"The emissions trading markets are still something that is relatively new and we have seen in the European market a recent crash that caused hundreds of millions of euros and losses to taxpayers' dollars and governments in Europe. We will not embark on a risk like that with taxpayer money," she said.

But Canada will not back out of the Kyoto Protocol ratified by the previous Liberal administration, she said, despite repeated claims by the new Conservative government that Canada would not achieve its emissions reduction target.

In May, the fledgling market for carbon dioxide (CO2) emissions saw prices plunge by more than half in a single week as European countries discovered they were polluting far less than they thought.

The innovative market was introduced to control carbon gases emitted mainly by burning oil, gas and coal that are driving perilous climate change.

Its backbone is the European Union's Emissions Trading System (ETS) which forces 11,500 firms that are big users of fossil fuels to meet a CO2 emissions target or pay a penalty of 40 euros (50 dollars) a tonne for 2006 and 2007, a punishment that will rise from 2008 to 100 euros (125 dollars) a tonne.

Those that are below their quota can sell their surplus on the ETS to companies that are over, thus providing a financial carrot to everyone to clean up his act.

Canada agreed under the Kyoto Protocol to reduce greenhouse gas emissions to six percent below 1990 levels by 2012.

In 2004, the emissions were 26.6 percent above 1990 levels, despite 6.3 billion Canadian dollars (5.7 billion US dollars) spent by the previous government on climate change measures since 1997.

Smog alerts have also increased dramatically in major Canadian cities in recent decades with the rise in air pollution.

"We were not only not on track, we were off the rails in terms of reaching our Kyoto commitment," she said.

Ambrose, who is also chair of the international Kyoto negotiating process, said she planned to unveil new Canadian environmental regulations in coming weeks.

"We need new targets. This does not mean an abandonment of Kyoto," she said.

Ottawa would support, albeit not financially, others who wish to set up an independent emissions exchange market in Canada, she said.

"Credits exchange markets do not need the government's permission to emerge," Ambrose said, pointing to a Chicago climate exchange and her recent consultations for a similar exchange in Montreal.

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