Industry fury as Beckett retreats over UK carbon allowances

The government was forced into a humiliating climbdown yesterday over the amount of carbon British industry will be allowed to produce under new European Union emission trading rules.

Margaret Beckett, the Environment Secretary, announced that the UK would proceed on the basis of a lower carbon allowance than ministers had wanted after the European Commission refused to permit an increase in the allocation.

The move represents a victory for Brussels, after the heavy-handed tactics used by Mrs Beckett to force it to agree to more generous carbon allowances. However, Commission officials sought to play down its pleasure at the Government's U-turn for fear of appearing triumphalist.

The climbdown was also welcomed by the environmental lobby, which had accused ministers of reneging on their commitment to reduce greenhouse gases. But it will pile extra cost on industry.

Mrs Beckett said the UK would now take the Commission to court in an effort to get the higher carbon allocation reinstated. She hopes for a ruling from the European Court of First Instance in the first half of next year.

But Commission officials and MEPs were convinced that the legal case stood little chance of success. Chris Davies, the leader of the British Liberal Democrat MEPs described the threat of action as "no more than a fig leaf designed to protect the Government from attacks by the Confederation of British Industry before the general election".

Under the new EU-wide trading system, British industry will be allowed to emit a maximum of 736 million tonnes of carbon over the next three years. In order to emit more than that, industry will have to buy permits from other countries which have undershot their carbon allocation. The permits are trading at about £10 per tonne of carbon.

The allowance of 736 million tonnes was what the UK applied for when it submitted its draft national allocation plan to Brussels last April. In July, the Government asked for an increased allocation of 756 million tonnes after discovering it had underestimated the amount of carbon produced by the UK because of higher electricity demand and increasing use of gas and coal-fired power stations.

The Department for the Environment, Food and Rural Affairs said it was "disappointed" at the Commission's refusal to allow an higher allocation. Defra also pointed out that the extra 20 million tonne allowance asked for amounted to only a 3 per cent increase in the UK's national allocation when it now estimates that UK emissions will exceed the allocation by 56 tonnes or 7.6 per cent.

David Porter, the chief executive of the Association of Electricity Producers, said it was essential that the Government got the UK's allocation right for when the second phase of the emissions trading scheme begins in 2008. "That's when investment in new power stations will come into play. It is imperative that the Government gives clear guidance about Phase 2 as soon as possible. Time is short. New power stations require serious finance and they take years to plan and build."

Stavros Dimas, the European Commissioner for the Environment, said: "It is important that companies based in the UK have the opportunity to trade in the EU emissions system from the start and I warmly welcome their participation. UK-based installations represent 11 per cent of the EU system so their active involvement in trading will contribute to its success and help them to meet their climate change obligations in a flexible, market-friendly way."

Officials in Brussels were concerned that, if they set a precedent by allowing the UK to change targets that had been approved, other nations would be certain to follow suit.