The emissions trading system that has been criticised for giving power generators a £9billion windfall is likely to be swept away in 2013.

The European Commission's draft plan for the third phase of emissions trading, to be released on Wednesday, is expected to introduce an auction for all emissions permits as Europe toughens its stance on polluting generators.

The changes to the allocation of permits will form the centrepiece of a raft of green measures, designed to achieve the European Union's challenging target of moving from 8.5 per cent renewable energy now to 20 per cent by 2020. The changes are likely to be translated into a British target of generating more than 30 per cent of power from renewable sources, compared with only 5 per cent at present.

The EU's changes to the scheme will please the Treasury, which finds the existing system of free allocations unpalatable but does not wish to hand political capital to its opponents by imposing a second windfall tax on utilities.

The changes, which are likely to be put in place for a seven-year period until 2020, will also find favour with Centrica, the British Gas owner, which has lobbied for permits to be auctioned, and with companies looking to invest in a new generation of nuclear power stations.

Jake Ulrich, managing director of Centrica Energy, said: “The Commission... [has] a big opportunity with these directives to reshape the Emissions Trading Scheme from 2013 to really deliver the big cuts in carbon dioxide output that we need.”

Forcing generators to pay for all their emissions permits will ensure that the polluter pays and will end huge windfalls to the highest polluting generators, Mr Ulrich said.

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