Carbon markets failing, say MPs
By Fiona Harvey | Financial Times | February 8 2010
The carbon markets are failing in their role of encouraging investment in cutting CO 2 emissions, MPs have concluded.
The environmental audit committee has urged the government to consider other measures, such as a floor price for carbon dioxide emissions, which would provide industries with greater certainty over the price of carbon and help to ensure the system of pricing was effective.
The MPs said a price of €100 per tonne of CO 2 could be necessary to encourage investment, compared with current prices of about €13.
Tim Yeo, who chairs the committee, said: "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.
"If the government wants to kickstart serious green investment, it must step in to stop the price of carbon flat-lining."
Under the European Union's emission trading scheme (ETS), heavy industries are issued with a quota of carbon permits, and companies that want to produce more must buy spare permits from cleaner companies. This should encourage companies to invest in efficiencies and technologies that reduce their emissions. But, at current prices, the signal is widely acknowledged as too weak to prompt action.
Many companies are strongly against tightening the quota caps, however, as this would impose higher prices on them, raising fears that they could be undercut by rivals from countries without carbon-cutting regulations.
Yesterday, the CBI employers' body cast doubt on whether a floor price was the correct response. John Cridland, deputy director-general, said carbon prices had fallen because the recession had cut output, meaning companies needed fewer carbon permits.
He said: "We agree there is uncertainty about whether the EU ETS will be sufficient to encourage future investment in technologies like nuclear, but there is a debate to be had about whether a floor price is the right response."
Richard Gledhill, a partner at PwC, said the continuing uncertainty over international action on climate change was also a key factor. He said: "Carbon markets are being helped by improving economic fundamentals, but the disappointing outcome of Copenhagen is undermining longer-term prospects in the carbon market, and the market is seeing less new project activity."
If the EU agreed to cut its emissions by 30 per cent by 2020 rather than 20 per cent, he said, the carbon price would rise - sending a "strong message to business for low-carbon technology development and investment".
But this is seen as unlikely as other countries have failed to raise their carbon reduction targets.
City carbon traders had been hoping that a strong agreement in Copenhagen, and the hoped-for passage of cap-and-trade legislation in the US would provide a boost to the market.
However, governments failed to agree in Copenhagen on continuation of the international carbon markets beyond 2012, and difficulties over US healthcare legislation have pushed climate change down the political agenda, making it unlikely that the White House will overcome opposition to its cap-and-trade proposals.
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