UPDATE 1-UK needs "step change" to meet climate target -report

* Committee urges faster shift to low-carbon economy

* Stops short of recommending tougher 2020 carbon target

(Adds details, background, reaction, quotes)

By Gerard Wynn and Mohammed Abbas

LONDON, June 30 (Reuters) - Britain still needs a "step change" in policy to meet its greenhouse gas reduction targets, despite a recession that sharply curbed emissions last year, the government's statutory climate advisers said on Wednesday.

Emissions of greenhouse gases fell by 8.6 percent last year, but mainly because of a financial crisis that cut British manufacturing output by a tenth.

If Britain is to meet its target of a 34 percent reduction from 1990 levels by 2020 more structural change is needed, the Committee on Climate Change said in its annual report, which stopped short of recommending a firmer 2020 target.

"We still need in underlying terms to achieve a step change in progress," said Adair Turner, head of the committee.

Wednesday's report singled out slow progress to deploy electric vehicles, renewable energy and home insulation, and criticised fragmented policies and a focus on self-regulation.

Adair said policy needed to be strengthened in the electricity, transport, building and farming sectors.

More far-reaching recommendations included an overhaul of energy markets, including legislation to support carbon prices and limit emissions from gas as well as coal-fired power plants, and a roll-out of electric cars "to move beyond the feasible improvements in the internal combustion engine".

The government has in the past followed the committee's advice on targets, for example to toughen its goal for 2050 to an 80 percent cut compared with 1990.

RECESSION

Last year's recession-driven fall in emissions masks a much slower underlying rate of reduction. "The vast majority of the fall ... derives from the recessionary effect," Adair said.

The financial crisis may even make future action more difficult, as a slump in demand for carbon permits has caused a fall in carbon prices intended to penalise fossil fuel emissions under the European Union Emission Trading Scheme.

The committee cut its forecast of the carbon price in 2020 to about 20 euros per tonne of CO2 from 50 euros per tonne as estimated in 2008. Carbon now trades at about 15 euros.

The government needed to tighten penalties for power generation from high-carbon fossil fuels and increase incentives for cleaner energy, the report said.

A carbon price floor could support EU prices, but the committee had not yet resolved where the floor level should be. Britain's new coalition government supports a floor price.

"We have a range of 20-70 euros," depending on future gas prices, said David Kennedy, the committee's chief executive.

Their report supported fitting carbon capture and storage (CCS) technology to gas as well as coal-fired power plants. Burning gas unabated produces fewer carbon emissions than coal but is still incompatible with medium-term targets, it said.

And it recommended maintaining support for early adopters of pure electric cars: the new coalition government has not yet confirmed it will keep a 5,000 pounds grant towards such purchases, against a backdrop of wider spending cuts.

The report said that the farming sector could double required carbon cuts through 2020 at no extra cost, for example through more frugal use of fertilisers and more coherent support for anaerobic digestion, a process which traps methane emitted from animal waste and uses it as fuel. (Reporting by Mohammed Abbas and Gerard Wynn; editing by Peter Graff)