BRUSSELS, Belgium - The EU will tell governments Wednesday if their plans for the next stage of the EU's emission trading scheme will fly or not, in an effort to fireproof a program criticized for giving industry an easy ride last year.
It is expected to criticize some nations for granting too many emissions permits from 2008 to 2012, warning that this may jeopardize a model aiming to cut back on the gases that cause climate change without making industry bleed.
Emissions trading is the cornerstone of an EU push to reduce greenhouse gas releases by 8 percent below 1990 levels by 2012 as it promised under the 1997 Kyoto Protocol on climate change.
"The world is basically watching the European continent," the program's EU co-ordinator Peter Zapfel said. "The most critical voices on the Kyoto Protocol like the U.S., Australia who decided not to ratify ... and Canada which has a big gap to close ... they all discuss or they start or they are in fact introducing emissions trading schemes themselves."
The EU scheme is the world's largest so far, worth 7.2 billion euros ($9.44 billion) last year when it traded 362 million tons of carbon. It has already exceeded both those values and volumes during the first six months of 2006.
"It has to be and will be the nucleus of an international carbon market," Zapfel said.
Starting last year, companies that produce large amounts of carbon dioxide can trade allocations for how much they can release. The aim is to give them a financial incentive to cut back.
But putting a price on carbon has not been a glorious success so far - even though the European Commission stresses that the program is in its early days and everyone involved is still learning what works and what doesn't.
What definitely doesn't work is supplying too many credits because there is no incentive for companies to reduce emissions.
"The key point there is the emissions trading market will only work - in the economic sense that it helps reach Kyoto targets at least cost and in an environmental sense that it actually reduces emissions - if we have scarcity in the market," Zapfel said.
Last year, there was a large surplus of permits. Environmentalists blamed governments for handing out too many. Germany reported the largest surplus of emissions credits, after producing 21.4 million tons, or 4.3 percent less in emissions than its average annual cap allowed.
When news of a surplus broke last May, the price of carbon went into a nose dive, falling from over 30 euros ($39.34) a ton to under 10 euros ($13.11) a ton in three days.
Zapfel said the EU did not have a target price for carbon in mind, saying public authorities had no role to set prices.
Allocations are fixed once they are granted, making Wednesday's decision the EU's only real chance to demand changes. "Governments cannot go back and say we want to give more or fewer allowances," he said.
To prepare for the next stage, nations have to decide how many allocations they will give out and who gets them, balancing the needs of different sectors from heavy carbon polluters such as power plants to steel makers and paper factories. It can give away at least 90 percent free of charge and auction up to 10 percent.
On Wednesday, the EU will say what it thinks about 11 national allocation plans from Britain, France, Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia and Sweden.
It has received another eight that it still has to assess and says it knows that another five are at a draft stage - including one from Spain which has the most ground to make up toward the Kyoto target. But Denmark has so far failed to hand one in and risks court action, Zapfel said.
"Basically our planet is getting warmer," he said. "What we are all concerned about is both balancing the economic cost of reducing our emissions ... with the economic costs that we would have to adapt to with a warmer climate."
The EU is already laying plans for the program's third stage starting 2013, saying it wants to bring in more gases and sectors. Separately, it is planning to draw in airlines at a yet-to-be-decided date.
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