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

Isramart news:
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.
It also advises that the EU think carefully before linking the ETS with proposed cap-and-trade schemes in the US, Australia and Japan, warning that without some form of carefully calibrated "carbon exchange rate" the price of carbon could be further undermined by an influx of cheaper allowances from schemes with different emission caps.

The report was welcomed by green groups, who called on the government to act quickly to bolster the carbon price imposed through the scheme.

"The EAC report provides a sober assessment of the inadequacies of the current emissions trading scheme (ETS) and how tackling our carbon emissions requires much greater and more urgent action in the UK and EU," said Keith Allott, Head of Climate Change at WWF-UK. "Relying solely on a weak ETS could risk locking us in to a costly high carbon future."

Friends of the Earth's International Climate Campaigner Sarah-Jayne Clifton offered a more damning assessment still, hailing the EAC report as "yet another nail in the coffin for the Government's deeply flawed reliance on carbon trading to tackle climate change".

"The committee has rightly identified that the European emissions trading scheme has barely cut emissions and the major weaknesses of future plans, and its calls for bigger UK carbon cuts without offsetting and tougher pollution standards for the power sector must be heeded," she said. "Not only is trading failing to drive down emissions, banks are growing fat developing ever more complex trading systems - and this risks another financial crash similar to that caused by sub-prime mortgages."

However, Richard Gledhill, partner and head of carbon market and climate change services at PricewaterhouseCoopers LLP, argued that effective reforms to the ETS could help drive up the price of carbon and deliver deep cuts in carbon emissions.

"If you talk to traders and market theorists, they will argue against price floors, saying markets work best without intervention, in this case delivering emission reductions at the lowest cost. But carbon markets also need to incentivise long term investment," he said. "Reserve prices in auctions would create an effective price floor and could help to reduce the potential for big price swings, and are worth exploring to provide stronger incentives for investment in low carbon generation. But you would need to apply these across Europe, not just in the UK."

However, he added that carbon pricing alone would not serve to drive long term investment in low carbon technologies and urged UK and EU leaders to deliver greater policy certainty to support their climate change strategies.

"Higher prices are needed to incentivise investment in many technologies. But higher prices aren't the only factor," he said. "Confidence in the market and in climate policy is also important. Uncertainty over the level of ambition in the EU and internationally and the delays in the climate negotiations aren't helping here