Report to argue for carbon price of £85 a tonne

The price of carbon allowances in the EU's emissions trading scheme (ETS) should be at least £85 a tonne, if they are to encourage firms to switch to low carbon technologies at a pace fast enough to ensure the government meets its emission targets.

That is the conclusion of a government-commissioned study into the scheme that will provide fresh ammunition to critics who argue that the government must intervene to push up a carbon price that is currently languishing at around €12 per tonne.

According to Sunday Times reports, a study from Chris Hope of Cambridge University's Judge Business School to be published later this year will argue that the ETS in its current form is flawed and that the price of EU allowances (EUAs) needs to be in excess of £85 a tonne if a sufficient range of low carbon technologies are to become viable.

Analysts have repeatedly argued that prior to the recession-led fall in carbon emissions, a carbon price of around €30 a tonne was proving effective at encouraging energy firms to switch from burning carbon-intensive coal to less polluting gas and biomass.

According to previous studies, however, a price of nearer €50 a tonne is needed to make switching to even the most cost-effective renewable energy sources economically viable, and now Hope's study will argue that the price will have to be higher still if the scheme is to encourage firms to invest in the more costly technologies needed to deliver the deep cuts in carbon emissions required under the government's climate change bill.

Hope is expected to recommend that major reforms to the ETS are necessary and that the government may need to impose a separate carbon tax on top of the trading scheme to deliver a clearer price signal to firms.

The news will further fuel the debate over whether government intervention is required to drive up the current price of carbon.

Several government advisors, including chair of the government's climate change committee Lord Turner, have suggested that a floor on the price of carbon may be required to give firms the certainty they require to invest in low carbon technologies.

But many traders in the market warn such a move would distort the market, arguing that the price of carbon will recover quickly following the recession. They recommend that if the government has to intervene to push up prices, it should do so by reducing the supply of EUAs at auction, rather than imposing arbitrary price floors and ceilings.