FACTBOX-How to strengthen the European carbon market

Feb 13 (Reuters) - A European Commission plan to temporarily remove some permits from the oversupplied EU carbon market if agreed could pave the way for deeper reforms.

These could include permanently taking away EU carbon permits from the Emissions Trading System (ETS) or tightening restrictions on how much bigger emitters can pollute.

The current Commission expires in 2014, meaning time is running out for any action and the market is beginning to resign itself to a prolonged period of low prices.

In addition to market intervention, over time, the following steps could also help to support the market.

2030 targets

The Commission has launched debate on a new set of energy targets to replace a set of three green energy goals that expire in 2020.

By 2020, the EU has pledged to cut carbon emissions by 20 percent from 1990 levels, source 20 percent of its energy from renewables and make a 20 percent improvement in energy savings compared with business as usual.

Some member states and some in business favour replacing the three targets with one carbon-cutting goal, combined with a robust Emissions Trading Scheme (ETS).

A more aggressive carbon-cutting goal, as part of a perceived need to cut carbon emissions by between 80 and 95 percent by the middle of the century, could lead to a higher carbon price by increasing demand for carbon permits called EU Allowances.

Links

Other carbon schemes are taking off and seeking to learn from the European Union's mistakes. Links with projects in Australia and Switzerland, for instance, could eventually bolster the ETS price.

The Commission is also working with China to develop pilot projects.

Carbon Capture and Storage (CCS)

A side effect of the weakness of the carbon price is the failure to get EU carbon capture and storage (CCS) projects off the ground because there is no economic incentive.

The Commission has prepared a consultation paper on the future of CCS in Europe, a technology which traps and buries carbon emissions from fossil fuel plants.

A draft copy seen by Reuters said CCS means higher generating costs and that it would only be attractive for coal-fired power generation with a carbon price of 40 euros ($53) per tonne or of 90 euros per tonne for gas.

Options to shift the economics could include mandatory emissions performance standards for big emitters or a CCS certificate system, requiring carbon emitters to buy CCS certificates, fungible with ETS allowances. ($1 = 0.7474 euros)

(Reporting by Barbara Lewis and Nina Chestney; editing by Jason Neely)