Industrial CO2 emissions to fall as tougher EU curbs come in

Carbon emissions from European energy and industrial companies increased by 1 per cent last year but traders expected that to be the high-water mark as industry begins to take action to meet much tighter pollution caps that were introduced earlier this year.

The European Union published yesterday its annual compilation of the carbon emissions of 10,500 power plants and factories that fall under the Emissions Trading Scheme (ETS), the system designed to help the bloc meet ambitious CO2 reduction targets by putting a price on pollution. Though not fully complete, the data provides clear evidence that energy bills are set to soar as lower emissions' targets push up the price of carbon permits.

Henrik Hasselknippe of Point Carbon, a research firm, said: "This is a confirmation of two things. One is that phase one [of the ETS] was vastly over-allocated relative to emissions. And two, that the EU has done a good job in reducing emissions in phase two. The market will be short in that period, and the price of carbon will reflect that."

In the first phase of the ETS, the EU overestimated the amount of pollution emitted by European industry, handing out permits that vastly exceeded emissions as a result. That meant that the price of carbon credits, which companies buy to bring them into compliance with targets if they emit too much CO2 in a given year, were worthless.

Under phase two, which came into effect at the beginning of this year, the EU cut targets by about one-tenth, leading to a CO2 price that has remained above €20 (£16) per tonne. Mr Hasselknippe predicts that it could go as high as €30 per tonne during phase two, which runs to 2012. From 2013, the EU is expected to enforce even lower ceilings. It has proposed, for example, the auctioning of 100 per cent of the permits to the power industry. Currently all but a small minority are free.

The EU aims to cut carbon emissions by 20 per cent by 2020 and it has imposed country-specific targets for each member. This will require hundreds of billions of investment in clean energy generation, which along with the higher cost of carbon, will be passed on to customer bills.

The UK is facing one of the steepest hills—the EU has said it must increase its renewable energy production from 5 per cent today to 40 per cent by 2020.