May 15 (Bloomberg) -- European Union power stations and factories in the world’s biggest emission-trading program cut carbon-dioxide output by 3.1 percent last year, the first drop since the system began in 2005.

Emissions from participating sites were 2.06 billion tons of CO2 equivalent, compared with 2.126 billion in 2007, the Brussels-based European Commission said today in an e-mailed statement. While the recession limited economic output at the end of 2008, the drop in pollution came in a year when the EU grew 0.8 percent, Environment Commissioner Stavros Dimas said in the statement.

The trading system “really started to make a difference to emissions in 2008,” Dimas said. “This should encourage other countries in their efforts to set up comparable domestic cap- and-trade systems.”

Polluters in the European emissions-trading system account for about half the CO2 discharges in the EU, which aims to cut greenhouse gases by 20 percent in 2020 compared with 1990. The U.S. is also considering CO2 trading to limit it emissions, and Democratic lawmakers proposed a program this week to cut emissions of greenhouse gases tied to global warming by 17 percent of 2005 levels in the world’s biggest economy by 2020.

The European Commission curbed allocations of pollution allowances in 2008 by 6.5 percent. In the three years through 2007, the first phase of the program, Europe gave out more permits than emitters needed, creating an oversupply that sent the price of EU carbon dioxide allowances as low as 1 euro cent.

Up 72%

Permits for December fell 36 cents, or 2.5 percent, to 14.08 euros ($19.08) a metric ton today on London’s European Climate Exchange. While prices are down 11 percent this year, they are up 72 percent from a low of 8.20 euros on Feb. 12.

Declining economic output late last year contributed to Europe’s reduced emissions, said Alessandro Vitelli, an analyst at IDEAcarbon in London, by phone. “You can’t ignore the impact of the recession in the fourth quarter,” he said. IDEAcarbon rates emission-reduction projects.

The 2008 decline in EU emissions follows increases of 0.8 percent in 2007 and 1.1 percent in 2006. Last year’s emissions data excludes Bulgaria, Liechtenstein and Norway because year- earlier data from those nations is unavailable or incomplete.

Borrow or Buy

Europe’s factories and power stations emitted 7.9 percent more than their government-granted allowances last year, the EU statement said. That means they had to borrow against their future allocations in the current phase, which runs through 2012, or buy credits on the market or similar programs run by the United Nations.

Under the EU program, emitters are required each year to turn over enough allowances to match their verified emissions. The installations surrendered 2.075 billion tons of allowances and credits for 2008, the statement said.

Free allowances made up 92 percent of those surrendered, it said. Factories and power stations in the program used United Nations credits for 3.9 percent of those handed in. The remaining 4.1 percent were borrowed from their 2009 allocation or bought at auction.

The figures indicate about 33 million tons, or 1.6 percent, of allowances were borrowed against the future allocation, said IDEAcarbon’s Vitelli. That’s probably lower than expected, while use of United Nations credits was higher than expected, he said.

UN Certified Emission Reduction credits for December fell today 2.9 percent to 11.58 euros.

About 0.9 percent of the EU installations didn’t surrender the required quantity of allowances by the deadline of May 1, accounting for 0.5 percent of allocations, it said. Another 2.2 percent of installations failed to submit verified emissions data before May 1.

Emissions dropped last year in five of the six biggest- emitting nations, Germany, Italy, Poland, Spain and France, the figures showed. Emissions rose on average for U.K. installations, the group with the second-highest output.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

Last Updated: May 15, 2009 13:22 EDT