EU carbon market failing to deliver green investment warn MPs

• Report: Role of carbon markets in preventing climate change
• Briefing for the Environmental Audit Committee - European Union Emissions Trading Scheme: A review by the National Audit Office (external site)
• Environmental Audit Committee

The Environmental Audit Committee is calling on the Government to consider measures that would guarantee a minimum price for carbon, such as a new carbon tax.

The Committee heard calls for a carbon price of €100 a tonne of CO2, or higher, in order to drive urgently needed investment in green technologies and energy efficiency. Current prices, which remain nearer to €15 a tonne, are too low to pull through the required investment.

Tim Yeo MP, Chair of the Environmental Audit Committee, said:

"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.

"The recession has left many big firms with more carbon allowances than they need and carbon prices have collapsed.

"If the Government wants to kick-start serious green investment, it must step in to stop the price of carbon flat-lining.

"Ministers should seriously explore the possibility of a carbon tax and must press the EU to tighten up the overall caps in the Emissions Trading System

The EU Emissions Trading System (EU ETS) is central to the UK’s efforts to cut emissions, but is currently failing to reduce carbon dioxide levels. The cap on emissions in Phase I (2005 – 2007) was too weak and allowances were over-allocated. Caps in Phase II (2008 – 2012) were supposed to be tighter, but have been seriously undermined by the impact of the recession.

Big firms were allocated free emissions allowances on the basis of business-as-usual projections made before the downturn. As economic activity has slowed as a result of the recession many firms have found themselves with more carbon allowances than they need. This has suppressed the price of carbon [see fig 2 in the report] and made green investment look less attractive.

Moves to tighten the EU ETS in its third phase (due to start in 2012) may improve the scheme’s effectiveness, but the Committee is worried that the use of offsets and the banking of surplus credits from Phase II could continue to undermine it.

A National Audit Office paper commissioned by the Environmental Audit Committee for the inquiry showed that offset credits could be used to meet up to 50 pert cent of the cuts in overall emissions imposed by the caps over the period 2008 to 2020. Evidence given to the Committee suggests that in some cases companies could meet all of their required cuts for Phase II without making any actual emissions cuts themselves.

The Committee is also calling on the Government to:

• push for the EU to adopt a European target that more closely reflects the climate change science, and to adopt a tighter cap for the EU ETS
• press the EU to improve how it responds to recession driven reductions in demand and review regularly whether the cap needs to be tightened
• auction as many allowances as possible, instead of giving them away for free
• encourage other European countries to increase the use of allowance auctions with reserve prices
• encourage more low-carbon power generation and tighter regulation on high-carbon power.

The Committee’s report reviews the prospects for linking the EU ETS with other emissions trading schemes. It finds that Europe should take care that in moving to a global emissions trading scheme it does not undermine the effectiveness of the EU ETS or weaken the carbon price.

If the EU ETS is merged with other schemes with more generous emissions allowances, or more generous subsidies for low-carbon emitters, then terms of trade – some sort of carbon ‘exchange rate’ – could be needed to ensure a level playing field.

The Committee cautions however that the Government, with its European partners, would need to ensure that schemes are not merged without such an 'exchange rate' being carefully calibrated.

Tim Yeo MP, Chair of the Environmental Audit Committee said:

"Only a global effort will make a real difference in tackling climate change. Other countries outside Europe are developing emissions trading schemes, and these need to be joined up.

"The Government and the rest of Europe should actively push for this, while ensuring that in doing so action is taken to at least maintain the carbon price."