United Nations also soared in 2011, rising 43 percent year on year to 1.8 billion units valued at $23 billion.

The main reason for this was a rise in demand for U.N.-backed emissions offsets, because a certain number of the credits can be used for compliance in markets such as the EU ETS.

Average offset prices, which trade at a discount to EU carbon prices, fell 21 percent year on year to $12.8 a metric ton, as a record number of credits were issued last year.

The Clean Development Mechanism (CDM), which paves the way for investments in emission-reduction projects in developing nations, is the biggest offset market. It accounted for over 95 percent of total spot and secondary emissions offset trading.

Yet the value of the primary CDM market, direct project-based transactions, declined to under $1 billion in 2011 from $1.5 billion in the previous year as its 2008-2012 commitment period draws to an end.

Primary investment in post-2012 CDM offsets, however, rose to nearly $2 billion in 2011 from $1.2 billion, despite depressed prices and uncertainty about the future of the Kyoto Protocol and its market mechanisms such as the CDM.

U.N. climate talks in South Africa last year agreed a package of measures that would extend Kyoto, a global pact enforcing carbon cuts, and decide a new, legally binding accord by 2015, coming into force by 2020.

"More ambitious targets are needed from a larger number of countries to foster demand that can set the groundwork for a truly transformational carbon market, one that can emerge from fragmented but workable market initiatives," the World Bank said.

"The challenge then will be to chart a course to further evolve these initiatives through linking and potentially reshaping the global carbon map."

It suggested recent and emerging cap-and-trade schemes in Australia, California, Mexico, South Korea and Quebec could contribute to future growth in overall carbon trading.

Meanwhile, primary project-based transactions in the voluntary offset market were valued at $569 million in 2011, up 37 percent, the bank said. ($1 = 0.7992 euros)

(Editing by Jason Neely)

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