BRUSSELS (Reuters) - The European Commission presented keenly awaited plans to bolster the Emissions Trading Scheme (ETS) by reducing a massive burden of surplus allowances and urged member states to hurry them through by the year-end.
The proposals are the latest in a series of efforts to fix a market designed to be the mainstay of the EU's climate policy.
In the past it has been undermined by scams. Now it is over-supplied by millions of allowances because of recession.
"The EU ETS has a growing surplus of allowances built up over the last few years. It is not wise to deliberately continue to flood a market that is already over-supplied," Climate Commissioner Connie Hedegaard said.
In April the price of carbon fell to a record low of 5.99 euros a tonne, far below levels needed to spur low-carbon investment and discourage pollution.
On Wednesday, the market dropped back below 7 euros, falling around 5 percent from the previous close.
To tackle the surplus, the Commission, the EU's executive, has decided on a series of steps, which it hopes can offer a solution in time for the next phase of the ETS, beginning 2013.
They include delaying the auction of new allowances and clarifying an article of EU law on auction time-tabling.
There are no firm numbers in the Commission's draft proposal, although a Commission analysis presents three options -- withholding 400 million, 900 million or 1.2 billion allowances over the first three years of the market's next phase.
"What we have been saying is that the surplus is up to 1.4 billion, but I understand from the technical experts we have to have certain room. You cannot eat up all the flexibility in the system, so 1.2 billion as far as they can see, that's probably the maximum," Hedegaard told Reuters.
After the Commission's summer break, the outline proposal and analysis will be debated by officials from all member states at a meeting of the Climate Change Committee on September 19.
"We hope we will get a pretty clear message already on September 19," Hedegaard said.
Also later this year, the Commission will present its first report on the functioning of the carbon market, which could launch a debate on the deeper reform many say is necessary.
Such structural change could include the permanent, rather than temporary withdrawal of allowances, but it would require much longer political debate.
The idea of adjusting the auction timetable is that this can be agreed relatively easily through a fast-track EU process.
European Union member states still need to endorse it.
"The Commission aims at having all the necessary political decisions taken before the end of the year. We have delivered the proposal before the summer break, and now it's up to member states and the parliament to deliver as soon as possible," Commission spokesman Isaac Valero-Ladron told reporters.
The prime EU opponent is Poland, which is dependent on carbon-intensive coal. Grateful for the economic reprieve provided by a weak carbon price, it opposes any intervention.
Germany, the EU's biggest economy, can use ETS revenues to help finance its shift to more renewables following its decision to withdraw from nuclear energy after Japan's Fukushima disaster. Germany, however, also has a powerful heavy industry lobby.
Reacting to Wednesday's news, the German economy ministry said it saw no need to intervene, especially in difficult economic times, while the nation's environment ministry had yet to comment.
Within the business community, some have lobbied hard for action to take the market to a level to drive low carbon investment. Analysts have said a price of anywhere between 20 euros and 50 euros is needed to encourage green power.
A statement signed by a group of energy firms, including Statoil, Royal Dutch Shell and Dong Energy welcomed the proposals.
They called for "the re-profiling of the auctioning calendar" to withhold a minimum of 1.4 billion allowances -- a figure backed by a European Parliament committee vote last December.
Others in industry said there was no case to remove permits.
"In a recession, in a very deep economic crisis, of course nobody in his right mind would try to artificially increase this unilateral EU cost," Peter Botshchek, energy expert at CEFIC, the European Chemical Industry Council, said.
Analysts said ETS prices would probably stagnate while the market awaited a definitive EU decision and the economy limped along. A strong EU deal could be a big spur, however.
"If there ends up being an agreement on (withdrawing) and cancelling in the order of 800 million allowances, we assume that carbon prices could increase by as much as 6 euros on average over the 2013-20 period compared to current price levels," Thomson Reuters Point Carbon analyst Marcus Ferdinand said.
Benchmark EU carbon was trading down 4.58 percent at 6.87 euros at 1610 GMT.
Additional reporting by Charlie Dunmore and Ethan Bilby in Brussels, Nina Chestney and Jeff Coelho in London and Markus Wacket in Berlin; editing by Rex Merrifield and William Hardy