EUROPE - A committee of UK MPs has proposed a carbon tax be placed on companies or the carbon trading pricing floor raised, to make inaction on climate change matter more expensive.

However, asset managers operating in the responsible investment market say any individual pricing changes by an individual EU member state are unlikely to work as buyers of carbon units would be able to buy cheaper deals abroad.

A study conducted by the UK Environmental Audit Committee this week found the carbon price has so far been "too low to encourage the necessary investment in low-carbon processes and infrastructure".

The committee of 17 MPs said the current European Union Emissions Trading System (ETS) said trading not really taken off and carbon emission actually grew across the UK and Europe between 2005 and 2007, largely because there is little incentive to reduce carbon emissions and buy carbon credits from an artificial market.

It therefore believes the EU ETS emissions cap should be lowered, a carbon tax should be introduced and allowance auctions with reserve prices - starting at a possible €100 - should be encouraged, in a bid to make energy companies and other such firms pursue low-carbon performance standards.

However, Ben Caldecott, head of climate change and energy policy at Climate Change Capital said any attempt to establish additional pricing rules in the UK would simply encourage energy firms to buy their carbon units elsewhere in Europe.

"Any measures that will make low-carbon alternatives attractive relative to high carbon profits is a good idea," said Caldecott.

"A high floor would be a good way to do it. But there are issues on how you would go about it. A minimum reserve price for auctions is set at national level. And the idea of setting a common minimum auction price would be hard  because a utility company can buy [units] anywhere other than their own country. And the mechanisms for an EU floor price could be difficult to get agree on across the board."

It's a sentiment shared by Olav Houben, senior portfolio manager at APG Asset Management, although he also stressed much of the low pricing is not just about inertia but lack of strategy information from key emitting countries.

"At this moment, carbon prices are low as a result of a combination of recession, low natural gas prices and uncertainty about the market for carbon after 2012.

"Current prices would be higher if the US would provide more clarity
regarding their willingness to combat climate change. This would
convince market participants that the market will be tight after 2012.
As current emission rights can also be used after 2012, this would have an immediate effect on current prices," said Houben.

He continued: "If the UK would opt for a tax approach, it would run the risk of
addressing the problem locally, while it is, in essence, a global problem."

The committee report noted emission rates rose during Phase 1 of the EU ETS initiative to cut carbon levels between 2005 and 2007 did not work, so there are already concerns that Phase II, between 2008 and 2012 will be "significantly over-allocated" and again in Phase III between 2013 and 2020.

Caldecott instead suggested the key to kickstarting carbon trading might be to reduce the carbon allowance cap or increase the emission reduction targets from 20% to 30%.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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