DRAX Power Station is facing a massive hike in its operating costs, after the European Union decided the next round of carbon emission permits would be fully auctioned off rather than given away.

Since 2005, power generators and other industrial polluters have had to hold permits for the amount of carbon they produce, meaning they have to pay an economic price for the greenhouse gases they emit.

In phase one of this emissions trading scheme, which ended in December, the Government allocated enough free permits to cover most generators' emissions.

Drax Power Station was given permits for about two-thirds of its carbon production, with the firm buying further allocations from other EU companies to cover its remaining emissions.

In phase two of the scheme, which began this month and runs until December 2012, the EU will hand out some free permits, but will require polluters to buy more at an initial auction stage.

Now EU chiefs have announced generators will have to buy all their permits in the third phase of the trading sheme, beginning in 2013.

This may prove very costly for larger polluters like Drax, who fear a rerun of the infamous auction for third-generation mobile phone licences.

In the late 1990s, mobile phone operators paid the Government £23 billion for use of 3G mobile networks - four times what regulators thought the auction would raise.

Melanie Wedgbury, a spokeswoman for Drax, said the firm feared such a high market valuation for carbon could lead to price shocks or even power cuts for UK residents.

"What we saw last week was no surprise, to be honest," she said. "We knew the proposals would suggest the move to full auctioning.

"We're against full auctioning of permits because we believe you run the risk of disrupting the market.

"Disrupting the market can lead to price shocks or, if companies don't buy enough permits, you could have security of supply problems.

"In a worst case scenario we could have the prices driven up like they were in the 3G auction."

Ms Wedgbury said Drax favoured a gradual phasing in of permit auctions so the market could adjust.

"It's important now for us to work closely with the Government to make sure we get a robust auction method," she said.

Drax, which supplies about seven per cent of the National Grid's electricity needs, emitted about 20 million tonnes of carbon dioxide last year.