EXCLUSIVE-Heavy industry to challenge EU CO2 permit quotas

By Michael Szabo

LONDON, Dec 11 (Reuters) - Europe's heavy industry is firing a barrage of legal challenges to cuts in the carbon permits they will get up to 2020 - subsidies worth over 4 billion euros ($5.5 billion) - with at least nine firms opening the assault in a Dutch court.

Companies including ExxonMobil, Dow Chemical (Swiss: 925686.SW - news) and Shell (LSE: RDSB.L - news) have challenged the Dutch government over what they say is an under-allocation of carbon allowances by the European Commission under the EU Emissions Trading Scheme (ETS), which are given free to heavy industry.

According to legal advice prepared for several chemical and steel firms and seen by Reuters, emissions generated at their plants from producing power by capturing heat (CHP) and burning waste gas were incorrectly treated by the Commission as attributable to the power sector, which has to pay for permits.

As a result, the related permits are to be auctioned by governments rather than given to industry, removing subsidies for manufacturers that source energy through those two activities.

"This distribution was not done in line with EU (rules)," the legal advice said.

A spokesman for the Netherlands' national court on Wednesday said at least nine companies had so far lodged complaints ahead of Wednesday's deadline.

"Based on a conservative estimate, European industry has been unjustifiably under-allocated 168 million permits in 2013 and around 800 million permits up to 2020," said the Utility Support Group's Vianney Schyns, a legal expert advising a consortium of chemical firms including SABIC, OCI (Amsterdam: OCI.AS - news) Nitrogen, Ineos and Lanxess (Other OTC: LNXSF - news) .

The allowances are valued at more than 4 billion euros, based on average EU carbon future prices of around 5.50 euros between now and 2020 .

Schyns added that he was helping another 10 firms file complaints in the Dutch court this week.

Another legal source advising firms said major industrial companies including Tata Steel and BP (LSE: BP.L - news) would also launch appeals in the Netherlands and in other countries.

Both the European Commission and the Dutch Ministry of Infrastructure and Environment - the government body named in the challenges filed in the Netherlands - declined to comment.

Three of the firms named confirmed that they were appealing the Commission's decision, adding that they had collaborated with others from their industries to coordinate their arguments.

FIRST DEADLINES

Sources said firms may find it difficult to challenge the Commission directly, so they are being encouraged to file in as many national courts as possible in the hope that at least one escalates the issue to the European Union's General Court in Luxembourg, where an over-arching verdict would be expected.

Firms have until Dec. 11 to file in the Netherlands and until Dec. 12 to file in Sweden, the first deadlines across the European Union's 28 member states, Schyns added.

Before companies in other countries can lodge complaints, they must first be notified by their governments as to how many permits they will get - a process that has been held up in most EU member states for months due to bureaucratic delays.

Under the EU ETS, the bloc's main tool to fight climate change, greenhouse gas emissions from Europe's 12,000 biggest polluters are capped and firms must surrender a permit for every tonne of carbon dioxide they emit.

In the scheme's current trading phase, which runs from 2013 to 2020, the majority of emissions allowances earmarked for utilities are sold, while heavy industry including makers of cement and steel receive most of their quota for free.

This is to help them compete with rivals in countries outside the EU that have less stringent environmental regulation, and because the firms argue that power generators pass on their carbon costs to them.

Bernhard Mauritz Stormyr, a spokesman for Norway-based chemical and fertiliser firm Yara, warned that as a result of the under-allocation, many industry sectors in Europe will be "seriously harmed" in both their global and regional competitiveness.

"This is not a question of seeking additional permits. We are simply pursuing what we perceive to be our legal right," he added.

To keep the bloc's overall emissions under legal limits, the Commission slashed the number of ETS permits to be given to EU industry in 2013-2020 by 12 percent below the amount they had requested, or by around 900 million units.

But trade groups say that assigning CHP and waste gas emissions to the power sector has distorted the bloc-wide reduction in allowances, or 'correction factor' in EU jargon.

The International Federation of Industrial Energy Consumers (IFIEC), which represents heavy industry across Europe, said the issue has been compounded by a lack of transparency in how the Commission calculated the reduction.

"Therefore we remain in doubt whether the significant reduction of the industry's allocation is correct," said IFIEC vice president Annette Loske.

Axel Eggert, director of public affairs at the European steelmakers association Eurofer, added: "You can't attack the whole correction factor but you can challenge part of it, around 5 percent of the 12 percent, which is a huge amount of money."

The Alliance of Energy Intensive Industries (CEMBUREAU) said that this, coupled with what it considered as oversights by the Commission related to the bloc's most efficient plants, made a cut in industry's carbon permit quota before 2021 unjustified. (Editing by Will Waterman)