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By Ben Garside and Barbara Lewis
STRASBOURG/BRUSSELS (Reuters) - European Union politicians rejected a plan to prop up the world's biggest carbon market on Tuesday, sending it plunging to a new record low and raising questions about its survival.
After months of bitter debate, a plenary session of European Parliament in Strasbourg rejected by 19 votes a Commission proposal to temporarily remove some of the oversupply that has overwhelmed the market for permits to emit carbon dioxide.
Ireland, holder of the rotating EU presidency, said support for the carbon market was still a clear priority and it would seek agreement from member states as a matter of urgency.
Traders took the lack of political support as a signal to sell, driving the market down to its lowest yet. Immediately after the vote, carbon prices dropped by around 40 percent to 2.63 euros a tonne.
They were trading at 3.15 euros, down 33.82 percent, by 1305 BST.
"The carbon market is now in a coma, until a clear intervention takes place," an emissions trader said.
Climate Commissioner Connie Hedegaard said in a statement the Commission was still convinced its proposal, known as backloading, could restore confidence in the Emissions Trading Scheme (ETS) pending deeper reforms.
"We will now reflect on the next steps to ensure that Europe has a strong EU ETS," Hedegaard said. "The market, the investors and our international partners are all waiting."
A majority of member states, which have been debating the plan in parallel with the parliamentary process, is said to support the Commission proposal. National representatives are expected to debate what to do next this week.
NOT SO QUICK
The Commission proposal, named backloading, was meant to be a quick fix that could be agreed by the end of last year.
But it has exposed deep divisions, with interest groups intensively lobbying members of the European Parliament.
Some analysts have also warned that failure to agree on EU steps could spur fragmentation in environmental policy as member nations move to safeguard their own green targets.
The power sector and other energy companies, such as Royal Dutch Shell <RDSa.L>, keen to promote natural gas rather than more carbon-intensive coal, have been strong supporters.
Analysts say a carbon price of around 50 euros is needed to encourage a switch away from coal to generation from less polluting sources.
Together with more than 40 firms, representing more than 875 billion euros ($1.15 trillion) in turnover, Shell placed a full-page advertisement in the Financial Times newspaper on Monday, saying backloading was needed as a stop-gap measure.
"Without agreement on the backloading proposal the price will fall further threatening the long-term survival of the EU ETS and lead to fragmentation of the single energy market through a patchwork of national regulations," it said.
Opponents of the Commission plan, have been led by energy intensive industries.
They have argued intervention in the ETS will push up energy costs when Europe is already suffering a competitive disadvantage compared with the United States, which has benefited from abundant supplies of shale gas.
EU business lobby BUSINESSEUROPE welcomed Tuesday's vote and said the focus should be on long-term reform.
"We want an ETS, but without political interference," Adrian van den Hoven, the body's deputy director-general, told Reuters.
Debate on deeper structural reforms is already under way, but is expected to take a long time via tangled EU process.
Apart from seeking lasting solutions, such as the permanent withdrawal of allowances, the Commission has also kicked off debate on 2030 energy and environment policy to succeed a set of 2020 goals.
At member state level, EU sources say a majority supports backloading even though Poland, heavily reliant on carbon-intensive coal, is opposed to it and Germany has failed to take a formal position because of divisions within its government on the issue.
"Reducing the number of emissions certificates would be an intervention in a functioning market system. It would place an additional burden on our industry and harm the competitiveness of Germany and the whole EU," German Economy Minister Philipp Roesler said in a statement.
(Additional reporting by Nina Chestney in London and Madeline Chambers in Berlin; editing by Jason Neely)