Britain’s electricity generating companies are to bear the brunt of tough curbs on carbon dioxide emissions, after the government agreed to a cut of 8m tonnes under the next phase of the European Union emissions trading scheme.

David Miliband, environment secretary, told members of parliament he would issue UK companies with 238m permits for 2008-12, representing a cap on emissions of 238m tonnes of CO2 a year, a reduction of about 3 per cent from the first period, which expires next year.

Power station operators are to receive a lower allocation of pollution permits than in the first phase of the scheme and will have to pay for them through an auction, Mr Miliband said.

Further details on allocations will be published later in the summer, but the most polluting coal-fired power stations, such as the Drax plant in Yorkshire, are likely to be the hardest hit, energy analysts said.

The new arrangement marks a first, if modest, government step towards raising the price of electricity generated from fossil fuels relative to carbon-free and renewable sources, potentially making nuclear power more attractive to investors.

Mr Miliband said electricity prices would increase by 1 per cent over five years from 2008 for industrial users and 0.5 per cent for domestic users.

The 8m-tonne reduction target is at the top end of the government’s 3m-8m range of curbs proposed three months ago.

The UK has gone further than most EU countries in agreeing to auction 7 per cent of its permits, raising a possible £150m (€217m) a year depending on the carbon price.

But the curbs are slightly less ambitious than first appears, because the government also increased on Thursday the current baseline total of CO2 emissions for companies covered by the scheme by 1.1m tonnes, meaning the reduction on current emissions is closer to 6.9m tonnes.

Businesses will also be able to achieve up to two-thirds of total emissions reductions by “offsetting” them with carbon capture schemes or clean technology projects overseas.

Mr Miliband conceded that the scheme would enable the UK to cut CO2 emissions by only 16.2 per cent by 2010 on 1990 levels, short of the government’s 20 per cent
target.

Business groups reacted with dismay to the additional burdens placed on industry.

The CBI employers’ group, which had lobbied hard for smaller reductions, accused the government of “taking a risk with the competitiveness of UK business”
by pushing up electricity prices.

However, environmental campaigners said the government should have gone further. The campaign group WWF estimates that the government would have to impose annual emissions limits of 222m tonnes of CO2 (a reduction of 24m tonnes) to hit its 20 per cent target.

Mr Miliband said the trading scheme was only “one club in the bag”, accounting for 45 per cent of UK CO2 emissions.

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