EU eyes $14 bln emission permits for carbon capture

BRUSSELS (Reuters) - The European Union is close to agreeing on a source of public funding for power stations to trap and bury carbon dioxide in the battle against climate change, lawmakers and European Commission sources said.

The European Parliament member in charge of legislation on carbon capture and storage (CCS), Chris Davies, said up to 10 billion euros ($14.20 billion) could be used from a strategic reserve of emission permits to promote the emerging technology.

Companies such as Siemens are working on cutting-edge technology to trap CO2, and pump it into empty gas fields and deep underground caverns.

Carbon sequestration is seen by industry as a potential silver bullet to curb emissions from coal-fired power plants, which are multiplying rapidly in India and China, threatening to heat the atmosphere to dangerous levels.

But while the technology exists, utilities are reluctant to build CCS power plants without public funding because it adds about 1 billion euros ($1.42 billion) to the cost of each power station and reduces their output.

Some environmentalists argue CCS is unsafe and could divert investment from renewable power sources. Others say it is a necessary evil to keep greenhouse gas emissions below levels dangerous for global warming.

The EU wants up to 12 demonstration plants by 2015, but until recently the European Commission's environment directorate had opposed the idea of using funds from its flagship Emissions Trading Scheme to support the technology.

But a European Commission source said on Wednesday the environment directorate is now looking at the possibility of granting allowances from its New Entrants Reserve, a pool of allowances set aside for new installations joining the scheme.

Analysts say the reserve could be worth 18 billion euros.

"We need to find the funding for CCS, and the Commission is considering allowing some of the New Entrants Reserve to be used to fund early CCS projects," the source said.

Such a move would respect Commission policy that the overall EU emissions cap should not be changed, but it does not address concerns the scheme should not favor one industry over another.

EU lawmakers have proposed a mechanism to deliver around 10 billion euros of EU aid from the reserve to kick-start CCS, but experts said the numbers were still under discussion.

"It is widely recognized that the New Entrants Reserve has much spare capacity and its use will ensure that there is no overall increase in the emissions cap," Davies told Reuters.

"The options for providing sufficient funding at a European level are very limited," he added. "My impression is that the Commission has reluctantly come to accept our proposal provides a fair basis for negotiation."

(Reporting by Pete Harrison, editing by Paul Taylor and Peter Blackburn)