The Government is to decide in the next month on setting new legally-binding limits for greenhouse gas emissions from industry, following advice in a new report recommending sharp cuts in the current levels.
The decision could leave Irish firms facing a bill of between €500 million and € 1 billion between 2008 and 2012, as firms will be required to buy "carbon credits" under the emissions trading system if they want to continue with their current emission levels.
The move is the first significant financial impact on the economy of the Kyoto protocol, which binds the Government to a series of measures aimed at reducing global warming.
Under the protocol each European country is required to draw up a National Allocation Plan (NAP), which will set out the overall emissions large firms will be allotted between 2008 and 2012.
Companies will have to buy "carbon credits" on the open market each year between 2008 and 2012 if they want to produce emissions above this level.
Proposals for Irish industry have now been finalised for the Department of the Environment by independent consultants Byrne Ó Cléirigh.
The proposals are due to go to Government at the end of this month or next month at the latest.
The proposals are believed to recommend setting a ceiling of between 22 and 23 million tonnes of greenhouse gas emissions per year for industry.
This would leave a shortfall of between four and five million tonnes for Irish industry, which will have to be made up through the purchase of credits.
One year's credits are currently being traded at just over €27 per tonne, but two separate reports have recently predicted that the long-term price could rise much further than this.
Investment banking firm Dresdner Kleinwort Wasserstein have predicted that prices will rise to €35 per tonne, while JP Morgan has estimated that prices could rise as high as € 50 per tonne.
Under such prices the cost per year for Irish industry will be in the region of € 200 million to purchase carbon credits or € 1 billion in total for the 2008 to 2012 period.
A pilot allocation plan has already been in operation since last February but the limits set under that plan were close to or above the actual emissions being made by most companies.
The main exception was in the electricity sector, where companies have spent €23 million buying carbon credits.
The NAP proposals have to be sent to the European Commission for approval by the end of June.
As part of this submission the Government will also be required to give an indication of the additional measures it plans to introduce to ensure Ireland meets its Kyoto commitments.
Under the agreement, the State is required to keep carbon dioxide and related emissions to a level in the region of 60 million tonnes per year.
Any emissions above this limit will have to be paid for through the purchase of credits by either companies or the State.
Current estimates suggest the State will overshoot this limit by at least eight million tonnes per year.
Emissions trading by the industrial sector will account for less than half of this, leaving a potential shortfall of five million that the Government will be responsible for.
In May, the Department of the Environment is to produce a set of revised proposals for reducing greenhouse gases, but the measures are not expected to be sufficient to produce major reductions in emissions.
Two key measures, the introduction of carbon tax and the conversion of Moneypoint power station, were abandoned by Government.
The Government has already indicated it would also be buying nearly four million tonnes of credits each year to account for this shortfall.
Earlier this month the National Treasury Management Agency told the Dáil Public Accounts Committee that this would cost € 550 million.
These estimates were based on the cost of carbon credits remaining under €30, and the cost could rise to over €900 million if the market cost rises to € 50.