UPDATE 1-Poland, Estonia can set CO2 quotas -EU court adviser
* ECJ opinion not definitive, indication of final ruling
* Ruling expected in 3-to-6 months
* Analysts see potential impact on other pending cases (Adds context, detail throughout)
By Barbara Lewis and Jeff Coelho
BRUSSELS/LONDON, Nov 17 (Reuters) - EU authorities were wrong to seek to impose a cap on emission permits in Poland and Estonia between 2008 and 2012, an advocate general at Europe's highest court said in an opinion on Thursday, dealing a new blow to depressed carbon prices.
The opinion is not definitive, but is a good indication of what the final ruling could be when the judges in the Luxembourg-based court rule in the next three to six months.
It said the Commission did not have the power to impose precise quotas for how many carbon permits member states could allocate, saying "states had a large margin of manoeuvre".
Advocate General Verica Trstenjak of the European Union Court of Justice (ECJ), giving the opinion, rebuffed the European Commission's appeal against a lower court ruling and said it should pay costs.
Poland and Estonia oppose the European Commission's imposition of limits on how many carbon permits they can hand out for free. The more free permits they can issue, the lower the carbon costs their industries and utilities have to pay.
The lower European court had ruled the executive Commission exceeded its authority in rejecting Poland and Estonia's carbon quotas. The European Commission appealed against that decision in late 2009.
Even the ECJ's final ruling would be unlikely to affect the countries' current carbon dioxide (CO2) caps under the bloc's Emissions Trading Scheme (ETS), and Poland has agreed not to change its emissions permit allocations in any case.
It is still perceived as another blow for the EU ETS -- the bloc's flagship method for combating climate change.
Isaac Valero Ladron, the Commission's climate spokesman, said the Commission was studying the legal arguments.
"As an initial reaction, the Commission is disappointed that the opinion delivered today apparently dismisses the Commission's interpretation of the EU ETS Directive," he said.
The scheme has been undermined by a series of frauds and a surplus of credits has pushed the price of carbon permits below 10 euros -- not enough to discourage the use of polluting forms of energy.
EU allowances fell further on Thursday, although traders blamed the more than 2 percent drop on weakness across the energy complex and concerns about the euro zone crisis.
"This is bad news as far as confidence in the European Commission is concerned, as it can have an impact on the outcome of other impending cases," said Isabelle Curien, a carbon analyst at Deutsche Bank.
The Czech Republic, Hungary and Romania have similar cases outstanding.
Together with many eastern European nations, reliant on highly polluting coal, they are nervous about having to pay a higher price for their carbon emissions.
Demand for CO2 allowances should rise in the next phase of the EU ETS between 2013 and 2020, when permits will be auctioned rather than handed out.
However, 10 EU member states, including Estonia and Poland and fellow east European nations, will be able to apply for the right to hand out free permits.
Many analysts say any price gains on the carbon market will still be limited as they expect the market to remain oversupplied with CO2 permits for most of the next phase. (Editing by Anthony Barker)
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