UPDATE 3-France proposes EU coal compromise -draft

(Adds quote in paragraph 15)

By Gerard Wynn

POZNAN, Poland Dec 3 (Reuters) - France wants a slew of exemptions to cut carbon costs for east European power producers and heavy industry, as the holder of the EU presidency tries to nail agreement on wider climate goals, a draft paper shows.

The compromise paper seen by Reuters, dated Dec. 2, would halve the cost of carbon targets for utilities in east Europe compared with their western counterparts and exempt companies vulnerable to global competition.

Poland has threatened to veto proposed European Union measures to slash greenhouse gases and more than double supplies of renewable energy by 2020, in a package due for final agreement by EU leaders next week.

Poland and other east European countries which depend on high-carbon coal for electricity say the measures could put coal plants out of business and drive up power prices.

The French compromise would give east European power producers free carbon permits under the bloc's emissions trading scheme (ETS) until 2016.

"In 2013, the total transitional free allocation shall not exceed 50 percent ... and shall decrease thereafter by equal amounts resulting in no free allocation in 2016," it said.

That applied only to countries with half average per capita incomes and which depend on coal for more than 30 percent of their electricity. Other utilities would have to pay for all their carbon emissions under tweaks to the EU ETS from 2013-20.

"France is putting big coal ahead of the approaching climate crisis," said Joris den Blanken, EU policy analyst for Greenpeace. "This could generate enormous windfall profits for energy giants like Vattenfall, RWE (RWEG.DE) and E.ON (EONGn.DE)."

FREE PERMITS

The French compromise would also allow "sectors which are exposed to a significant risk of carbon leakage" -- meaning they may shift production outside Europe if climate goals were too strict -- to get up to all their permits for free through 2020.

That could apply to cement makers, car manufacturers, steel and aluminium. They could also ask for state aid to compensate for higher electricity prices resulting from the EU ETS. Utilities in unregulated power markets pass on the cost of carbon permits to electricity prices.

The draft paper suggests allowing the EU executive Commission to bring forward the supply of permits if carbon prices exceed a six-month average by more than three times, provided the price increase did not reflect market fundamentals.

That represented another nod to east European countries concerned that manipulation by carbon traders could raise electricity prices.

"I'm just taking this off the printer now," said Poland's Deputy Environment Minister Janusz Zaleski of the French paper. "If Brussels is following our suggestions to protect the carbon market from speculators, than this is certainly better," he told Reuters.

If the world agreed to a new climate treaty to replace the Kyoto Protocol from 2013, the paper proposed to allow EU companies to meet carbon targets by investing in tree planting and forest conservation projects in developing countries.

Some green and development groups fear that including forest conservation in offset schemes will delay domestic cuts -- "What investments will that displace from transforming industrialised economies ?" said Iola Leal at forest group, Fern. (Additional reporting by Gabriela Baczynska; Editing by Peter Blackburn)