In a few posts lately I’ve discussed the importance of Poland, and other eastern European countries, to European efforts to secure agreement on a climate policy package. Poland has balked at emissions reductions commitments due to its heavy reliance on domestic coal for electricity production. At the same time, Europe really can’t let its climate policies appear to fail. So the question has been, what will it take to get Poland’s agreement to an EU climate policy package?

The obvious answer is to somehow create a loophole for Poland to be exempt from the requirements of EU climate policies. Such loopholes are the Achilles Heel of cap-and-trade, and doom the EU plans to policy failure. U.S. cap-and-traders should take note.

Today’s FT sheds some light on the nature on the emerging Polish loophole:

Power stations in eastern Europe could receive millions of euros of free carbon emission allowances to overcome opposition to a European Union climate pact.

The French proposal, a copy of which has been obtained by the Financial Times, is intended to address Poland’s concerns about the expansion of Europe’s emissions trading system, a central pillar of the EU’s ambitious plan to reduce carbon dioxide emissions by 20 per cent from 1990 levels by 2020.

Poland and other east European member states have strenuously objected to a measure in the original plan that called for electricity utilities to buy all of their emissions allowances at auction, beginning in 2013.

They argue that their coal-dependent utilities would be forced to pass on billions of euros in additional costs to consumers at a time when their economies are slowing.

The new proposal seeks to alleviate those concerns by giving a temporary exemption to countries that make 60 per cent or more of their electricity from solid fossil fuels. Their utilities would receive up to half their emissions allowances for free until 2016, according to the draft proposal.

Baltic states, which are poorly connected to the EU electricity grid, would also be eligible for the phase-in programme. Some European governments have indicated that the French proposal – one of the most substantive changes since the package was proposed by the European Commission in January – could set the grounds for a compromise.

Donald Tusk, the Polish prime minister, expres­sed optimism that the two sides were moving closer to a deal after meeting President Nicolas Sarkozy of France.

However, on Tuesday some others in the Polish government took a harder line on Tuesday. Mikolaj Dowgielewicz, Poland’s minister for European affairs, said he was still holding out for a separate system in which utilities would receive allowances based on reasonable benchmarks for their various technologies.

“We don’t want a gradual auctioning system because gradual auctioning would create a space for more windfall profits for energy companies,” Mr Dowgielewicz said, echoing concerns of environmental groups such as Greenpeace, which fear that utilities will pass on the cost of free allowances to their customers.

“I would not bet my money on when and how we are going to reach an agreement,” he added.