Heavy industries that account for 52 percent of Canada's carbon emissions would be allowed to trade emissions credits on a domestic market to be set up by the government, with possible future linkages with trading systems in the United States and Mexico.

"The government will set up the necessary tools for a carbon market in Canada, but it will be operated by the private sector and based probably in Montreal or Toronto," Eric Richer, a spokesman for Baird, told AFP.

Companies may also fetch credits from abroad under the Kyoto Protocol's clean development mechanism to encourage clean projects in developing countries, but only to reduce their emissions tally by up to 10 percent.

The ruling Conservatives previously refused to participate in this international mechanism, saying Canadian dollars should be spent on domestic clean air projects.

Under a new scheme, companies could contribute to a government clean technology fund, or trade local emissions credits, and any firm that reduced its CO2 emissions linked to global warming prior to 2006 would be rewarded with a one-time credit.

The government's environmental plan, unveiled Thursday, calls for a 20 percent carbon emissions cut by 2020, based on 2006 levels, and by up to 70 percent by 2050.

Canadian producers of electricity using combustion, the booming oil and gas sector, base metal smelters, iron and steel companies, and some mining firms, as well as cement, pulp and paper, aluminum and chemicals producers face mandatory emissions cuts.

The European Union's Emissions Trading System (ETS) is the first and so far only significant market in carbon, created by the UN pact and comprising 11,500 big industrial firms that account for about half of the 25-nation bloc's CO2 output.

But its crash, with CO2 now changing hands in the ETS at little more than one euro after soaring to 30 euros (33 dollars) a tonne last year, triple that at the market's launch in January 2005, has worried observers.

The ETS works under a cap-and-trade approach.

Each firm is given a quota. They face a penalty of 40 euros (52 dollars) for every excess tonne of CO2 for 2007 (and also for 2006), a punishment that will rise to 100 euros (130 dollars) a tonne from 2008.

Companies that are under quota can sell off any surplus to those over their quota, thus providing a financial carrot to everyone to clean up his act.

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