July 18 (Bloomberg) -- Royal Dutch Shell Plc, Europe's largest oil company, said financial incentives for carbon dioxide capture would cut the region's emissions from factories and power stations by 3.7 percent as early as 2015.

A European Parliament plan backed by Shell to offer 500 million carbon dioxide allowances worth about 16.2 billion euros ($26 billion) for carbon-capture and storage may help curb emissions by 80 million metric tons a year from 2015 through 2020, said David Hone, group climate-change adviser for Shell.

That's almost 4 percent of the expected emissions in 2015 subject to the region's carbon dioxide trading program, the world's largest, according to forecasts from Mark Lewis, an analyst at Deutsche Bank AG in Paris. It's also about half the cuts needed that year after emitters import United Nations greenhouse-gas credits to help meet an emissions cap, he said.

The incentive's ``hugely optimistic'' scenario would push down carbon and power prices, other things being equal, Lewis said July 15 by telephone. ``It might be more realistic to assume half that much.''

Seeking to Curb

The EU needs to find an extra 163 million tons a year of cuts on top of UN credit imports to meet a proposed cap in the eight years through 2020, he said.

Governments around the world are seeking to cut greenhouse gases as the global population rises and economies in China and India grow. Emissions are blamed by scientists for climate change, which may cause stronger storms, drought and food shortages. Carbon-capture technology gathers carbon dioxide during power generation and pipes it into underground storage rather than venting it into the air.

The proposed incentive, which would be paid only after carbon dioxide is stored underground, is needed to quickly attract investment in the technology that's yet to be proven on a large scale, Shell's Hone said July 7 in an interview at the Brussels Environmental Finance conference.

``It is the key to getting this going,'' he said. ``It provides the incentive to fill the funding gap'' at a time when carbon dioxide prices need to be about double to get projects started, he said.

EU emission permits for December 2013 closed yesterday at 32.31 euros a ton on the European Climate Exchange in London.

Under the Shell-backed plan, power stations would be granted an extra emission permit for each ton of carbon dioxide stored. The allowances would be issued out of those set aside for new-entrant power stations and factories, Hone said.

Incentive Method

The plan was proposed by parliamentarian Chris Davies.

The European Commission, regulator of the emissions regime, isn't in favor of the proposal since it's trying to move to selling allowances from giving them away, Peter Zapfel, the commission's carbon-trading coordinator, said July 8 on the sidelines of the Brussels conference.

European Union member states can use money from sales of allowances to help fund carbon capture if they want, Zapfel said. ``Why should it be given in the form of allowances?''

Still, a benefit of granting allowances as an incentive is that taxpayers only give up revenue if there's an environmental benefit, Trevor Sikorski, an analyst at Barclays Capital in London, said yesterday by e-mail.

``There's some uncertainty for the developer on how much subsidy they will receive while under the direct research and development subsidy there is uncertainty for the policy maker about how much carbon will be captured for the level of subsidy provided,'' he said.

Some nations with storage possibilities including Germany and the U.K. may be in favor of Davies plan, while other nations including Spain may not want to give up the potential revenue from allowance sales, Sikorski said.

``This will be a highly politicized debate,'' he said.

About 33 million tons a year could be saved in the six years through 2020 from carbon-capture projects, or about 200 million tons over the period, he said.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

Last Updated: July 18, 2008 09:43 EDT