Royal Dutch Shell, the world's second-largest oil company, threatened yesterday to stop investing in Europe if it is forced to pay for emissions permits that have previously been free.

Christian Balme, a Shell France director, told the European Parliament that if the EU moved towards a system in which emission quotas were auctioned, it would destroy Shell's profitability in Europe.

In January, the European Commission announced proposals aimed at slashing EU emissions of CO2 by 20 per cent of 1990 levels by 2020.

One of the cornerstones of this was a proposed reform of the Emissions Trading Scheme (ETS), which allocates a fixed quota of emissions permits to heavy industry for free.

The EC has proposed that from 2013, oil refineries and airlines, and possibly some other industrial sectors, will have to pay for 20 per cent of their emissions permits, rising to 100 per cent by 2020.

Mr Balme argued that if the proposals become law they would have a devastating economic impact on Shell's European operations.

They include some of the region's biggest oil refineries including Pernis near Rotterdam and its Heide, Godorf and Wesseling plants in Germany.

“It's impossible. So there will be no more investments by Shell in Europe,” Mr Balme said. “I am talking about $250 million [£126 million] of profits at the moment. If we extrapolate the price of CO2 by the tonne, we arrive at the same level, which is unacceptable.”

Shell says that it favours “cap and trade” trading systems for big polluters, including power generators and most industrial facilities.

A spokeswoman for Shell said yesterday that allowances should be free. “Shell does not favour auctioning allowances in the first phase of a system because the impacts on the industries and firms covered by the system are highly uncertain,” she said.

The EU's announcement in January was accompanied by warnings that it would be “economic suicide” to punish industry so heavily and risked simply pushing investment and emissions into regions where trading schemes do not exist.

A decision on whether other industries should have to pay for permits was delayed.

Several big energy companies and utilities are trenchantly opposed to the auction plans and have threatened to withdraw investment from the EU. Member states are trying to reach agreement by the end of this year.

A range of other proposals were included in the EU's package of reforms, including setting national targets for power generation from renewable energy.

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