By Kate Abnett
BRUSSELS (Reuters) - The European Union should change the way it hands out free pollution permits in the bloc's carbon market, which is failing to bring about deep cuts in emissions, EU auditors said.
The EU carbon market is the world's biggest - covering around 45% of the bloc's greenhouse gas emissions. It puts a price on pollution by forcing factories, power plants and airlines running flights within Europe to buy permits to cover their emissions.
Industry and airlines get some permits for free, to avoid "carbon leakage", which occurs when businesses move out of Europe to avoid carbon costs.
But the European Court of Auditors (ECA) said in a report on Tuesday the system had slowed down companies' efforts to cut emissions as the handouts were not well targeted.
"The more that allowances are provided for free, the less of an incentive there is to decarbonise," said ECA member Samo Jereb.
"Free allowances at least need to be reduced for certain sectors which are not heavily exposed to carbon leakage."
The Commission is already planning to curb free permits from 2021, although factories representing more than 90% of EU industrial emissions will still receive some.
Auditors said the Commission should change these rules so that factories' handouts are more closely tied to their specific exposure to carbon leakage. This could hike carbon costs for polluters. It would "reduce windfall profits", they said.
The Commission will propose a package of carbon market reforms by June 2021, aimed at delivering deeper emissions cuts this decade. This could see further changes to the system of free permits.
A leaked Commission document outlining plans to curb the carbon market's total supply of permits helped push the price of EU carbon permits to near all-time highs this week.
Airlines receive 82% of their EU carbon permits for free, a system ECA said has supported carbon-intensive flights over trains.
(Reporting by Kate Abnett, editing by Marine Strauss and David Evans)