By Alister Doyle and Victoria Klesty
OSLO (Reuters) - Norway followed the European Union on Tuesday with a $90 million scheme to encourage energy-intensive industries to stay in the country, a move analysts said highlighted weaknesses in Europe's flagging carbon market.
"The purpose is to prevent the Norwegian manufacturing industry from moving their enterprises to countries with less strict climate regulations," Prime Minister Jens Stoltenberg said.
Changes to the EU's Emissions Trading Scheme (ETS) from next year allow member states to compensate big energy users, like aluminum or steel producers, for costs linked to carbon emissions. The plan is to prevent higher costs driving business out of Europe.
"This shows some of the fundamental problems with emissions trading," said Steffen Kalbekken, head of research at the Center for International Climate and Environmental Research in Oslo. "We are getting the worst of two worlds.
"The (carbon) prices are too low to produce the technological shift we need" to force big emitters to clean up, he said. "But they are still high enough to cause some problems for industry and international competition."
Norwegian companies including aluminum maker Norsk Hydro welcomed the plan. EU allowances for December, at 7.74 euros a tonne, have fallen to a six-month low this week partly on Dutch opposition to new rules in the EU trading scheme.
Norway said some elements in its guidelines, which will affect some 80 companies mainly operating within aluminum, chemicals, ferroalloys and paper production, were still undecided. The scheme will run to the end of 2020.
"We have estimated it could cost about half-a-billion crowns per year, but that is an uncertain estimate... and it will vary with the emission prices," Stoltenberg told Reuters.
Much of Norway's manufacturing industry is power-intensive since the country, with mountains, rivers and fjords, has a ready supply of cheap and zero-carbon emission hydro power.
Prices for Norway's carbon-free electricity have been rising since the introduction of the EU ETS in 2005 because companies have handed on the costs of compliance to all electricity users.
Stoltenberg said that Norway, which is linked to the market, wanted to ensure that the trading system does not have unintended consequences for clean Norwegian hydropower.
"This is an adaptation that the EU has recognized," he said of the measures. "I'm sure that one reason why Australia is linking up to the EU quota system is that they reckon they can manage their industry through such a compensation system."
Australia said on Aug 28 that it would link its carbon trading scheme with the EU's by 2018.
Sanjeev Kumar, with the green think-tank E3G in Brussels, said that Norway's decision was a sign that the EU market was having a wider influence.
"From a European perspective this is a good thing," he said. "It shows that the EU ETS is starting to seriously have an impact upon legislation on other countries, like Australia and Norway."
But the EU's compensation rules have driven a split between EU member states, with a third urging the EU Commission to place a cap on government subsidies.
And the rules could also hamper an EU plan to shore up carbon prices after the Dutch government in May said it would not support any measures to force carbon prices higher unless the compensation rules were revised.
Aluminum producer Norsk Hydro said the compensation scheme would allow it to take up a new power contract for its Soeral plant in western Norway. Had there had been no compensation, Hydro would likely have closed the plant.
Global miner Rio Tinto owns 50 percent of the Soeral plant while Hydro owns 49.9 percent. "This has been a pre-requisite for starting power negotiations at Soeral.... now we have to start talks (with power suppliers) quickly," said Hydro spokeswoman Inger Sethov.
Norway has set a goal of cutting its greenhouse gas emissions by 30 percent below 1990 levels by 2020. The EU has a goal of at least a 20 percent cut over the same period. Developing nations have no 2020 targets. ($1 = 5.7610 Norwegian crowns)
(Additional reporting by Henrik Stolen, Terje Solsvik and Balazs Koranyi)