WASHINGTON - Big business is pressuring the EU to water-down its climate ambitions including, most particularly, around the key issue of auctioning carbon permits, says international agency Oxfam.

Oxfam says that in tomorrow’s Environment Council meeting in Brussels, European decision-makers must resist industry scaremongering if the EU is to lead the way at global talks. If the EU buckles, it will fail to deliver on its own objectives of avoiding global warming above 2°C and send the wrong signals to the UN Climate Conference now underway in Poznan.

Raising money to help developing countries cope with the worsening effects of climate change is vital for any new international deal. “Poor countries need at least $50 billion a year to adapt to the negative impacts of climate change and much of it could be raised by earmarking the revenues of auctioning carbon permits. This would be one of the most decisive contributions that rich countries could make to engender good-will and progress at the Poznan talks,” said Elise Ford, head of Oxfam’s Brussels office.

However, the EU is now tangled up in horse-trading and squabbles among member states and Parliamentarians as it struggles to finalize its Climate and Energy Package this month. “The EU package should have been a shining example of ambition to the world – and it still could be that – but there are grubby finger-marks of corporate interest all over it now,” Ford said.

In general, business groups are strongly opposed to the auctioning of emissions permits, saying they should continue to get them for free. They argue that paying for carbon permits will lead to higher costs, a loss of competitiveness and ‘carbon leakage’ as firms facing global competition will shift their operations to other countries which will not face a carbon price.

In particular, the iron and steel, cement, oil refining and chemical manufacturing sectors have been lobbying intensely for continued free allocation – and they seem increasingly confident of winning concessions.

Business Europe – a federation of national employer organizations and one of the main business lobby groups at the EU – opposes auctioning outright. The UK’s Confederation of Business Industries wants the gradual phasing-in of auctioning for non-exposed sectors. The German industry association BDI wants free allocation of permits based on benchmarking of carbon-efficiency of key processes. The petroleum industry association Euopia opposes auctioning for refineries, and has already said publicly its members will not face 100% auctioning. The European Roundtable Industrialists opposes an automatic shift to auctioning. Royal Dutch Shell wants an exemption for its oil refining and chemicals businesses.

"This is a formidable line-up employing threats and ultimatums – including the bogus argument that their members will suddenly pack up and move to other countries. They are exaggerating for effect. We need 100% full auctioning across all ETS sectors from 2013 as the best way to incentivise emissions cuts – and we need much of this income earmarked to help developing countries,” Ford said.

A recent Cambridge University study found that only a few industrial processes and activities are likely to be impacted significantly by auctioning permits.“Auctioning of permits is more environmentally effective and economically efficient than free allocation because it ensures that the full cost of carbon is factored into investment decisions. It supports the principle of “polluter pays”. It generates revenue to support green innovation, and to help developing countries to adapt and mitigate. It stops the continuing scandal of windfall profits,” Ford said. Recent estimates say that windfall profits in the German, UK, Polish, Spanish and Italian power sectors will be up to 71 billion Euros by 2012.

“By giving away permits for free, the EU would be undermining the carbon price signal and delaying the changes we need in investment strategies toward greener technologies,” she said. “Contrary to industry grand-standing, the risks of carbon leakage from auctioning are low, only occurring for a very narrow range of sectors.”

In any event, in the few instances where carbon leakage could occur, it is not clear that free allocation is the best way to address it, because this still slows down investment in greener alternatives, Oxfam says.