But analysts said the system, which will see companies issued with permits to emit around 95 percent of their current CO2 levels, could cause a power shift in the industry as greener generators benefit at the expense of those that use coal and oil.

"Investors should be aware of it because it's something that is very, very important for the European utilities," David Solozabal, a utilities analyst at JP Morgan, said of the scheme which is due to go live in January 2005, but which could move share prices even sooner.

Scottish and Southern Energy (SSE.L: Quote, Profile, Research) , Britain's largest generator of hydro-electricity, is most commonly tipped by analysts to be a winner because it could become a net seller of CO2 permits.

Investment bank Credit Suisse First Boston predicts the new regime could add 11 percent to the company's net worth if the market price of the right to emit a tonne of CO2 settles at nine euros.

"We assume that would be the equivalent upside whenever the benefit starts to get priced in (to the share price),"said Jason Goddard, a utilities analyst at the bank.

Dresdner Kleinwort Wasserstein has set a target price of 680 pence for SSE's shares, up from 648p currently, assuming the permits trade at 7.5 euros a tonne, and 50 pence higher if the market price is 20 euros.

If the permits trade at a higher price - earlier this year the European Commission predicted a 20 to 33 euros a tonne range - SSE shareholders could be in for a major bonanza.

PERMITS TO POLLUTE

In March European Union governments will submit their National Allocation Plans for CO2 permits to Brussels. In the hope of cutting overall emissions, companies are expected to be given the right to emit only 95 percent of current CO2 output. If a company exceeds its limit, it will be allowed to avoid a stiff fine by buying permits from someone with a surplus, thus creating a secondary market.

Companies in the electricity sector, which accounts for 60 percent of the emissions covered, will be faced with either cutting back production, and possibly revenues, or keeping production stable and buying extra permits.

Both actions should push electricity prices up.

But if a generator such as hydro and nuclear-focused Spanish generator Iberdrola (IBE.MC: Quote, Profile, Research) re-balanced its output to produce more power from its dams and less from fossil fuels, it could hold output steady or even raise it, without buying permits.

At higher power prices this could mean a big revenue boost.

Or, a generator with a lot of renewable capacity could decide against growing market share and re-balance its generation mix to create excess credits to sell in the market.

AND THE LOSER IS...

However, the proposed regime leaves companies heavy in coal plant such as Germany's RWE (RWEG.DE: Quote, Profile, Research) and Spain's Union Fenosa (UNF.MC: Quote, Profile, Research) exposed, analysts said.

Some analysts predict that even if they have to reduce power production to meet reduced emission targets, the higher prices will mean revenues remain constant. Others however say power prices will not rise enough to preserve the margins.

Political factors could also have a big impact on how the industry shapes up. Industry players said politicians may preclude some companies from getting a windfall from the system while others could be protected as factors such as the preservation of coal mining jobs come into play.

The companies themselves are being coy about any impact. Hydro generators like SSE and Vattenfall [VATN.UL], Nordic region's top power utility, say there are well placed to benefit but won't talk figures.