European lawmakers defied the European Commission Tuesday to vote down controversial plans to make polluters pay more under a scheme designed to cut greenhouse gases blamed for global warming.
The European Parliament voted 334 against, with 315 for and 63 abstentions on a proposal to freeze 900 million tonnes of carbon dioxide emission credits in 2013-15.
The European Commission launched the plan last year hoping the freeze would boost prices by cutting the supply of credits, thus making it financially more attractive for companies to invest in clean technology rather than continue polluting.
Analysts said a 'Yes' vote could have seen the price of CO2 credits double, giving new impetus to the EU's Emissions Trading System (ETS).
Instead, as news of the rejection came through, the price per tonne of CO2 slumped to 2.63 euros before recovering some lost ground to trade just below 3.0 euros.
Environmental group Greenpeace called the vote a "historic failure," and said national governments should now act to cut greenhouse gas emissions.
The ETS was set up with the aim of cutting greenhouse gas emissions by 21 percent between 2005 and 2020.
EU Climate Change Commissioner Connie Hedegaard said she regretted the 'No' vote.
"Europe needs a robust carbon market to meet our climate targets and spur innovation," Hedegaard said in a statement.
The Commission "remains convinced (the plan) ... would help restore confidence in the EU ETS in the short term until we decide on more structural measures.
"We will now reflect on the next steps to ensure that Europe has a strong EU ETS," she said. "The market, the investors and our international partners are all awaiting."
Ireland, the current EU chair, said the vote was disappointing, stressing that "the immediate need to address the carbon price issue in the ETS remains a clear priority."
Work on the proposal would continue, it added in a statement.
EU officials had said they expected a "very close" vote after the conservative European People's Party, the largest group in the parliament, announced it would oppose the move because it did not believe in such market intervention.
"We do not want to support a new tax" on industry, said EPP member Amalia Sartori of Italy.
The EPP also attracted support from the small European United Left group which condemned the ETS as "ineffective and perverse," and from conservative British MEPs opposed in principle to interference in the market place.
Poland, which relies very heavily on coal for its power, and industries using huge amounts of energy such as steel all opposed the plan given the potential cost involved.
Steel and similar industries "have every interest in the price of CO2 being very low," said one EU source.
Under the ETS an amount of pollution credits is first allocated free of charge to companies to cover their CO2 emissions.
If their emissions exceed this level, companies can either buy more credits through the ETS or choose to invest in new technology to reduce their pollution and save money in the longer-term.
The EU initially planned to sell credits for 8,500 million tonnes of carbon emissions in the period 2013-2019 and some officials had suggested that the freeze needed to be for 1,400 million tonnes to be really effective.
Last week, the environment ministers of Britain, Denmark, France, Germany, Italy and Sweden wrote in a letter to MEPs that "eight years of efforts" to control CO2 emissions would be put at risk if parliament voted 'No'.
MEPs separately approved plans to exclude international flights from the ETS regime until 2014 pending a global accord at the International Civil Aviation Organization (ICAO), after their inclusion sparked uproar from around the world.
Almost all ICAO members objected to the EU carbon tax on international flights to and from the bloc, which formally took effect in January 2012, saying it violated international law.