Power firms pay price of carbon row

The electricity generating companies will have to swallow any reduction in the UK's carbon dioxide emissions allowance, the Government announced yesterday to the industry's fury.

As the Government admitted for the first time it may not get the European Commission to agree that to increase the UK's allocation of carbon emissions, the generating companies accused it of unfairly penalising them.

David Porter, the chief executive of the Britain's Association of Electricity Producers, complained it was "grossly unfair" for the Government to pass the entire burden of the reduction on to electricity generators. He said it was urgently seeking talks with ministers. "We are always picked on to bear the brunt. This will cause a great deal of pain in the electricity generating industry," he said.

Mr Porter added that, given the ongoing dispute between the UK and Brussels, the electricity industry still had no certainty about future emissions allowances, which was needed to make business decisions.

The Government conceded it would miss the deadline at the end of this month for making firm allocations of carbon allowances to British industry. It cannot make firm the provisional allocations, published yesterday, until it reaches agreement with the Commission.

The Government has been trying to convince the Commission that the UK allowance must be raised by 20 million tonnes to 756 million. However, the Department of Trade and Industry and Margaret Beckett's Department for the Environment, Food and Rural Affairs, admitted:"The Government has confirmed any allocation below 756 million would be achieved by reducing the number of allowances given to the electricity generation sector."

The Government put out a provisional national allocation plan, based on 756 million tonnes of carbon emissions - to cover this year, 2006 and 2007 - causing huge confusion in industry and financial markets, as the European Commission has not accepted this level. James Emanuel, a director of Evolution Markets, a brokerage which specialises in carbon emissions, said: "It's bizarre. The market is shocked."

The dispute with Brussels arose because Britain itself first asked Europe for an allowance of 736 million tonnes last year but changed its mind after intense lobbying from industry, which said the figure would be too onerous to meet. However, according to the Commission, by the time Britain submitted a revised proposal - of 756 million tonnes - it was too late.

One tonne of carbon dioxide emission is equal to one emissions allowance. The EU is implementing a system to reduce emissions of greenhouse gases - of which carbon dioxide is the principal offender - to comply with the Kyoto treaty on climate change. Kyoto comes into force tomorrow.

It is thought unlikely that the Commission will give way to the UK, as other EU member states may then seek to have their allocations increased.

The Government is still threatening to take the Commission to court. It has the support of business for sticking with the higher allocation. Martin Temple, the director general of the Engineering Employers Federation, said: "The government's decision to allocate emissions permits on the basis of the revised NAP [national allocation plan] achieves the right balance... However, we would urge it to resist any further pressure to revise this current position and to stand firm in its discussions with the European Commission."