The global carbon market was yesterday dogged by further controversy after a new report slammed the UN's key carbon trading mechanism and questioned its practice of allowing large-scale hydro electric projects to sell carbon credits.

Just days after a WWF study into the credibility of the UN's Clean Development Mechanism (CDM) claimed a fifth of carbon credits were flawed, a new report from environmental group International Rivers has similarly concluded that many of the hydro electric projects approved by the UN to sell CDM credits should have been rejected.

Under the CDM, industrialised nations can partly meet their Kyoto emission reduction targets by financing low-carbon initiatives in developing countries and buying carbon credits from those projects. However, for these emission projects to qualify to sell carbon credits they have to demonstrate that they are "additional" and would not have gone ahead with out assurances that they could generate a revenue stream by selling carbon credits.

According to the International Rivers' study, many of the 654 hydro projects approved by the UN fail to meet this criteria and would have gone ahead even if they were not included in the CDM.

The report claimed that more than a third of the large hydros approved for credits by the CDM's Executive Board were already completed before CDM approval, while 89 per cent of projects were expected to be completed within a year following approval, suggesting that the selling of carbon credits acts as a windfall to hydroplant operators rather than an essential part of the business model.

The report argued that because hydro projects typically take over four years to build, "few, if any, of the developers of these projects could have realistically needed CDM credits to build their dams".

Report author Barbara Haya said that not only was the CDM "blindly subsidising the destruction of rivers", it was also leading to increased emissions because developed nations could comply with the Kyoto Protocol by buying flawed credits from these projects rather than cutting their own emissions.

"Money that should be supporting decarbonisation in developing countries is flowing into the coffers of hydropower developers with the only effect on carbon emission levels being to increase them," she argued. "Hydro developers are repeatedly justifying their applications to the CDM with surreal arguments, such as that projects that are already completed will only be completed if they receive CDM revenue. Even worse is that the companies supposed to audit the developers' claims and the CDM's Executive Board seem prepared to endorse such Alice in Wonderland arguments."

International Rivers said that three-quarters of the hydro projects in the CDM pipeline had not yet been approved and urged the CDM executive board to send out a signal that it takes the principle of additionality seriously and reject those projects for which there is a strong enough economic case that they would go ahead anyway.