The European Union's emissions trading scheme faces its second major hurdle in a matter of weeks on Friday as EU states struggle to meet a deadline to finish plans laying out industry pollution rights for 2008-2012.
The scheme, the 25-nation EU's key instrument to fight climate change under the Kyoto Protocol, has been trying to claw back credibility after 2005 data released in May showed a surplus of carbon dioxide (CO2) credits, triggering a price plunge.
Under the scheme, EU countries set limits on how much CO2 companies in high-polluting sectors, like power and steel, can emit. Those that overshoot their targets can sell extra permits, while those that pollute above their limit must buy allowances on the market or face a fine.
The executive European Commission said the 2005 data showed member states allocated too many rights to their industries in the first trading phase. This eliminated scarcity, crucial for the market as it forces factories to pollute less.
Environment Commissioner Stavros Dimas has repeatedly warned EU governments to take the 2005 data into account in their national allocation plans for 2008-2012, the second phase, and to submit them to the Commission by Friday's legal deadline. So far, neither warning looks likely to be followed.
Barbara Helfferich, Dimas' spokeswoman, said Estonia was the only country to have turned in its plan officially so far. Several states have said they will miss the deadline, and around half those that have given details on their plans have proposed increases on the CO2 quotas from 2005-07.
That may provoke a battle with the EU executive, which approves or rejects the plans and is keen to bolster its reputation as a leader in the battle against global warming, tarnished by the CO2 price fall and by data showing 2004 greenhouse emissions in the bloc rose year-on-year.
As opening gambits, the content of the pollution plans would not have a big impact on the carbon market, said Louis Redshaw, Head of Environmental Markets at Barclays Capital. Redshaw pointed out that the deadline for quotas for the market's 2005-07 period had been September 2004, with Poland, Cyprus and Malta yet to reach final agreement with Brussels.
Environmental groups Greenpeace, WWF, Friends of the Earth and CAN Europe called on EU states to lower their C02 limits or caps by at least nine percent compared with the 2005-07 period.
"The environmental effectiveness of the EU Emissions Trading Scheme in its second phase can only be achieved by more stringent caps, credible allocation rules and transparency of the allocation methodology, data and process," they said in a joint statement.
The Commission has three months to make a decision on the plans once they are submitted. The EU body is also studying ways to change and expand the scheme, including adding the aviation sector and other heat-trapping gases.
The European Parliament will hold a debate about the Commission's proposal to include aviation next week. Though the vote will be non-binding, it is seen as a signal of the parliament's views about the move.
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