UPDATE 1-UK carbon compensation plan in line with EU rules

Wed May 21, 2014 12:06pm EDT

(Adds details, background, industry comment)

By Michael Szabo

May 21 (Reuters) - A British plan to compensate certain energy-intensive industries for higher energy costs resulting from its carbon price floor is in line with EU state aid rules, the European Commission said on Wednesday.

Britain's carbon price floor, which was raised in April to 9.55 pounds ($16.09) per tonne of carbon dioxide, is effectively a tax on companies' consumption of power produced from fossil fuels and is aimed at reducing greenhouse gas emissions.

"The compensation partially offsets the higher electricity costs, similar to what is done for the costs of the EU Emission Trading Scheme (ETS)," the Commission said in a statement.

It added that the measure "would further EU energy objectives without unduly distorting competition" in the market.

Under the EU-approved plan, Britain can reimburse industries including steel, paper, plastics and chemicals up to 80 percent of the costs related to the carbon floor price and the EU ETS.

But the Commission excluded compensation for sectors such as cement, ceramics and glass, which it deemed to be less exposed to higher energy prices. As a result, industry officials say firms will miss out on tens of millions of pounds in relief funds.

"This puts these companies at a major disadvantage compared to other EU competitors that don't have this carbon tax," said Laura Cohen, chief executive of the British Ceramic Confederation (BCC).

Companies are required to apply for the funds, which had been promised to most industry by the British government and set aside by the British Treasury.

"(The cement and lime sectors) are vulnerable to imported material. The consequences of higher carbon costs are potentially catastrophic to domestic supply if these costs are not reduced by compensation measures," Richard Leese of the Mineral Products Association said.

He estimated that the carbon price floor would cost the two sectors a combined 93.5 million pounds between 2014 and 2020.

The BCC's Cohen said members of her organisation that had applied for the compensation are forecast to face nearly 20 million pounds in carbon costs by 2020 under the measure.

"The UK government needs to explore options to meet its commitment to provide relief to these companies," Cohen added.

British finance minister George Osborne in March said the carbon floor price will be frozen next year at 18.08 pounds per tonne, rather than rising annually through the rest of the decade.

The excluded sectors are calling on the British government to resubmit an application to Brussels, but sources familiar with the matter said the European Commission is unlikely to change its mind.

"We are currently considering how best to represent the interests of the (excluded) sectors," said a spokeswoman for Britain's Department for Business, Innovation and Skills.

($1 = 0.5935 British Pounds) (Reporting by Michael Szabo in London; editing by Jane Baird)

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