It will become more expensive for businesses in the European Union to burn fossil fuels this year after the 28-country bloc decided Wednesday to beef up its carbon trading system.
The agreement ended a year of bickering over how to amend what is Europe's prime tool in the fight against climate change and the world's biggest emission trading system.
Under the cap-and-trade scheme, companies pay per ton of carbon dioxide they release into the atmosphere, with the pollution certificates traded on the market. The EU now decided to postpone the sale of 900 million additional carbon allowances — a move that will tighten supply and likely drive up prices of carbon allowances by 10 to 15 per cent, according to analysts.
The tightening of the market is set to take effect this spring, EU Commission spokesman Isaac Valero said.
European business lobbies vigorously opposed beefing up the carbon market, saying it would raise energy prices and broader operating costs, undermining companies' competitiveness. Environmentalists, in turn, urged the EU to push ahead.
The 28-nation EU, the world's largest economy, introduced the system in 2005 to encourage industries to reduce emissions and invest in greener technologies.
Companies can trade these certificates, providing an incentive to cut emissions. Over time, the number of allowances will be lowered, cutting the overall emissions in the EU.
However, the system ran into problems when the prices for licenses dropped amid lower-than-expected demand because of Europe's stalling economy. The low price, which is currently just below 5 euros ($6.8) per ton, reduces companies' incentives to invest in new, less-polluting technology.
EU climate chief Connie Hedegaard lauded the agreement for "stabilizing the carbon market in the coming years" and vowed to press for a more fundamental overhaul of the system down the road to make it yet more efficient.
The Commission, the bloc's executive arm, first proposed the tightening of the carbon allowances, but the measure was shot down in April in the European Parliament amid heavy lobbying from Europe's industry and business lobbies.
Another vote months later, however, approved the measure, which was subsequently cleared by EU governments.
In the U.S., President Barack Obama's efforts to pass a cap-and-trade bill at the federal level failed on Capitol Hill due to bipartisan opposition.
California, however, has introduced a cap-and-trade program similar to the EU's. The scheme sets a limit on the amount of carbon that can be released annually from the state's biggest industrial polluters, with permits being auctioned off and the cap declining over time.