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EU set to give new carbon permits - extended

The European Union is to establish carbon limits for the second phase of the carbon trading scheme, a key way to cut greenhouse gas emissions.

The EU is tipped on Wednesday to say some European countries have handed out too many carbon permits between 2008 and 2012, and to urge further cuts. The European Trading Scheme (ETS) is part of the EU's aim to cut greenhouse gas emissions by 8% of 1990 levels. Trading carbon is meant to enable firms to cut emissions at the lowest price. The scheme is the largest scheme of its kind and was developed by the EU as a way to meet its targets under the Kyoto protocol. The protocol was aimed at tackling global warming by setting limits on greenhouse emissions - but was never ratified by two major players, the US and Australia. By creating a market for carbon, firms are meant to have a financial motive to cut emissions. Heavy polluters, notably power firms, are obliged to own the right for each metric ton of carbon dioxide they produce. Depending on their needs, they can buy or sell permits.

But critics have argued that the limits have been set too high, thereby failing to encourage firms to make the necessary cuts. In their defence, proponents have said the scheme - which only started last year - is in its infancy and needs time to adapt. Carbon prices plummeted in May after it was revealed that governments had doled out too many permits, creating a surplus. Other trading schemes have looked to Europe's carbon trading scheme, which is worth some €7.2 billion ($9.4 billion, £4.8 billion), as a template. "It has to be and will be the nucleus of an international carbon market," said Peter Zapfel, the EU coordinator of the scheme. Even though the US and Australia failed to ratify Kyoto, they have both developed voluntary trading initiatives. While the ETS currently covers large polluters - such as power firms and oil refineries - in time it is set to include emissions from planes among others. Allocations will be set on Wednesday and they cannot be changed. "Governments cannot go back and say we want to give more or fewer allowances," said Zapfel. The EU will assess allocations for 11 member states on Wednesday, including Britain, France, Germany, Latvia and Ireland.

Electricity prices could double in Europe if power firms are to meet emissions reduction targets under the Kyoto protocol, says a report. Carbon prices are set to surge, and firms might pass this rise on to the wholesale market, says a report by consultancy Global Energy Decision. The report said European nations, such as France and Germany, will find it ever harder to meet emissions targets. The carbon market is deemed a key tool under Kyoto to reduce emissions. The report, entitled Countdown to Kyoto 2008-2012: The Carbon Challenge for Europe's Electric Power Sector, examined Northwest Europe including France, Germany, Benelux, Austria and Switzerland.

The report argues that forward carbon prices will be between €40 and €80 per metric ton - more than double current levels. However the report also says it is unlikely "that costs will be permitted to be passed on to electricity consumers for long durations". As the deadline looms to meet Kyoto's phase one targets, firms will be trying to buy additional carbon allowances. But allowances expected to be provided on a national basis "will fall far short of meeting industry requirements alone", which will further push up carbon prices. "Utilities will need to make substantial purchases from the Kyoto mechanisms," to meet its targets, says the report.

These mechanisms refer to carbon reduction schemes in developing countries, which allow firms to reduce their carbon emissions at the lowest possible price. One obvious way for firms in the power sector to reduce their emissions is to switch the type of energy they use, for example from inefficient coal-fired power stations to efficient gas stations. But some European nations lack the flexibility in their power sectors to change from high to low carbon fuels. And it would be impossible to completely cease using coal-fired power stations - especially in Germany - because of a lack of alternative capacity. Moreover, industry "does not have the power sector's flexibility to respond to changes in carbon price by reducing their emissions". "The fundamentals of this new reality must be more carefully assessed and understood by government, industry and especially the electric power sector," said Ron Mahan, chairman of Global Energy. (BBC News)