EU carbon market gives emitters easy ride in 2006

By Jeff Mason and Gerard Wynn

BRUSSELS/LONDON (Reuters) - New figures further undermined Europe's flagship weapon against climate change on Monday, showing industry got too many permits to emit the greenhouse gas carbon dioxide last year, as in 2005.

The data all but consigned the first trading period of the EU carbon market from 2005-07 to the status of an experiment.

But Brussels was quick to disclose separate figures showing that the European Union was on track to meet emissions targets under the Kyoto Protocol on global warming.

Europe's carbon trading scheme is supposed to curb carbon dioxide (CO2) output by handing too few emissions permits to heavy industry like steel mills and power plants, forcing businesses either to clean up or buy extra allowances.

Instead, preliminary data showed that companies got a surplus last year, as in the first year of the scheme.

"I think the first phase shows you have to have the politics and the market right," said Nick Mabey, the chief executive of E3G, an environmental group focused on sustainable development.

"Markets aren't magic, they only work if the politics creates scarcity."

Brussels has taken a tough line with member states for the scheme's second phase from 2008-12, demanding further cuts to 15 out of the 18 proposed quotas it has ruled on so far -- adding on Monday Austria to its list of rejections -- convincing analysts that the next phase will be tougher.

"The problem that we had during the first ... trading period was an overallocation of emissions (permits)," said Environment Commissioner Stavros Dimas, before release of the 2006 data.

"During the second trading period we hope that we shall maintain the necessary scarcity."

Only Denmark, Ireland, Italy, Spain and Britain gave their businesses too few permits in 2006, as countries were meant to do, the data suggested.

DELIVERY

Industry's total quota of free permits exceeded by some 30 million tonnes reported emissions of 1.84 billion tonnes of CO2 -- around a third of the size of the surplus reported in 2005, down because of a small increase in emissions last year.

For details see table: and

The EU carbon price for delivery in 2007 was down a fifth at 1.1 euro ($1.47) at 1545 GMT, versus a carbon price of 16.9 euros for delivery in 2008, the first year of the market's next phase.

Also damaging to the credibility of the EU carbon market, Europe's biggest emitters, the power companies, have profited from the scheme by passing on to electricity consumers the cost of carbon allowances they got for free.

Utilities in the Netherlands, Germany, Belgium and France stand to earn from 5 billion to 14 billion euros per year as a result of the scheme, according to the Climate Strategies research group.

Monday's figures were preliminary, accounting for some 93 percent of all data. Roughly 9,000 of 10,000 installations had submitted data and the Commission said it would update its website with further submissions daily.

The 15 countries that joined the European Union before 2004 were on course to meet their Kyoto Protocol target to cut their collective greenhouse gases by 8 percent by 2012, compared to 1990 levels, Brussels said on Monday.