The European Commission responded saying a second round of quotas, from 2008, should take into account these latest figures, signalling the need for stricter emissions limits.

Businesses included in the scheme -- Europe's main tool for meeting Kyoto Protocol targets -- had feared it would push up costs as a result of power price rises, concerns partly eased by this week's carbon price collapse.

"This (price drop) does potentially strengthen the political hand of the European Commission in relation to phase two National Allocation Plans," said Anthony Hobley, general counsel to the London-based Climate Change Capital fund, which has over US$100 million invested in carbon markets.

Already Britain has said it could increase the quotas in the second round, while Germany has said it had planned only for a tiny cut, of 1.6 percent.

But green groups saw the price fall as evidence that countries had deliberately inflated the pollution projections, to avoid potentially costly reduction.

France, the Netherlands and the Czech Republic have come in under their target.

"We've said all along that the allocations were too lax in the first round of national allocation plans, and you no longer need to take our word for it. The market has reflected that." said Greenpeace climate policy adviser Steve Sawyer.

"The allocations need to be ratcheted down for these companies in the next round."

COLLAPSE

The ground-breaking EU market has made a commodity of carbon dioxide -- widely blamed for climate change -- by linking the greenhouse gas to tradeable carbon credits, making pollution a financial burden to Europe's most energy-hungry businesses.

Carbon credit prices could now plummet to as low as one or two euros, from a 31-euro high last week, traders say, depending on the full EU emissions picture that emerges in the next two weeks.

A slump would persist until 2008, when the new credits are handed out, they say.

"The key unknown is whether the price signal has in fact stimulated some emissions abatement in the industry sectors or whether the lower emissions are the result of gaming the allocation process," said Abyd Karmali, UK managing director of ICF Consulting.

"Anything can happen," one trader, who declined to be named, said on Friday when referring to forthcoming data releases from countries including Britain and Germany. "(If the price collapsed) that would persist in principle in phase 1."

Participants and politicians cautioned against a panic reaction to this week's crash, citing the novelty of the scheme.

"We have seen the market inflated and we are now seeing a settling back," said Barbara Helfferich, spokeswoman for Environment Commissioner Stavros Dimas, on Friday.

"We need to realise this is a very young market and it is the first compliance phase. We are not surprised there are fluctuations as a market such as this one has to settle," she said.

ICF's Karmali added: "The first phase of the EU scheme was always likely to be the most volatile as price discovery takes a while to occur in such markets."