Environmental Audit Committee

Monday 8 February 2010

Contact: Nicholas Davies 07917488141


NEW REPORT: The role of carbon markets in preventing dangerous climate change

The EU's flagship Emissions Trading System is failing to deliver vital green investment, after a collapse in carbon prices magnified by the recession, MPs warn in a report out today. The Environmental Audit Committee is calling on the Government to consider measures that would guarantee a minimum price for carbon, such as a new carbon tax.

The Committee heard calls for a carbon price of ‚100 a tonne of CO2, or higher, in order to drive urgently needed investment in green technologies and energy efficiency. Current prices, which remain nearer to ‚15 a tonne, are too low to pull through the required investment.

Tim Yeo MP, Chair of the Environmental Audit 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."

"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 now step in to stop the price of carbon flat-lining.

"Ministers should seriously explore the possibility of a carbon tax and must press the EU to tighten up the overall caps in the Emissions Trading System."

The EU Emissions Trading System (EU ETS) is central to the UK's efforts to cut emissions, but is currently failing to reduce carbon dioxide levels. The cap on emissions in Phase I (2005 - 2007) was too weak and allowances were over-allocated. Caps in Phase II (2008 - 2012) were supposed to be tighter, but have been seriously undermined by the impact of the recession. Big firms were allocated free emissions allowances on the basis of business-as-usual projections made before the downturn. As economic activity has slowed as a result of the recession many firms have found themselves with more carbon allowances than they need. This has suppressed the price of carbon [see fig 2 in the report] and made green investment look much less attractive.

Moves to tighten the EU ETS in its third phase (due to start in 2012) may improve the scheme's effectiveness, but the Committee is worried that the use of offsets and the banking of surplus credits from Phase II could continue to undermine it. A National Audit Office paper commissioned by the Environmental Audit Committee for the inquiry showed that offset credits could be used to meet up to 50% of the cuts in overall emissions imposed by the caps over the period 2008 to 2020. Evidence given to the Committee suggests that in some cases companies could meet all of their required cuts for Phase II without making any actual emissions cuts themselves.

The Committee is also calling on the Government to:

  • push for the EU to adopt a European target that more closely reflects the climate change science, and to adopt a tighter cap for the EU ETS;
  • press the EU to improve how it responds to recession driven reductions in demand and review regularly whether the cap needs to be tightened;
  • auction as many allowances as possible, instead of giving them away for free;
  • encourage other European countries to increase the use of allowance auctions with reserve prices; and
  • encourage more low-carbon power generation and tighter regulation on high-carbon power.

The Committee's report reviews the prospects for linking the EU ETS with other emissions trading schemes. It finds that Europe should take care that in moving to a global emissions trading scheme it does not undermine the effectiveness of the EU ETS or weaken the carbon price. If the EU ETS is merged with other schemes with more generous emissions allowances, or more generous subsidies for low-carbon emitters, then terms of trade - some sort of carbon 'exchange rate' - could be needed to ensure a level playing field. The Committee cautions however that the Government, with its European partners, would need to ensure that schemes are not merged without such an 'exchange rate' being carefully calibrated.

Tim Yeo MP, Chair of the Environmental Audit Committee said:

"Only a global effort will make a real difference in tackling climate change. Other countries outside Europe are developing emissions trading schemes, and these need to be joined up.

"The Government and the rest of Europe should actively push for this, while ensuring that in doing so action is taken to at least maintain the carbon price."


1. The energy and industrial sectors participating in the EU Emissions Trading System (EU ETS) have to acquire 'allowances' (permits to produce greenhouse gas emissions) to cover their annual emissions, and this is designed to encourage them to reduce emissions where most cost-effective.

2. This is the Committee's third report on emissions trading (see http://www.publications.parliament.uk/pa/cm200607/cmselect/cmenvaud/70/70.pdf and http://www.publications.parliament.uk/pa/cm200607/cmselect/cmenvaud/1072/1072.pdf ). The Committee has previously found that the overall cap on emissions in Phase I of the scheme was too weak and allowances were over-allocated. Europe-wide emissions actually increased by 38 million tonnes between 2005 and 2007 (the first phase of the scheme) and still remained below the cap [Figure 1 on page 10 of the report]. Phase II was supposed to set a tighter limit, but the global financial crash has served to loosen this€”as firms have been handed emissions allowances on the basis of business-as-usual projections made before the downturn.

3. Figure 2, on page 21 of the report, shows the changes in the carbon price from 2005 up to the end on 2009.

4. The NAO's report for the Committee was published in April 2009, and is available on their website: http://www.nao.org.uk/publications/0809/eu_emissions_trading_scheme.aspx


The report published today by the Environmental Audit Committee (EAC) is its Fourth Report of Session 2009-10, HC 290. Details of all the Committee's press releases together with its Reports, oral evidence and other publications, are available on the Committee's website at: www.parliament.uk/eacom

The text of the Report is available on the Committee's website: http://www.publications.parliament.uk/pa/cm/cmenvaud.htm

Copies of the Report can be obtained from TSO outlets and from the Parliamentary Bookshop, 12 Bridge Street, Parliament Square, London SW1A 2JX (020 7219 3890) by quoting House of Commons Number HC 290.

The Environmental Audit Committee

Under the terms of Standing Order No. 152A the Environmental Audit Committee is to consider to what extent the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development: to audit their performance against such targets as may be set for them by her Majesty's Ministers; and to report thereon to the House.


Chairman: Mr Tim Yeo, MP

Gregory Barker MP Mr Nick Hurd MP Mrs Linda Riordan MP
Mr Martin Caton MP Ms Jane Kennedy MP Mr Graham Stuart MP
Colin Challen MP Mark Lazarowicz MP Jo Swinson MP
Mr David Chaytor MP Mr Ian Liddell-Grainger MP Dr Desmond Turner MP
Mr Martin Horwood MP Mr Shahid Malik MP Joan Walley MP

Media Enquiries: Nick Davies, 020 7219 3297. or via email: daviesnick@parliament.uk

Other enquiries: Gordon Clarke, 020 7219 0248.

Specific Committee Information: Details of all the Committee's press releases and inquiries, together with its Reports, oral evidence and other publications, are available on the Committee's Internet home page, which can be found at: www.parliament.uk/eacom/

Watch committees and parliamentary debates online: www.parliamentlive.tv

Publications / Reports / Reference Material: Copies of all select committee reports are available from the Parliamentary Bookshop (12 Bridge St, Westminster, 020 7219 3890) or the Stationery Office (0845 7023474). Committee reports, press releases, evidence transcripts, Bills; research papers, a directory of MPs, plus Hansard (from 8am daily) and much more, can be found on www.parliament.uk