MPs call for carbon tax to tackle "failing" EU cap-and-trade scheme

The campaign to reform the EU emissions trading scheme (ETS) will secure an important new ally today with the release of a major report from the Environmental Audit Committee of MPs that will urge the government to consider introducing a carbon tax designed to guarantee a minimum price for carbon.

Environmental and business groups, including a number of energy firms, have long complained that the low price of carbon that has resulted from the recession has undermined the case for investing in low carbon technologies. They have also warned that inevitable fluctuations in the price of carbon make it difficult for companies to plan infrastructure investments that are likely to have a life span of several decades.

The Environmental Audit Committee (EAC) agreed that the current mechanism, whereby the price of carbon is determined solely by supply and demand for emission allowances, is flawed and called on the government to consider measures that would guarantee a minimum price for carbon, such as a new carbon tax.

"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," observed Tim Yeo MP, Chair of the Environmental Audit Committee. "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."

He added that ministers should "seriously explore" the possibility of a carbon tax and should push the EU to tighten up the overall caps in the ETS.

The report warned that while the current phase of the ETS had been undermined by a collapse in demand for emission allowances brought about by the recession, deflated prices were likely to continue into the next phase of the scheme which begins in 2013.

Under the rules of the ETS, firms are allowed to transfer emission allowances from the current phase of the scheme into the next phase making it easier for them to comply with tightening emission caps.

The EAC report cited a study from the National Audit Office, which warned that the banking of surplus credits from the current phase of the scheme coupled with the use of carbon offsets could cover up to 50 per cent of the cuts in overall emissions that are meant to be delivered between 2008 and 2020.

The price of carbon is expected to rise over the coming years with a recent report from Barclays Capital predicting that prices will rise from their current level of around €13 to €24 by 2012, before averaging €40 a tonne during the next phase of the scheme.

However, prices will remain well below the €50 to €100 range that many experts will believe will be needed to make costly low carbon technologies such as carbon capture and storage economically competitive.

In addition to calling on the government to investigate the potential for a carbon tax similar to that being prepared in France, the report urges it to push the EU to develop a mechanism for tightening emission caps in response to recession driven reductions in emissions and increase the number of emission allowances that are auctioned.