MEPs reject move to fix flagship climate policy

The proposed reform - known as backloading - would have postponed the auctioning of 900 million carbon allowances from 2013-2015 until 2019-2020.

The fewer permits - it was hoped - would lead to a hike in the carbon prices, with the current price level so low that there is virtually no incentive for companies to cut their emissions.

Ahead of the vote, MEPs were strongly lobbied by environmental and business organisations.

In the end, 334 voted against the reform, and 315 in favour.

Straight after the vote, carbon prices dropped to a new low of €2.63 a tonne.

The European Commission, which proposed the reform, said it "regrets" the outcome. Climate change commissioner Connie Hedegaard said she would "reflect on the next steps. The market, the investors and our international partners are all awaiting."

Green groups condemned the result.

“Today’s vote is a historic failure. In its present form, the carbon market will not stop a single coal plant from being built," said Joris den Blanken from Greenpeace.

"MEPs have voted against the polluter pays principle and putting a market-oriented price on carbon emissions," said Remi Gruet of the European Wind Energy Association.

Eurodeputies were split over free market ideology.

Conservative MEPs, who largely voted against the reform, said the commission should not be interfering in a market process. This point was also espoused by business lobby group BusinessEurope which welcomed the rejection of "political interference."

The conservatives were strongly criticised by their left-wing counterparts who accused them of having "failed to act responsibly."

"This is the beginning of the re-nationalisation of European climate politics. This kind of politics plays into the hands of the climate sceptics," said Socialist MEP Matthias Groote.

Symbolic resonance

The result is likely to have as much symbolic as well as practical resonance.

The EU has long viewed itself as the global lead in climate change policies.

But the financial and economic crisis of the recent years has knocked environment policy off the EU's political agenda, amid arguments that industry should be allowed to recover rather than adhere to potentially constraining climate legislation.

Tuesday's vote also comes at a sensitive time globally, with talks underway to find a new international climate change agreement for post 2020 by 2015.

Hedegaard for her part noted that the issue will go back to the environment committee for reconsideration.

Meanwhile member state representatives will continue to discuss the issue - largely favoured by governments - in two meetings this week.

Irish environment minister Phil Hogan, in charge of the talks, said: "The immediate need to address the carbon price issue in the ETS remains a clear priority."

"While I can understand concerns around intervening in a market-based instrument, the reality is that the EU is faced with an exceptional policy situation which demands an exceptional policy response," he said.