GOVERNMENT PLANS to tax windfall profits earned by power companies from free carbon credits could be open to a legal challenge.

Earlier this week, Minister for Energy Eamon Ryan said the Government intended to tax windfalls earned by electricity companies on carbon emission charges that were being passed on to their customers.

The measure is expected to raise €75 million in a year, and the State intends channelling the money back to large companies and industries, which use substantial electricity, to help offset their energy bills.

However, it is understood a number of the companies that will pay the tax are looking at the possibility of taking legal action to prevent the Government imposing it. They believe that the proposed charge is contrary to EU law and are taking legal advice on the matter.

The windfall is rooted in the EU regime to control and penalise greenhouse gas production, the emissions trading directive. The EU has banned governments from profiting from the directive, which is designed to cut emissions and implement parts of the Kyoto treaty, by regulating greenhouse gas emissions.

Industry sources say similar measures introduced by governments in Germany, France and Spain were all shot down as they were held to have breached the directive’s terms.

Power companies are benefiting from the windfall because they are charging their customers the full cost of greenhouse gas emissions, even though EU law has decreed that the generators do not have to bear this cost until 2012.

Estimates of the amount that customers are paying in carbon costs run to €200 million a year, but Mr Ryan’s department has rejected this and said this week that the tax was likely to raise €75 million.

The industry is predictably opposed to the tax, although none of the players in the Irish market has publicly come out against it at this stage. Sources suggest that this is because they may be looking at taking the legal route.

They are also likely to object to the measure on the basis that it will apply in the Republic and not in the North. As there is a single electricity market in this country, the tax will disadvantage operators with generating plants in the Republic.

The tax will only be applied until 2012, when power companies will have to purchase “carbon credits” on the open market.

The credits are essentially a licence to pollute or to exceed emissions limits laid down by the EU.

The “credits” are created in a number of ways, including by businesses who earn them by reducing their emissions below amounts tied to what their emissions were in the early 1990s.

The credits can then be bought and sold on the open market.