UK, Germany seek cuts to lax EU pollution quotas

Germany and Britain urged the European Union to set tougher quotas for greenhouse gas emissions after the bloc released data suggesting that last year's allowances had been far too generous.

The figures confirmed a Reuters report, based on data accidentally placed on an EU website before publication, that most states had undershot their pollution quotas under the EU's carbon dioxide trading scheme.

The scheme is the centrepiece of the EU's strategy to tackle climate change, and is supposed to drive cuts by giving firms too few permits to pollute, forcing them either to clean up or buy extra permits from those companies with a surplus.

Analysts saw the EU figures as evidence of over generous targets. But the European Commission was not yet prepared to say this was the cause of the 64 million tonnes permits surplus in 2005, out of the total industry quota of 1.8486 billion tonnes.

The EU executive said the numbers showed some firms had cut emissions in the face of steep oil prices and other pressures.

"We have to see whether (the targets) were too conservative... or if they (firms) did indeed reduce emissions. It's very complicated research we have to do," said Barbara Helfferich, spokesman for Environment Commissioner Stavros Dimas.

The Commission is treading a fine line. If emission limits are too strict this could choke economic growth. If they are too lax and the cost of the pollution permits is too low, Europe has less chance of achieving its Kyoto goals to cut climate change.

Analysts and green group saw the numbers as proof that national governments and industry had deliberately tried to minimise the cost and competitiveness impacts of the scheme.

The EU Commission has previously said it would push for tougher caps in the carbon market's second phase from 2008 to 2012, where there was proof member states had been too generous.

"I will be encouraging the Commission to use this information to improve the enforcement of tough caps for Phase 2," said Ian Pearson, the UK environment and climate change minister.

Britain was one of just five out of 21 EU states to overshoot its emissions targets. Top EU polluter Germany undershot its cap by four per cent and moved swiftly to say it would make retroactive cuts to its 2005 permit allocation.

The EU carbon market accounts for half the bloc's greenhouse gas emissions, and green groups hope the present difficulties will spur the EU to crack down from 2008 to 2012, which coincides with the Kyoto Protocol commitment period.

Currently some 13 out of 25 European Union member states will not meet their Kyoto greenhouse gas targets under present policies and the bloc as a whole is also behind.

"The market can only become functional and create incentives... if the amount of allowances is set at a level which is in line with the Kyoto targets," said Stephan Singer, Head of the European Climate and Energy Unit at WWF.

The EU's carbon market is based on the fact that some companies can cut pollution more cheaply than others, and it allows these more efficient firms to sell their permits to others in units called carbon credits. Prices for credits rebounded on Monday by 50 per cent to €14.00 a tonne on the European Climate Exchange before dropping back to €12.25, which is barely a third of a peak of €31 set last month. The gains reversed falls seen on Friday when news of the surplus emerged.

It is not all doom and gloom for the scheme - its present volatility is typical of a new market lacking hard data, with its recent price crash mimicking events on the still-flourishing US acid rain market soon after its launch over 10 years ago.

The EU market, with $8 billion traded in 2005, is the world's biggest environmental market and at the forefront of what many see becoming the world's foremost tool to tackle climate change.