Prices in the EU's Emissions Trading System (ETS) on Thursday (24 January) dropped to €2.81 a metric tonne after a vote in the European Parliament's energy and industry committee opposing a scheme known as "backloading" - or supporting prices by extracting allowances from the market and reinjecting them later.
In volatile trade, they later climbed back above €4.
The European Commission warned this week that the price could drop dramatically and the scheme could become irrelevant unless parties agreed on a rescue plan.
"This should be the final wake-up call both to governments and the European Parliament," EU Climate Commissioner Connie Hedegaard said.
"The alternative is a re-nationalisation of climate tools, meaning a future patchwork of up to 27 different systems and taxes instead of one market creating a level playing field internally in Europe."
The €110-billion scheme is core to Europe's efforts to prompt utilities and industry to go green but carbon prices are far too low to provide that incentive. Analysts say carbon prices need to be at least €20 to make utilities switch to lower carbon energy generation.
Scheme to stay
Launched in 2005, the scheme is now in its third trading phase and is legislated to run until at least 2020, which means it cannot be dismantled even if prices crash to zero.
Thursday's vote is part of a long EU process. Although not binding, it is the latest sign of the difficulty the EU is having in reaching agreement on how to intervene in the carbon market.
A vote in the environment committee, expected next month, as well as another in a committee of representatives of member states, are far more decisive.
Many doubt the Commission's proposal will be passed, meaning more ambitious reform plans might not happen for years, leaving the market limping along and Europe's ambitions to lead the world fight against rising carbon emissions severely dented.
So far, coal-intensive Poland is opposed, Britain wants a more ambitious plan and Germany, the EU's most influential member, is undecided.
Eurosceptics and those who oppose regulation, such as energy-intensive industries, might celebrate, but others want a coherent EU-wide policy and ultimately a global carbon price.
"Many in the business community have been clear on this issue for over a decade - it's all about putting a price on carbon," said David Hone, climate change advisor for Royal Dutch Shell.
"Policymakers need to focus on the single clear goal of a carbon price in the energy system, rather than multiple energy mix targets. This is what business really needs."
Since the European carbon market launched in 2005, it has been beset by problems, including tax fraud, and an over-allocation of permits that generated huge windfall profits for polluters.
Prices crashed to near zero in 2007 from a €32-euro peak in April 2006 because of the over-allocation of permits. But traders today dismiss that collapse, blaming it on early errors in the experimental phase of the market.
It spurred Commission reforms and less generous allocation of allowances, helping prices to reach almost €30 in 2008 - a level many market participants do not expect again this decade.