November 10, 2008 / 3:46 PM / 10 years ago

Carbon cost fears won't dent EU climate plan: analysts

LONDON (Reuters) - Cutting carbon costs for power plants and factories under European Union plans from 2013 will not harm the bloc’s fight against climate change but could hold back energy market liberalization, say analysts.

Several member states are resisting EU plans to force electricity generators to buy carbon permits in state-run auctions under the EU emissions trading scheme (ETS) after 2012.

The plan is to tilt competitiveness in favor of low-carbon energy sources which contribute less to climate change, under wider energy and climate proposals due for adoption next month.

Poland, Hungary, Slovakia, Estonia, Lithuania, Latvia and the Czech Republic fear the plan could harm their high-carbon coal industries, while Italy is worried about the impact of carbon costs on its factories.

East European countries complain that the EU plan will force their utilities to pass on to electricity consumers the extra cost of buying permits called EU allowances (EUAs), raising power prices for everyone.

Analysts agree power prices will rise, but some argue that may happen anyway under a trend to liberalize energy markets, which will force power generators to pass on such costs whether they get EUAs free or not as happens in western Europe now.

Tinkering with the EU carbon plans could also delay such liberalization.

“It is not desirable to leave a member state behind in terms of this scheme. You run into a whole lot of competitive cross-border issues which the Commission will not want to deal with,” said Trevor Sikorski, carbon analyst at Barclays Capital.

A compromise on the issue could also fuel accusations of special treatment for some member states.

“The idea of diversity between member states isn’t there right now and would have to be re-introduced. There is nothing to stop you from doing it, but it would be a political issue,” said Daniel Radov, associate director of Nera Economic Consulting.


One advantage of auctioning is that it provides a way for governments to recoup the extra carbon costs which utilities pass on to consumers, and recycle these back to the taxpayer.

“In my opinion, the money should go to our industry and our population as much as possible,” Maria van der Hoeven, Dutch Economy Minister, told Reuters last week. “They paid for it so they should get it back as much as possible.”

That auction revenue could reach 70 billion euros annually for the combined exchequers of all EU states by 2020. Such money could come on the table in brinkmanship to prevent Poland and other east European states from blocking the EU climate and energy plans.

“The (opposing countries) technically have enough votes to block, but I don’t think it will come to that,” said Guy Turner at New Carbon Finance. Instead, countries will leverage their position to negotiate concessions.

Under EU’s plans, factories will also have to buy permits to cover all their carbon emissions, although not until 2020.

Europe’s biggest business lobby group BusinessEurope said last week that it wanted manufacturing industry to get free EUAs provided they meet certain efficiency goals.

The group claimed that forcing industry to pay for carbon emissions permits would hurt Europe’s competitiveness.

That competitiveness worry means such groups may have more success than power generators in their plea, although there are other policy options to help them including state aid.

In any case, a compromise would not hurt the wider goal of the EU climate and energy package to cut greenhouse gas emissions by a fifth by 2020. “If the EU did back down, it still has the boldest and furthest reaching climate package of any country in the world,” said Guy Turner.

Additional reporting by Catherine Hornby in Amsterdam; editing by Gerard Wynn and James Jukwey

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