Page last updated at 15:42 GMT, Thursday, 24 September 2009 16:42 UK

Harrabin's notes: Trading down

In his regular column, the BBC's environment analyst, Roger Harrabin, considers the effect of a surprise court ruling on Europe's flagship environment policy, the EU Emissions Trading Scheme (ETS). The court ruled in favour of Poland and Estonia, who complained they hadn't been given enough permits.

Mittal's steelworks in Dabrowa Gornicza. Poland
Poland is trying to modernise its Soviet-era heavy industry

Under the EU's ETS, the European Commission allocates carbon permits to member states.

But Poland and Estonia complained that they hadn't been given enough permits and the European Court of First Instance ruled that the commission has exceeded its powers.

The court said it was up to member states rather than the EU to set emissions targets.

The price of carbon permits immediately dropped following the ruling. This in turn reduces the incentive for firms to invest in energy efficiency in cases where it becomes cheaper to buy low-cost permits.

The ruling is a shock to the commission - and it is expected to appeal.

Henry Derwent, CEO of the International Emissions Trading Association, told BBC News: "We seem to have a hole appearing in the fabric of the EU emissions trading scheme and it's clear that the EU is going to have to act very fast to plug this hole."

He said the EU's ambition for emissions cuts up to 2020 was probably secure, but that a change in the distribution of permits between different countries could send shockwaves through the carbon markets. "It's bound to affect future investment," he said.

"Everyone wants more certainty about carbon price rather than less and this is unfortunately a great blow for uncertainty."

Carbon traders said that there was a possibility that 50 million tonnes' worth of emissions permits might flood the carbon market.

It is another setback for the EU carbon markets, which are still in the "settling down" period. It certainly does not bode well for the EU's effort to persuade the US into a global carbon market.

Carbon markets were forced on the EU by the US as part of their Kyoto climate treaty negotiation but America then pulled out, leaving Europe to develop the system.

There is currently strong opposition to carbon trading from several members of the US Senate. They say it benefits those who can lobby hardest for emissions credits.

A bloc of nations led by Bolivia is also opposing carbon trading in the UN, on the grounds that it is immoral for one country to trade away its carbon emissions responsibilities with another.

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