By Barbara Lewis and Nina Chestney
BRUSSELS/LONDON (Reuters) - A European Commission plan to revive Europe's carbon market appears headed for a setback that would keep emissions prices depressed for years, although it may scrape approval in a European Parliament committee next week.
The Emissions Trading Scheme (ETS) was designed to force Europe's industry and power sector to cut emissions and shift to clean energy.
Instead, over-supply and low demand for permits have dragged prices to less than 5 euros ($6.65) a tonne, well below the 40-50 euro level believed to encourage low-carbon investment.
To try to boost the market, the Commission, the EU executive, has proposed a temporary withdrawal of some of the surplus permits generated by over-generous allocation to firms in the first years of the scheme and exacerbated by recession.
Without agreement on the plan, known as backloading, the price of carbon permits will fall even further, threatening the scheme's long-term future.
Even with a deal, backloading is now regarded as too little too late as the protracted debate on what was meant to be a quick fix has stood in the way of getting on with more sweeping reforms, such as permanently removing allowances.
Next week's ballot marks the start of a second round of voting.
In April, the European Parliament voted against backloading, sending the price of carbon allowances to record lows.
To try to gather support, some EU lawmakers have amended the wording of the proposal, but EU sources said the dilution could also irritate some politicians who originally backed it.
The Commission's initial proposal suggested temporarily removing 900 million permits and returning them from 2018.
Under the amended version, some EU politicians will propose that the permits re-enter the market sooner.
HURDLES TO JUMP
EU sources and analysts said members of the parliament were still unpredictable and even if the plan passes the committee level, as it did earlier this year, the higher hurdle would be the plenary vote in the first week of July.
"What is almost certain is that, at this stage, it is unlikely that the original backloading proposal can be approved and implemented within the original timeline," Societe Generale analyst Paolo Coghe said.
If the plenary and committee vote are positive, the next task is to get approval from EU governments. Many are on board, but with two big exceptions - Poland and Germany.
The plenary vote failed in April after extensive lobbying by energy-intensive industry, which argued against anything that would inflate energy costs, and by Poland, which is heavily reliant on coal.
Germany, the EU's biggest economy, has so far failed to take a stance as the cost of energy has stoked heated debate ahead of elections in September.
The German economy minister has reflected the views of industry, while the environment minister has supported backloading, in line with energy firms with an interest in natural gas and carbon capture and storage technology.
They say a reformed ETS is the best and cheapest way to drive a shift to cleaner energy.
"There is little choice other than a carbon price," BP's chief economist, Christoph Ruehl, said earlier this week.
The EU aims to have almost carbon-free electricity by 2050, but the financial crisis has made short-term cost-cutting and lowering energy bills for consumers the priority.
Shale gas has also polarized opinion as the United States has managed to lower its rate of carbon emissions because cheap shale gas has displaced coal.
In Europe, by contrast, the weakness of the ETS means it is cheaper to burn the coal the United States no longer needs than gas, which only emits around half as much carbon.
(Editing by Anthony Barker and Jeff Coelho)