Europe's Emissions Trading System is touted by supporters as a model for US President Barack Obama's own cap-and-trade scheme and other countries seeking to cut greenhouse gases and boost green technologies.

But the price of a tonne of carbon dioxide (CO2) or its equivalent has nosedived as big European polluters, responding to plummeting demand for their products, emit less.

After peaking at nearly 30 euros (38 dollars) in mid-2008, CO2 traded at 9.95 euros (12.60 dollars) a tonne on Friday, according to BlueNext, one of several European carbon exchanges.

Under the ETS, the European Union allocates carbon polluting allowances to member states to meet its obligations under the UN's Kyoto Protocol.

The states then assign quotas to those industries that belch most CO2 into the atmosphere.

Companies that emit less than their allowance can sell the difference on the market to companies that exceed their limits, thus providing a financial carrot to everyone to become greener.

But the energy, steel and cement sectors which comprise most of the ETS members are in the front line of the global crunch.

As economic activity falls, so do their emissions, which means surplus carbon is flooding the market.

"The rule of thumb is that one percentage point less of GDP growth in Europe corresponds to a reduction of at least 30 million tonnes of CO2," explained David Rapin, director for development at BlueNext.

Viewed narrowly, the drop in CO2 emissions helps the environment.

On the other hand, low carbon prices give businesses little incentive to develop and install new technologies to slash future emissions.

"This is not good news for green investments. As long as the CO2 price remains low, industry will remain short-sighted and not invest the resources needed over the medium and long term," said Damien Demailly of green group WWF France.

"The instability of the price of CO2 -- inherent in the carbon market -- is one of the weaknesses of the system," he said.

Some experts are saying the rules need a rethink.

Cedric Philibert, an expert at the International Energy Agency (IEA) in Paris, advocates adding both a ceiling and a floor to carbon market prices.

"We need price floors to give investors confidence and price caps so that we don't hesitate to set ambitious targets" for reducing greenhouse gases, he said.

Defenders of the market in its current form described the latest fall as a fluctuation in a youthful market and defended the system as essentially sound.

In 2007, the ETS suffered a crash when carbon quotas, set during an initial two-year test period, turned out to be far too generous. After a months-long slump, prices picked up when governments set tougher targets for the 2008-2012 period.

"It is a very young market. There are bound to be fluctuations in the short term. But experts agree that in the long term, prices are bound to go up," said Rapin of BlueNext.

If the outlook is poor in the short term, in the long term, carbon looks bonny, according to this view.

A new global pact for tackling climate change is scheduled to be wrapped in Copenhagen at year's end, and scientists say the deal has to be many times tougher than Kyoto to roll back global warming.

And the United States, which under George W. Bush opposed cap-and-trade, has now warmly embraced it under Obama. He projects more than 600 billion dollars in revenue over the next 10 years from the sale of carbon emission allowances.

Obama's plans have so far had no major impact on carbon trading in Europe, but -- again, in the long term -- they could have important consequences, as the two markets are sure to join up, creating a vast pool of liquidity, said analysts.

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