The Environmental Audit Committee issued a report arguing that the current EU carbon price of around €15 per tonne are too low to drive investment in green technologies and energy efficiency.
According to studies, the price would have to be at least €100 per tonne in order to trigger enough investment for shifting to a low-carbon society.
Carbon prices under the EU's emissions trading scheme (EU ETS; see EurActiv LinksDossier) have "collapsed" in the wake of the economic crisis, undermining the scheme for the period 2008-2012 after gross over-allocation in the first trading period, the committee said. Permit prices fell from €29/tCO2 to only €8/tCO2 between July 2008 and February 2009.
"Emissions trading should be helping us to combat climate change, but at the moment the price of carbon simply isn't high enough to make it work," said Tim Yeo MP, chair of the Environmental Audit Committee.
The report warned that the problem could be carried over to the post-2012 period, despite further tightening of the scheme that will see Western European electricity utilities have to start buying all their allowances at auction. As firms were allocated more credits than they can use in the recession, banking these surplus allowances could continue to undermine the scheme, it said.
Moreover, half of the cuts in emissions could be met with offset credits between 2008 and 2020, showed a paper by the National Audit Office commissioned for the report. The committee said it had evidence that some companies could meet all their requirements to curb emissions for the second trading period without making any cuts themselves.
"If the government wants to kick-start serious green investment, it must step in to stop the price of carbon flat-lining," Yeo said.
Towards a carbon 'floor price'?
The committee called on the UK government to press the EU to tighten the ETS cap to be more in line with climate science, as well as to review it regularly. It added that ministers should investigate the possibility of giving companies financial incentives to encourage them to cancel their allowances voluntarily.
The report also asked the government to work with the European Commission and other member states to roll out a floor price for the EU ETS, which increases progressively with the market carbon price.
The Commission has not been favourable to intervention in the carbon market, because it believes that the financial crisis will only have a temporary impact on allowances (EurActiv 03/03/09).
The lawmakers stressed that the UK must act even without EU support. They thus urged ministers to explore the possibility of introducing a carbon tax in the UK and curbing the number of allowances.
"If necessary, the UK should be prepared to act in these areas unilaterally, to demonstrate a continuing leadership role on tackling climate change," the committee said.
Cautious about international market
The report stated that the EU ETS will ultimately have to be merged with other cap-and-trade systems that are sprouting up in other parts of the world to be an effective climate protection tool.
But it urged the EU to exercise caution in linking with systems that hand out emissions allowances more generously or subsidise their low-carbon businesses more heavily. A level playing field could be guaranteed with "some sort of carbon 'exchange rate'," according to the committee.
"The government, with its European partners, would need to ensure that schemes are not merged without such an 'exchange rate' being carefully calibrated," it underlined.
The EU has set its sights on establishing an OECD-wide carbon market by 2015, with a transatlantic link as the first step. But US President Barack Obama's plans to get a federal cap-and-trade system through the Senate have run into trouble, and similar political hurdles are being experienced in Australia.