The European Union opened a contest
for the first portion of about 4.3 billion euros ($6 billion) in
subsidies to store carbon dioxide underground and promote
renewable energy as part of the fight against global warming.

The EU invited bids for “clean coal” and renewable aid
that will come from the planned sale over the next two years of
a total of 300 million allowances to emit carbon dioxide under
Europe’s cap-and-trade program. Today’s announcement covers 200
million of the CO2 permits, which will come from a reserve set
up for the post-2012 phase of the EU emissions-trading system.

The European Investment Bank, the 27-nation EU’s lending
arm, will sell the allowances to generate revenue for the
winning carbon-capture and renewable-energy projects. The EU
trading system imposes CO2 quotas on around 12,000 power plants
and factories, forcing those that exceed their limits to buy
extra permits and allowing businesses that emit less to sell
their surplus.

“The initiative will act as catalyst for the demonstration
of new low-carbon technologies on a commercial scale,” European
Climate Commissioner Connie Hedegaard said today in Brussels
after the call for proposals was announced in the EU Official
Journal. The planned subsidies are on top of almost 1.6 billion
euros in aid approved last year from the EU budget for both
kinds of energy initiatives.

Demonstration Projects

The EU aims to have as many as 12 carbon capture and
storage demonstration projects ready by the end of 2015, saying
the emissions-avoiding technologies at coal-fired power plants
will help meet Europe’s goal of reducing greenhouse gases
including CO2 by a least a fifth in 2020 compared with 1990. The
planned aid from the reserve of CO2 allowances is for at least
eight carbon-capture projects and 34 renewable-energy
technologies, covering up to half the construction and operation
costs that companies and national governments will also help
finance.

The EU emissions-trading program, the world’s biggest
greenhouse-gas market, is a cornerstone of European efforts to
tackle the heat waves, storms and floods tied to climate change.
The system started in 2005 with a three-year trading period, is
now in a second phase that ends in 2012 and will enter a third
stage running from 2013 through 2020.

The overall supply of allowances over the periods is
diminishing, and the EU is moving toward the general auctioning
of permits now granted largely for free to fill the CO2 quotas.
EU carbon allowances for 2010 rose 0.6 percent to 14.32 euros a
metric ton as of 10:40 a.m. in London.

Phase-Three Allowances

The permits from the so-called new entrants’ reserve to be
sold by the EIB probably will be the first phase-three
allowances brought to the market. Power producers have said they
need phase-three permits immediately to hedge their future
electricity sales.

European electricity industry association Eurelectric said
in April the EU should auction as many as 500 million phase-
three permits, including 200 million from the new entrants’
reserve, before the start of the next trading period. The EU
plans to sell all 300 million permits to be used for aiding
carbon-capture and renewable projects before the third phase.

“The sale of the 300 million allowances is expected to be
completed before 2013,” the European Commission, the EU’s
regulatory arm, said in a statement. Before the sales begin, the
Luxembourg-based EIB will publish the number to be sold in 2011
and 2012, according to the commission.

European Utilities

West European utilities including RWE AG and E.ON AG will
get no more free permits in the third phase, while east European
power plants will have to buy 30 percent of their permits at
auctions, with the amount rising to 100 percent in 2020.

The commission will probably start discussions with member
states later this year about the timing and volume of early
auctions for carbon allowances in the third trading period.

Jos Delbeke, director general for climate at the
commission, said in April the EU may sell 100 million tons of
phase-three allowances in 2012 “to demonstrate the system is
working” and alleviate uncertainty about the process.

The EU set the ceiling on CO2 emissions at 2.039 billion
tons in 2013, including aluminum and chemical makers that join
the program that year. The cap will be adjusted further to
account for airlines, which will become a part of the system
from 2012.

The planned EU subsidies are on top of aid approved last
year to develop technologies for carbon capture and storage and
for renewable energy. In 2009, under a 5 billion-euro economic-
stimulus package from the EU budget, the bloc earmarked 1
billion euros for carbon-capture projects by utilities including
Vattenfall AB, Endesa SA and Enel SpA and 565 million euros for
offshore wind power initiatives.

Technologies including carbon capture and storage, solar
power generators and wind turbines could help the EU meet its
climate goal. CO2 emissions avoided through carbon capture and
storage in 2030 could account for some 15 percent of the
reductions required, according to the commission.