The European Commission imposed swingeing cuts in permitted carbon emissions by industry yesterday, provoking a storm of protest from European governments and warnings that the cost of Europe’s emissions trading system (ETS) would drive up electricity prices.

Brussels has drawn a red line through the national allocation plans of nine EU governments and demanded overall cuts of 7 per cent in annual greenhouse gas emissions in the second phase of ETS, from 2008 to 2012.

Germany has been forced to cut its carbon cap from 482 million 453 million tonnes, a reduction that Michael Glos, the Economy Minister, judged “totally unacceptable”. Latvia and Lithuania have seen their proposed allocations halved. Greece, Ireland, Malta, Slovakia and Sweden have also suffered big cuts. Of the ten national allocation plans considered, only Britain’s passed muster. The UK offered to cap its emissions at 246 million tonnes.

A spokesman for the Commission said that there was no appeal against its ruling. The crackdown on carbon follows the ETS’s disastrous first year, in which the price of carbon permits plummeted because of massive over-allocation of permits by EU governments. Under the scheme, governments are expected to allocate carbon permits to firms such that emissions are capped at a level that creates a shortage of permits and an incentive to reduce emissions. Companies that emit less than their allocation of carbon can sell permits to polluters.

Fearing a humiliating outcome, France withdrew its national allocation plan on Monday after an emergency meeting between Nelly Olin, the Environment Minister and Stavros Dimas, the European Environment Commissioner.

Mr Dimas said: “Today’s decision sends a strong signal that Europe is fully committed to achieving the Kyoto target and making the EU ETS a success.”

However, German utilities complained that the tighter caps on carbon dioxide could hinder new power generation and Latvia’s Environment Minister said that the ruling was “far too tight for us to fit into”.

The ETS has come under fire for allowing free allocations of carbon permits instead of a sale by auction. Power generators have enjoyed billions of pounds in windfall profits because electricity suppliers are entitled to pass on the cost of carbon to electricity consumers, despite having received their carbon permits at nil cost.

The windfall profits are deterring investment in cleaner power generation and encourage utilities in Germany to continue operating power stations that use dirty coal, argues Centrica, the British utility.

David Miliband, the UK Environment Secretary, said that the Commission’s decision was good news. “The EU has a responsibility to ensure scarcity in the carbon market and a sustainable price of carbon,” he said.

The Commission is assessing a further eight national plans and has taken out infringement proceedings against six states — Austria, the Czech Republic, Denmark, Hungary, Italy and Spain — for failing to submit their plans.

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