EU members face showdown over emissions trading scheme

EU members face a showdown with the European Commission over the bloc's innovative emissions trading scheme if Brussels finds that they are still swamping the market with pollution permits, officials and analysts said.

The trading system, under which industrial polluters can buy and sell emissions quotas, is supposed to be the cornerstone of EU efforts to cut greenhouse gas emissions under the Kyoto Protocol.

However, the credibility of the scheme, which is still in its infancy, has taken a beating recently because member states alloted more emissions permits than industrial plants needed.

"If member states put more allowances into the market than are needed to cover real emissions, the scheme will become pointless and it will be difficult to meet our Kyoto targets," EU Environment Commissioner Stavros Dimas warned last week.

After issuing more quotas than polluters could use in 2005, most of the member states that have filed their allocation plans for the 2008-2012 period with the commission so far had once again handed too many emissions permits, Dimas said.

"There has to be a certain scarcity in emissions allowances to make this trading scheme work," said climate change policy expert Noriko Fujiwara at the Centre for European Policy Studies. "It's really basic economic theory," she added.

Earlier this month, the EU's executive commission launched proceedings against eight members for failing to send in their allocation plans for the second 2008-2012 phase of the scheme by an end June deadline.

In a first step towards legal action, the commission sent warning letters to Austria, Czech Republic, Denmark, Hungary, Italy, Portugal, Slovenia and Spain for ignoring the deadline.

Although the exact date has not been set, the commission is to rule next month on whether members' allocation plans stand up and has the right to reject them.

Dimas said: "I've said repeatedly that the commission will be tough but fair in our evaluations of the national allocation plans. It is clear that we will need to be."

Analyst Henrik Hasselknippe with consultancy Point Carbon said that the commission had little choice but to take a hard line. "I expect the commission to get tough, they will have to," he stressed.

While Britain and the Netherlands were setting the example with the best allowance plans, he said Poland was the "most blatant example of intended over-allocation", followed by France and the Baltic states.

The overallocation of permits in 2005 dented the scheme's credibility and caused the market price for permits to plunge.

Hasselknippe said prices have since stabilised at around 12 euros for a tonne of carbon emissions, although the market was fundamentally "long", or in other words, supply was greater than demand.

The scheme is also under close scrutiny abroad. California Governor Arnold Schwarzenegger for one is interested in setting up with a handful of east coast states a similar market in the United States, which has refused to sign the Kyoto Protocol.

On top of the blow to the international standing of the system, its troubles also make it more difficult for member states to reach their targets under the Kyoto Protocol.

Commission spokeswoman Barbara Helferrich warned that if member states did not take action to cut their greenhouse gas emissions, then they could miss their targets for reducing emissions targets under the Kyoto Protocol and faced the threat of fines.

"According to European legislation, those member states that don't reach their goals can be sanctioned through an infringement procedure," she said.

"In addition, at the international level, the Kyoto Protocol states that there can be international sanctions as well," she added.