Dec. 12 (Bloomberg) -- European Union leaders broke a deadlock over climate-change legislation with concessions that ease costs on energy and manufacturing companies, seeking to spur a new global accord.

EU heads of state and government delayed plans to end after 2012 the free allocation of allowances on which carbon-dioxide emission quotas are based, giving relief to eastern European electricity producers that rely on coal and to steel, paper and other industries across the 27-nation bloc that face an economic slump.

In upholding the main plan to reduce the CO2 quotas, the leaders aim to spur the U.S. and China -- the world’s biggest emitters -- to join the fight against global warming. The EU accord balances worries about job losses and a desire to help the United Nations draft a treaty to succeed the Kyoto Protocol after it expires in 2012.

“This is really historic,” French President Nicolas Sarkozy, holder of the EU’s rotating presidency, said after a summit today in Brussels. “There’s not one continent that has rules as strict as we’re adopting.”

The accord puts most of the finishing touches on draft legislation that underpins the EU’s goal to cut greenhouse gases including CO2 by a fifth in 2020 compared with 1990. The new EU rules center on the European emissions-trading system, the world’s biggest greenhouse-gas market, which requires companies that exceed their CO2 quotas to buy permits from businesses that emit less.

“The landmark EU deal demonstrates that, despite the financial crisis, governments can work together to take urgently needed action on global warming,” said Kate Hampton, head of policy at Climate Change Capital, a London-based fund management company.

Trading System

The new EU law will reduce the annual quotas for electricity, steel, paper and other industries now in the trading system by 11 percent on average in 2013-2020 compared with 2008-2012. The EU program covers companies ranging from utility RWE AG and oil refiner Royal Dutch Shell Plc to steelmaker ArcelorMittal and paper producer Stora Enso Oyj.

In that context, the political tussle was over the extent to which the EU should add to the costs for industry of reducing CO2 emissions by using government auctions to allocate the allowances that make up the shrinking quotas. Most allowances are now granted for free to fill the quotas.

Auctioning

The European Commission, the EU’s regulatory arm, had proposed full auctioning for all power producers as of 2013. The commission said manufacturers should face 100 percent auctioning from 2020 after a phase-in starting at 20 percent in 2013.

Under today’s summit accord, allowance auctions for existing eastern European power plants will start at 30 percent in 2013 and rise to 100 percent in 2020. All other EU utilities will face full auctioning as of 2013, as proposed by the commission.

The leaders replaced the goal of 100 percent auctioning for manufacturers in 2020 with a 70 percent requirement that year. The proposed 20 percent auction rate for them in 2013 remains intact, as does the possibility for a larger share of free permits should the risk arise of factories moving to non-EU regions with less stringent emission rules.

The EU says its ability to strike a deal between rich nations and poorer ex-communist countries is a model for the world. With the U.S. opposed to the Kyoto Protocol and China spared binding targets under the treaty, the EU is counting on support from President-elect Barack Obama, who backs caps on greenhouse gases.

‘Yes You Can’

“We are asking him to join Europe and to, with us, lead the world,” European Commission President Jose Barroso said. Echoing Obama’s campaign rhetoric, Barroso said Europe’s message to the Americans is: “Yes you can.”

The commission auction proposals, made in January, had prompted Poland to complain that its electricity prices would rise too much and Germany to echo manufacturers’ warnings of plant closures in Europe. Poland gets 95 percent of its electricity from coal, which emits more than twice as much CO2 as natural gas when used by power plants, and Germany is the EU’s largest economy.

The commission had said ending free permit grants for all power producers in 2013 and for the rest of the emissions- trading industries in 2020 would send a positive signal by increasing the cost of polluting, prevent “windfall” profits for companies able to pass on the costs and bring governments billions of euros with which to fund environmental projects.

Eastern Worries

By reducing revenue for national governments, the planned scaling back of auctioning for manufacturers at one point added tensions at the summit by fueling eastern European worries about the willingness of rich EU nations to help poorer ones pay for the tougher emission rules.

In response, the leaders increased the share of EU emission allowances that will be redistributed mainly to the poorer eastern European nations. The redistribution level for permits slated for auction will be 12 percent instead of 10 percent proposed by the commission.

“The results were optimal and very much to our advantage,” said Polish President Lech Kaczynski.

Under U.K. prodding, the European leaders agreed to set aside 300 million EU emission allowances from a planned reserve for new plants to subsidize projects that aim to store CO2 underground. Companies including Vattenfall AB have called for government aid to develop the costly technology.

Emissions Trading

The emissions-trading law is part of a package that also includes draft legislation setting national limits on greenhouse gases from industries outside the trading system such as agriculture, capping CO2 from cars and promoting renewable energy like wind and solar power.

The whole package needs the support of the European Parliament, which is due to vote next week, as well as of national governments. EU Parliament and government negotiators had reached agreement on most parts of the planned laws and are due tomorrow to scrutinize the aspects covered in today’s deal among leaders.

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net

Last Updated: December 12, 2008 10:51 EST