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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 the European Parliament in Strasbourg rejected by 19 votes a Commission proposal to remove temporarily 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 priority and it would seek agreement from member states, debating in parallel with the parliamentary process, as a matter of urgency.
The Commission and many in the power sector and elsewhere in industry are keen for a higher carbon price to drive investment in lower carbon energy.
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 33.4 percent, by 1523 BST.
"The carbon market is now in a coma, until a clear intervention takes place," an emissions trader said.
Climate Commissioner Connie Hedegaard said the Commission still believed 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."
But she said forging agreement on climate policy had become a lot harder following economic crisis.
"The vote shows it has become more difficult than it was three years ago, five years ago. Still I hope that in Europe, we would not have become so poor that we think it should cost nothing to pollute," she told Reuters.
A majority of member states is said to support the Commission proposal. National representatives are expected to debate what to do next this week.
NOT SO QUICK
The Commission's backloading proposal was meant to be a quick fix that could be agreed by the end of last year.
But it exposed deep divisions, with interest groups intensively lobbying members of the European Parliament.
Hedegaard, together with analysts and some in the energy sector have warned that failure to agree on EU steps would spur fragmentation in environmental policy as member nations move to safeguard their own green targets. Britain, for instance, already has a carbon price floor.
Analysts say a carbon price of around 50 euros is needed to encourage a switch away from coal to generation from less polluting sources.
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 of the Commission plan.
Together with more than 40 firms, representing more than 875 billion euros (752 billion pounds) 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, said.
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.
Environmental campaign groups voiced dismay at Tuesday's vote, which Greenpeace called "a historic failure".
"In its present form, the carbon market will not stop a single coal plant from being built," Greenpeace EU climate policy director Joris den Blanken said.
(Additional reporting by Nina Chestney in London and Madeline Chambers in Berlin; editing by Jason Neely and William Hardy)