Climate change committee chief signals support for carbon "floor price"

Calls for a "floor price" on carbon allowances received influential backing yesterday when Lord Turner, the chairman of the government's Committee on Climate Change, signalled he would support such a move.

The price of carbon credits under the EU emission trading scheme (ETS) has collapsed from €31 last summer to about €8 last month, prompting calls for a " floor price" to be imposed that would provide firms with greater confidence that investments in low carbon infrastructure will deliver long term returns.

Jonathon Porritt, chair of the Sustainable Development Commission, said recently he would like to see a "floor price" imposed on carbon that would effectively combine the flexibility of a market-based approach to driving down emissions with the certainty offered by a carbon tax.

Speaking yesterday, Lord Adair Turner told MPs on the energy and climate change select committee that the EU should give serious consideration to the proposal, arguing that if the price of EU allowances (EUAs) remain at their current level it will remove the incentive for firms to invest in low carbon technologies.

"We have concerns [that] if the carbon price continued at its present level it would not send the signals which are required [to investors]," he said. "I'd think, given the fall in the carbon price this year, that's something that should be considered. It would, of course, need to be considered at European level."

However, the price of EUAs has recovered slightly in the past week to about €12 and many analysts remain convinced that the price of carbon will recover without the need for interventions that could distort the market and make it harder for the ETS to link up with forthcoming cap-and-trade schemes in North America and Asia.

Speaking at a recent press conference in support of the ETS, David Hone, group climate change advisor at Shell, said that attempts to impose arbitrary price floors and ceilings on markets invariably led to distortions in the market.

His comments were echoed by Alessandro Vitelli of analyst firm IDEAcarbon agreed that the potential damage caused by a floor price would outweigh the benefits. "A floor price simply gives the market a massive get out clause that means it can’t do its job, " he argued. "You give investors more visibility over the future, but that will not guarantee that the investment will flow towards low carbon projects again."

He added that governments could intervene to bolster the price of carbon without undermining market forces by simply moving to lower the overall carbon cap whenever a recession leads to reduced emissions.

"Governments could bring the cap back down in the same way as banks intervene by changing interest rates, " he said. "It is a simpler way of pushing up the price of carbon without distorting the market."

Alternatively, governments could delay the auction of fresh EUAs on the market, he added, a move that would similarly reduce supplies of allowances and help drive up prices. "The EU said it could bring auctions forward when the market was overheating to help bring down prices," he said. "That same principle could be reversed to help increase prices."