U.S. cap and trade plans risk European mistakes

By Gerard Wynn and Pete Harrison - Analysis

LONDON/BRUSSELS (Reuters) - Plans by the United States to tackle climate change through a cap and trade scheme must learn from the mistakes of Europe if they are to avoid giving away multi-billion-dollar windfalls to industry.

American lawmakers are at the first stage of drafting a cap and trade scheme, in a larger climate bill which could transform how the United States produces its energy and boost the chances of agreeing a new ambitious global pact to fight climate change.

Fierce lobbying by industries and some legislators to dilute the impact on fuel bills, especially during a recession, could undermine carbon cuts, European analysts say.

"The U.S. debate is really U.S.-centered. There is so much focus on buying the 60 (Senate) votes needed, and each senator's vote that is bought comes with something attached, some type of concession for a sector or for trade unions," said Susanne Droge of the German Institute for International and Security Affairs.

The European Union scheme, launched in 2005, has struggled to shake off two early mistakes: handing out too many permits which removed the requirement to buy them, and giving them to power plants for free.

Analysts say utilities pass on the price of carbon permits to consumers regardless, making billions of euros (dollars) in windfall profits across the sector as a result.

And because there were initially too many permits the EU carbon price crashed to zero two years ago, relegating the first trading phase of the scheme from 2005-07 to an experiment.

As well as paying higher power prices under the EU scheme, industries such as metal makers, chemical plants and paper mills have their own carbon quotas, implying a double cost.

DRAFT

U.S. details are far from finalized in a process which needs approval of both houses of congress and is now only at committee stage.

The chairman of the Energy and Commerce Committee, Representative Henry Waxman, said on Thursday his panel would debate and pass the bill by the end of next week.

That would clear it for other panels to consider before a debate by the full House, probably by August.

The legislation faces more uncertainty in the Senate.

European academics implore lawmakers to resist the pressure of industry lobbyists, for example for free handouts.

So far the U.S. plans appear aware of the risks -- allocating free permits for example to the steel sector according to average emissions -- meaning if you pollute less you'll still get the same number of permits, and a surplus to sell as a reward for being clean.