PwC latest to call for carbon floor price

The push to impose a floor price on carbon credits gained fresh momentum today with the release of a new report from PricewaterhouseCoopers which argues that a so-called "hybrid" carbon tax-and-trade scheme would provide firms with the certainty they require to invest in low-carbon technologies.

The report assesses the merits of various carbon pricing mechanisms and concludes that there is a strong case for a hybrid model that combines the flexibility of cap-and-trade schemes with the certainty of a carbon tax by imposing a floor and ceiling price on carbon allowances.

Speaking to BusinessGreen.com, report author John Hawksworth said that there was a strong case for introducing measures that would limit price volatility and allow firms to invest in low-carbon technologies while being confident that the price of carbon will justify the project.

He argued that a price floor could be imposed as part of the EU emissions trading scheme (ETS) relatively easily. "Governments could simply set a reserve price at auction that they will not sell allowances below and that would effectively set a floor price," he said, adding that in the longer term governments would have to agree to impose floor prices across various national and regional schemes.

The report is the latest in a series of calls for a reassessment of the way in which carbon is priced after falling industrial output and carbon emissions resulted in the price of allowances (EUAs) in the EU ETS collapsing from more than €30 (£28) last summer to about €10 currently.

Several of the government's top environmental advisors, including chairman of the Climate Change Committee Lord Adair Turner, chairman of the Sustainable Development Commission Jonathon Porritt, and chief economist at the Carbon Trust Michael Grubb, have signaled their support for a hybrid tax-and-trade scheme that would impose a floor price on EUAs.

However, many market watchers remain sceptical that such a scheme could work, arguing that imposing a floor price would undermine the market's ability to ensure the most cost-effective means of cutting emissions are those that attract the most investment.

Trevor Sikorski, a director in Barclays Capital's carbon trading division, said that any attempt to impose a floor price would represent "a market distortion that is unneeded". He added that even a floor price would not guarantee investment in low-carbon technologies, arguing that the role of prices was not to assign capital expenditure but instead "equilibrate markets by putting a price on the scarcity of the commodity… if the market needs investment to equilibrate, then it will signal this."

However, Hawksworth said that while imposing price floors and ceilings would serve to distort conventional markets, the artificial nature of the carbon market meant that it represents an exception to the rule.

"Normally you would say that if a price is low, it is low for a reason," he admitted. "But in this instance the market has been created for the specific reason of bringing down emissions and that is difficult to achieve if the price gets too low, so governments need the flexibility to address excessive price volatility."