EU agrees measure to safeguard carbon market from Brexit

* UK-issued permits void from 2018 if there is hard Brexit

* International flights exemption from carbon charges to be extended

* UN aviation emissions scheme enters into force in 2021 (Adds airline association comment)

By Julia Fioretti

BRUSSELS, Oct (Shenzhen: 000069.SZ - news) 19 (Reuters) - EU lawmakers and member states have agreed ways to safeguard the carbon market if Britain leaves the emissions trading scheme as a result of Brexit.

The deal seeks to prevent a mass selloff in the carbon market if British companies suddenly find themselves out of it. Britain is the EU's second-largest emitter of greenhouse gases and its utilities are among the largest buyers of carbon permits.

Under the EU's Emission Trading System (ETS (Shenzhen: 002545.SZ - news) ), which charges power plants and factories for the carbon dioxide they emit, the EU would void permits issued by a country leaving the bloc from January 2018 onward.

But having had a say in how the ETS is shaped, most analysts believe Britain will remain part of the system, following a similar path to Norway. Despite not being an EU member, Norway has companies that participate in the scheme.

Slow progress in Brexit talks has increased the possibility of a messy break-up that could leave British businesses with little legal clarity on emissions.

"We very much hope that we find a good agreement with the British government and especially in climate and energy policy, for us, it would be the preferred option that the UK continues participation in EU policies," said Peter Liese, a lawmaker from the European's Parliament's biggest centre-right group the European People's Party, who helped to steer the process.

The International Emissions Trading Association (IETA), which represents global participants in emissions trading schemes such as banks, utilities and industrials, said its preferred scenario would be for Britain and the EU to agree on continued participation by UK companies in the ETS until the end of 2020 at a minimum.

"A hard Brexit scenario poses a risk of approximately 220 million allowances issued by the United Kingdom to be offloaded onto the market between 1 January 2018 and 29 March 2019,” the lobby group said.

INTERNATIONAL FLIGHTS UNDER THE RADAR

The EU lawmakers and member states also agreed to extend an exemption of international flights from the bloc's charges for carbon emissions until the end of 2023, under a deal agreed late on Wednesday.

This gives a United Nations agreement on curbing airline emissions time to come into force.

Under Wednesday's agreement, flights into and out of the EU will continue to be exempted from the ETS until the end of 2023, so that the EU can assess if the UN deal is effective enough.

Airlines for Europe (A4E), which represents carriers such as Air France KLM, Lufthansa (Xetra: LHAB.DE - news) and IAG, welcomed the deal.

"We welcome that policy makers took the industry’s concern into account, that there can be no double burden for European airlines which would put them in a competitive disadvantage," Thomas Reynaert, A4E’s Managing Director, said.

In 2012, the European Commission ordered carriers to buy credits for foreign flights under the ETS but backtracked when countries said it violated their sovereignty and China threatened to cancel plane orders from Airbus Group (Milan: AIR.MI - news) .

As a result, the Commission agreed to exempt international flights until 2017 so the International Civil Aviation Organization (ICAO) could reach a deal on a global market-based measure for offsetting airline emissions.

After a deal was clinched last October, the Commission proposed extending the exemption for an indefinite period.

EU lawmakers have criticised the ICAO deal for not doing enough to curb aviation emissions and had initially pushed for the exemption to only be extended until 2021, when the ICAO deal comes into effect.

"Stalling European climate action in the aviation sector because of a weak international deal doesn’t do justice to the climate," said Kelsey Perlman, Aviation Policy Officer at Carbon Market Watch. "This is especially alarming since the industry’s efforts are nowhere near enough what is needed to stay below 1.5 degrees warming."

Wednesday's agreement needs a final confirmation from member states. (Additional reporting by Susanna Twidale in London; editing by Jeremy Gaunt, Lisa Shumaker, G Crosse and Jane Merriman)