EC threat to sue on emissions

UK Government on collision course with Brussels over carbon trading

The European Commission has threatened to sue the British Government over the controversial carbon emissions trading scheme. The looming legal standoff threatens to plunge the European scheme further into farce.

The Department for Environnment, Food and Rural Affairs (Defra) is refusing to meet the EC deadline of next month to submit its application for the second phase of the scheme, covering 2008-2012. This is despite a pledge by the new Secretary of State, David Milliband, to place climate change at the heart of the political agenda.

A spokeswoman for the EC said: "We have pushed Defra not to play around with this. Having member states submit plans late is not helpful. It would be illegal and we would start infringement procedures." Defra said it needed more time to collect the data.

On Friday, the EC accidentally published market-sensitive figures on the internet which were not due to be released until tomorrow. The figures revealed that most EU countries had in effect fiddled their pollution levels to avoid paying carbon taxes.

The carbon trading scheme, which was introduced in January last year, is designed to give companies an incentive to cut pollution and to punish those that do not.

Each country must agree with the EU an annual national "allocation" of pollution levels for heavy industry. This should be lower than existing levels.

If participating companies exceed their individual allocations, they must buy in carbon credits to balance their books. Those companies that pollute less than their individual targets can sell the surplus.

According to the figures leaked on Friday which the EC will confirm tomorrow, 15 EU countries actually polluted less last year than their target allocation. The EC had based countries' allocations on the information they provided on existing pollution levels, and analysts said member states had deliberately exaggerated these to secure a higher allocation.

Carbon prices fell by almost one-third on Friday.

The UK is one of only five countries that polluted more than its allocation for last year. This means that British companies must buy in credits to balance their books. Analysts estimated that Drax coal station, which generates 8 per cent of the UK's electricity, will now have to spend £74m on buying carbon credits.

David Porter, chief executive of the Association of Electricity Producers, said: "I'm fearful of the scheme falling into disrepute." He added that companies would be reluctant to invest in new power plants if the price of carbon was unpredictable.

Veronica Smart, from energy consultancy EIC, said: "The UK was leading by example. It's now clear that other member states have not followed suit."

She added that she expected the EC would introduce tougher allocations for the next phase of the scheme. Carbon emissions by heavy industry are now independently audited, which means that the EC will not have to use countries' estimates to work out their current pollution levels for the second phase.