By Barbara Lewis and Nina Chestney
BRUSSELS/LONDON (Reuters) - The European Union may have to offer its heaviest polluting industries another ten years of free carbon credits to prevent them from leaving the region to do business elsewhere, EU regulators have suggested in a report seen by Reuters.
Ten years ago the EU launched a plan to tackle climate change by asking heavy industry and utilities to pay for every metric ton of carbon dioxide they produced. After fierce lobbying, it conceded that the heaviest polluters could have free permits.
The so-called Emissions Trading System (ETS) runs until 2020 and it was hoped by environmental campaigners that the next version of it would substantially reduce free allocations to encourage firms to invest in new technology to lower their carbon emissions.
However a document seen by Reuters shows regulators are considering drafting a new law that will offer free credits covering between 30 and 100 percent of companies' carbon emissions, depending on how likely they are to relocate abroad.
The list of companies entitled to free permits covers sectors including steel and chemicals producers that have been threatening to relocate to areas with less stringent emission limits.
The document explores a wide range of factors to assess how to hand out allowances to sectors such as cement, glass and oil refining.
One option breaks emissions intensity down into very high, high, medium and low-carbon, so that industries be entitled to respectively 100 percent, 80 percent, 60 percent and 30 percent free allocation.
Another option is to give all sectors 30 percent of emissions free.
"It's almost an insurance policy for the Commission to show it has considered all the options," said Marcus Ferdinand, analyst at Thomson Reuters Point Carbon.
EU heavy industry argues that any change to the existing arrangement would disadvantage them, particularly given that any new global climate deal is unlikely to make significant requirements of other countries to cut their emissions.
Government officials are meeting in Bonn, Germany, from June 1-11 to work on a global climate deal that countries hope to agreed within six months.
"For companies competing internationally with other sites around the world with no carbon costs it is vitally important they get 100 percent free allocation," said Roz Bulleid, senior climate and environment policy adviser at trade association UK Steel.
Environmental groups have criticized the existing allowances rules and say companies are receiving more than they need, given the recent global recession and slower industrial output. As a result, they say, heavy polluters are generating huge profits from the ETS scheme.
A 2014 report by lobby group Sandbag showed steel firm ArcelorMittal had 1.4 billion euros worth of surplus of carbon credits at the end of 2013 while cement firm Lafarge had 0.6 billion euros' worth.
The Commission had hoped to publish draft legislation on reforming the ETS before its summer break that starts in August, but Energy and Climate Commissioner Miguel Arias Canete said last week it might not be ready until later.
The European Commission’s impact assessment review board said more work needs to be on the potential impact of the options and a new version of the document will likely be re-submitted.
Once the draft legislation is produced it will likely go through several revisions as it goes through a number of steps before it can become law. This process could take around two years.
(Additional reporting by Susanna Twidale; Editing by Sophie Walker)