Government mulls increase in carbon credits sold at auction

Just days after the government outlined how it plans to auction carbon credits under the next phase of the EU's emissions trading scheme, reports have emerged that it is considering significant changes to the scheme that would see the proportion of credits sold at auction increase.

The government is planning to auction seven per cent of the EU Emissions Allowances (EUAs) issued to carbon intensive businesses and energy companies during the next phase of the scheme running up to 2012 – a move that will net the Treasury an estimated £1.6bn over the next three years.

However, according to reports in both the Sunday Times and the Guardian, officials are investigating raising the proportion of EUAs that are sold at auction to 10 per cent – the maximum level allowed under EU rules – in an attempt to raise an extra £500m a year for investment in anti-fuel poverty and domestic energy efficiency measures.

The proposed move is one of a number of options being considered by the government, as it comes under growing pressure to respond to spiralling energy prices.

Green groups and some Labour MPs have called for a repeat of the 1997 windfall tax on the profits of big utilities, but such proposals have prompted fierce opposition from the CBI and other business groups. As such, an increase in the proportion of EUAs sold at auction is seen as an attractive compromise position, providing energy companies with further incentive to curb emissions while raising revenue for increased winter fuel payments for the poor and elderly.

A spokeswoman for Defra refused to be drawn on whether any decision on changes to the auctioning process had been reached, but she added that the scheme was designed to be "flexible". "As announced last week, we're planning to auction seven per cent [of the credits]," she said. "But the scheme has always been designed to be flexible, so that it can be adjusted based on how things move forward."

The government is also reportedly considering reforms to the carbon emissions reduction target (Cert), which obliges energy companies to part-fund home insulation and other energy efficiency measures for their customers.

Under the three-year programme, energy companies are expected to invest £2bn in helping people on low incomes to improve the energy efficiency of their homes. But the government is now considering tweaking the scheme to increase the amount invested in the first two years of the scheme.

Both the proposed changes to the EUA auction and the Cert scheme are likely to further add to the upward pressure on energy bills for both business and domestic customers, but the government hopes the new schemes will help accelerate the adoption of energy efficiency measures while ensuring those on low incomes are better protected against higher bills.