Carbon Trust calls on EU to set minimum price for permits - 21 July

The European Union's emissions trading scheme should set a minimum price for permits to pollute in order to create an incentive for industry to cut greenhouse gas emissions, the UK government- backed Carbon Trust said on Wednesday.

The Carbon Trust wants governments in future to set aside 10 per cent of all permits and auction these at a minimum price in the second phase of the scheme that runs from January 2008 to December 2012.

This is in line with an EU directive, which states that up to a tenth of permits issued in the second phase can be auctioned.

The EU has set a deadline of June 30 for its members to submit their proposals for the second phase permits.

The UK has already said it will not meet the deadline, and about six other EU members have indicated that they would not meet the deadline.

The UK government is likely to wait until its energy review is published in July.

Other EU members are expected to wait until the EU publishes a report into phase one of the scheme, focusing on factors that contributed to the halving of carbon prices in April from a peak of more than €30 a tonne.

The price fall was triggered by a report showing that too many permits were issued in phase one, which runs from January 2005 to December 2007. In phase one, 2.2bn permits were issued free of charge each year.

Michael Grubb, chief economist of the Carbon Trust, said a limit of 10 per cent for permits to be auctioned would be sufficient to balance the market.

The other 90 per cent would be issued free of charge.

The emissions futures market is already factoring in a tighter supply of permits in phase two.

Carbon futures for December 2012 delivery are currently priced at €20 per tonne of carbon dioxide.

This is nearly 25 per cent higher than the December 2007 CO2 futures price, and compares with €15.15 a tonne in the June contract on the European Climate Exchange.

The Carbon Trust offers three recommendations: give all business sectors fewer free allowances than their projected 'business as usual'; benchmark the allocations given to power generators and differentiate by technology type for incumbents but not for new entrants; and use auctions to increase supply and stabilise prices.