Jan. 23 (Bloomberg) -- European Union regulators proposed tighter caps on emissions blamed for climate change, threatening higher energy costs and clashes with industry over the world's biggest greenhouse-gas trading market.

The European Commission proposed to cut carbon-dioxide allowances for electricity, steel, paper and other industries now in the EU emissions-trading system by 11 percent on average in 2013-2020 from 2008-2012. The draft law would also add the aluminum and chemicals industries to the system, which requires businesses that exceed their emission quotas to buy permits from companies that emit less.

In addition, the commission aims to allocate fewer permits for free, saying power producers should purchase their whole allotment as of 2013 and full auctioning should apply to other industries from 2020 after a phase-in. The overhaul aims to make emissions more costly and help the EU meet a goal of reducing greenhouse gases by 20 percent in 2020 compared with 1990.

``There is a cost, but it is manageable,'' commission President Jose Barroso told the European Parliament today in Brussels. ``Every day the price of oil and gas goes up, the real cost of the package falls. Instead of costs, we really should be talking about gains for the EU.''

Economic Slowdown

Europe's push to curb CO2, the main greenhouse gas tied to higher world temperatures, rising sea levels and more frequent heat waves, storms and floods, comes amid slowing European economic growth as concerns about a U.S. recession mount. Electricity prices may rise 10 percent to 15 percent by 2020 as a result of the proposals, said the commission, the 27-nation EU's regulatory arm.

The emissions-trading measures are the centerpiece of new climate-change legislation that would have a 60 billion-euro ($87 billion) price-tag by 2020, according to the commission, which says the cost of inaction would be higher. The package, which focuses on energy because it is the root cause of air pollution, is an attempt to kick-start the development of cleaner economies.

``The EU is definitely trying to stake out leadership on low-carbon technology,'' Abyd Karmali, London-based global head of carbon emissions at Merrill Lynch & Co., said by telephone. EU ``carbon dioxide prices will be strengthened, because the emission reduction targets outlined are very strict.'' The package needs the support of EU governments and the European Parliament in a process that can take two years or longer.

Varying Targets

Two other draft laws would set varying targets for EU nations to curb emissions from industries such as road transport and buildings that are outside the trading system and to raise the market share in Europe of renewable energy including biofuels to an average 20 percent in 2020 from 8.5 percent now.

A fourth proposal would make legal changes to allow industry to capture CO2 from plants and store it underground, a new and costly process. CO2 that is captured and stored would be treated as not emitted under the emissions-trading system.

The expanded trading system would cover about half the EU's greenhouse-gas emissions. At stake is Europe's quest to turn the system into the cornerstone of a global market under any new agreement including the U.S. and China, the biggest polluters, to curb emissions after the Kyoto Protocol expires in 2012.

The U.S. opposes Kyoto and China is spared binding reduction targets under the treaty, which forces the EU to cut emissions 8 percent by 2012 compared with 1990. The EU says emissions trading can help overcome the impasse over a new accord by offering market mechanisms to tackle global warming.

`Challenging Framework'

``The commission has proposed a challenging framework for energy for the next 12 years, based on a stronger, streamlined carbon market,'' Kate Hampton, head of policy at Climate Change Capital, a London-based fund management company, said in an e- mailed statement.

The draft legislation would cap allowances for the roughly 11,400 installations now in the system at an average 1.846 billion metric tons of CO2 a year in the eight years through 2020 compared with 2.083 billion tons annually in 2008-2012. The companies covered range from utility RWE AG and oil refiner Royal Dutch Shell Plc to steelmaker ArcelorMittal and paper producer Stora Enso Oyj.

In adding the aluminum and chemical industries, the draft law would also increase the types of greenhouse gases covered by the system. It would include emissions of perfluorocarbons and CO2 by aluminum makers and nitrous oxide and CO2 by chemical manufacturers.

German Concerns

``There's high uncertainty for investments by the chemical industry in Germany,'' the country's VCI industry association in Frankfurt said in an e-mailed statement. The proposal ``offers no planning security at all.''

The EU intends to add airline emissions of CO2 as soon as 2011 under a separate commission proposal from late 2006. That draft legislation is still being scrutinized by national governments and the EU Parliament.

As a result of the planned addition of these new industries, the overall average annual EU cap for 2013-2020 isn't yet known.

The commission plans to allow the EU import of emission credits earned from energy-efficient projects abroad, provided these rights under Kyoto are left over from quotas set for 2008- 2012. In the event an international treaty is reached to succeed Kyoto, a ``substantial'' additional use of these credits would be allowed, the commission said.

Too Little `Climate Action'

With a ``satisfactory'' global pact, the EU says it would go as far as cutting greenhouse gases by 30 percent in 2020. Environmental groups said the commission should have aimed for that target instead of the 20 percent cut in today's package.

``As things stand, EU countries and industry will deliver less climate action than we need,'' Greenpeace said in an e- mailed statement. The emissions-trading proposals involve a mechanism for further reducing the number of permits should a global deal be reached.

Under the new system, the commission would publish the EU- wide quantity of allowances to be issued each year from 2013. The existing system, which began in 2005 with a three-year trading period followed by the current five-year phase, lets governments draw up nationwide caps that need commission approval.

Overallocation

This arrangement helped to cause an overallocation of allowances in the initial 2005-2007 period, a collapse in their market prices, a commission crackdown on national permit grants for 2008-2012 and EU pledges to centralize the system from 2013.

As part of the campaign to toughen the rules, the commission has also stressed the need to auction permits to prevent the possibility of windfall profits from free allocations, particularly for power producers able to pass on cost rises to customers.

As a result, today's proposals foresee 100 percent auctioning of allowances for electricity companies from the start of the 2013-2020 period. The auctioning rate for other industries including oil refineries would be 20 percent in 2013 and rise annually by 11.4 percentage points until reaching 100 percent in 2020.

The commission proposed allowing a possible exception from auctioning for any energy-intensive industries judged to be ``particularly exposed'' to global competition and liable to relocate to non-EU countries without emission curbs. Germany highlighted the need for such a provision, which could also involve applying EU emission curbs to importers.

Protection Vital

``It is absolutely necessary to safeguard the industries as long as we have no new international accord on climate control,'' German Environment Minister Sigmar Gabriel told reporters in Berlin.

Auctioning revenue could reach between 30 billion euros and 50 billion euros in 2020, according to the commission, whose projection assumes a CO2 permit price of 39 euros a ton.

EU CO2 permits for 2008 fell 27 cents, or 1.3 percent, to 20.03 euros a ton today, according to the European Climate Exchange in London. Prices have risen 28 percent in the past year. Installation in the program can use current permits in the 2013-2020 trading phase.

The auctioning rights in that period would be divided among national governments, which would pocket the revenue.

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

Last Updated: January 23, 2008 12:53 EST