LONDON (Reuters) - Prices for European carbon emissions permits are too low to deliver low-carbon investment and the British government should press the EU to tighten limits on emissions, a UK Parliamentary committee said on Monday.
The European Union’s Emissions Trading Scheme (EU ETS) is the 27-nation bloc’s main weapon against climate change. It forces companies to buy permits for each metric ton of carbon they emit. Carbon output is capped and the level is lowered year by year.
As industrial output slowed in the recession, many companies had more carbon permits than they needed to cover their lower emissions. Many sold the surplus permits to raise cash, cutting the price more than half to under 15 euros ($20) a metric ton.
Experts say carbon permits called EU Allowances (EUAs) need to rise to around 100 euros a metric ton in 2020 to drive low-carbon investment. Analysts forecast prices to be some 30 euros by then.
“At the moment the price of carbon simply isn’t high enough to make it work. If the Government wants to kick-start serious green investment, it must step in to stop the price of carbon flat-lining,” said Tim Yeo, chairman of the Environmental Audit Committee (EAC).
The government should press the EU to significantly tighten the scheme’s emissions caps, cancel new entrant reserve allowances and auction as many EUAs as possible instead of giving them to heavy polluters like utilities for free, the EAC said.
The EU ETS allows member states to set aside a national pool of spare EUAs called New Entrant Reserves for new or expanding industrial firms. Unused quotas from firms that close down are added to the pool.
Deutsche Bank estimates the total number of reserves in the EU will be over 300 million by 2012. Cancelling them, rather than auctioning or giving them away, would avoid too many permits flooding the market, the committee said.
The EU should also commit to a tougher emissions cut target of 30 percent below 1990 levels by 2020, instead of 20 percent, the committee urged.
To overcome current low prices, the government should consider the scope for a carbon tax, the committee advised. It should also encourage other member states to increase auctioning with reserve prices and press for a price floor in the EU ETS.
Under the EU ETS, governments can auction some of their national EUA quotas. The Carbon Trust estimates the government could receive 4 billion euros to 8 billion a year from its monthly auctions from 2013 to 2020.
Currently such revenue goes to the UK Treasury, but the government should show the profits go toward tackling climate change, the committee said.
The EAC said the use of offset credits means nations and industries with high emissions can buy their way out of making carbon cuts themselves. The government should therefore press for a limit on offset use.
Linking the EU ETS with other worldwide carbon schemes should not be done without setting an exchange rate, so that all the participants in a wider market are on a level playing field, the committee said.
“This report is yet another nail in the coffin for the government’s deeply flawed reliance on carbon trading to tackle climate change,” said Sarah-Jayne Clifton, Friends of the Earth’s International Climate Campaigner.
Editing by David Holmes