Dec. 17 (Bloomberg) -- The European Union approved tighter emission caps on energy and manufacturing companies as of 2013, bolstering the world’s biggest greenhouse-gas market in a bid to spur the U.S. and China to help fight climate change.

The European Parliament voted to reduce annual 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 EU assembly also endorsed adding the aluminum and chemical industries to the system, which requires companies that exceed their emission quotas to buy permits from businesses that emit less.

In addition, the Parliament approved allocating fewer of the allowances that make up the shrinking quotas for free, requiring some power producers to buy their whole allotment as of 2013 and other industries to face 20 percent auctioning that year. The overhaul aims to make emissions tied to fossil fuels more costly and help the EU meet a goal of reducing greenhouse gases by 20 percent in 2020 compared with 1990.

“Revolutionary change in the energy sector is what we need,” said Avril Doyle, an Irish member who steered the legislation through the 27-nation assembly today in Strasbourg, France. “There’s a need for Europe to drive the process.” Final approval of the law by national governments is a formality in the coming weeks after EU leaders last week broke a deadlock over free allowances for utilities in poorer member states and Doyle inserted that deal into the final text.

Kyoto Successor

Europe’s push to curb CO2, the main greenhouse gas tied to climate change, comes as the United Nations seeks an accord to succeed the Kyoto Protocol after it expires in 2012.

The EU wants its emissions-trading program to underpin a new deal including the U.S. and China, the main polluters. With the U.S. opposed to Kyoto and China spared binding reduction targets under the treaty, the EU is counting on support from President-elect Barack Obama, who backs greenhouse-gas caps.

The tougher emissions-trading rules are the centerpiece of a package of new European climate-change legislation. A second law sets national targets to limit discharges by industries outside the trading system and a third piece of legislation sets a 20 percent target for renewable energy in Europe in 2020. Yet another law will phase in caps on CO2 from cars as of 2012.

‘Aggressive Reduction’

The emissions-trading law will reduce allowances for the 11,400 power plants and factories now in the system to an average 1.846 billion metric tons of CO2 a year in the eight years through 2020 from 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.

“The EU has endorsed an aggressive reduction in the cap,” said Mark Lewis, a carbon-market analyst at Deutsche Bank AG in Paris. “This is a significant achievement that re-affirms the EU’s global leadership in reducing emissions.”

The bloc is also adding airline CO2 emissions to the system in 2012 under a separate law approved earlier this year. Because of the expansion to include carriers as of that year and aluminum and chemical companies starting in 2013, the overall average annual EU cap for 2013-2020 isn’t yet known.

Companies will be able after 2012 to import UN-backed emission credits earned from energy-efficient projects in developing countries under the rules endorsed today. UN permits are cheaper than EU allowances and can be used as an alternative for compliance under the trading program.

UN Credits

For installations now in the system, UN credits can cover an estimated 1.554 billion tons of EU emissions in 2008-2020. This reflects a basic provision, with some exceptions, restricting the use of imported credits in 2013-2020 to unexhausted parts of quotas already fixed for 2008-2012.

The limits on UN-credit use for aluminum and chemical companies will be about 4.5 percent of their verified emissions in 2013-2020, while the amount for airlines will be around 1.5 percent in that period. The EU has already set a 15 percent limit for carriers in 2012.

If a new global treaty is reached, the EU intends to go as far as cutting greenhouse gases by 30 percent in 2020 -- a step that would force more tightening of the caps and increase companies’ access to UN credits in 2013-2020.

The Carbon Markets and Investors Association expressed “concern” about the EU restrictions on imported credits in the absence of an accord to succeed the Kyoto Protocol. The credits are generated under Kyoto’s clean development mechanism, or CDM.

Impact

“These restrictions will impact on the ability of businesses to invest in the CDM beyond 2012,” said the London- based association, which represents investors in clean technology and providers of carbon finance. “CDM is an important finance tool for driving climate change solutions in developing countries.”

Another element of the legislation sets aside as many as 300 million EU emission allowances from a reserve for new installations to subsidize projects that store CO2 underground. Companies including Vattenfall AB and Shell have called for government aid to develop the costly technology.

The permits will be available until the end of 2015 for up to 12 carbon capture and storage demonstration projects within the EU. The EU must still work out the procedures for offering the subsidies, which will probably take the form of cash generated by the auctioning of the allowances, said officials.

Permit Auctions

The law moves toward the general auctioning of EU allowances now granted largely for free to fill the quotas.

Permit auctions for existing eastern European power plants will start at 30 percent in 2013 and rise to 100 percent in 2020, while all other EU utilities will face full auctioning starting in 2013. The auctioning rate for manufacturers will start at 20 percent in 2013 and rise to 70 percent in 2020.

The European Commission, the EU’s regulatory arm, had proposed full auctioning for all utilities as of 2013 and for all manufacturers starting in 2020. The scaling back reflects a desire by lawmakers to give relief to eastern European electricity producers that rely on coal and to steel, paper and other industries across the EU that face an economic slump.

The legislation allows for a larger share of free allowances should factories be liable to move to non-EU regions with less stringent emission rules.

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

Last Updated: December 17, 2008 10:38 EST