BusinessGreen - As fresh details emerge confirming that US legislators plan to water down proposed cap-and-trade legislation, a group of European investors have called on world leaders to move in the opposite direction and undertake urgent reforms designed to tighten up emerging carbon markets.

The Institutional Investors Group on Climate Change (IIGCC), which represents assets totalling about €4 trillion (£3.5tn), released a report yesterday warning that the EU must move to deliver a stronger price signal through its emissions trading scheme (ETS) if it is to prove effective at curbing greenhouse gas emissions and promoting investment in clean technologies.

The investment case for some low-carbon technologies has been seriously undermined in the past year as demand for emissions credits has fallen and the price of a tonne of carbon in the ETS has more than halved from a high of about €30. The collapse in price has been attributed to the onset of the global economic downturn and resulting cuts in emissions from heavy industry, but it has still prompted growing numbers of firms to demand the introduction of a carbon floor price that would allow them to have greater confidence in return on investment calculations.

IIGCC chairman Peter Dunscombe urged governments to deliver a stronger carbon price signal that would boost investment in low-carbon technologies. “The credibility of emissions trading schemes would be greatly improved with a robust price signal as well as clear and frequent communication from the regulator on trading data and improved transparency over direct government participation in schemes,” he said. “We encourage governments to learn from the experience of the EU ETS and the problems faced by long-term investors as a result of excessive volatility and uncertainty.”

The report also advises that new cap-and-trade markets, such as that planned in the US, should set “ambitious caps” in line with the Intergovernmental Panel on Climate Change (IPCC) recommendations if they are to create the level of scarcity required to deliver higher carbon prices.

Under current proposals, the US scheme will deliver carbon emission cuts of 17 per cent by 2020, well below the 20 to 30 per cent level the IPCC estimates will be required for the world to have an acceptable chance of limiting global warming to two degrees above pre-industrial levels by the end of the century.

In addition to calling for the wider rollout of cap-and-trade schemes, including in large emerging economies such as China, the report also recommends major reforms to the UN-backed Clean Development Mechanism carbon offsetting scheme designed to better ensure approved projects deliver real emission reductions.

The report comes as US green groups this week digested reports that the Waxman-Markey climate change bill will be significantly less stringent than first expected.

Fresh details released on Friday by the House Energy and Commerce Committee confirmed that despite claims from the White House that it would like to see 100 per cent auctioning of pollution permits, up to 85 per cent of the permits issued under the scheme could be given away for free.

Under the proposals, which could go before the House of Representatives as early as this week, 35 per cent of the credits will be issued free to energy firms, while carbon-intensive industries will get a further 15 per cent free.

The natural gas sector would receive an additional nine per cent of the permits in circulation, oil refiners would pick up two per cent, users of heating oil would get 1.5 per cent, and car firms would receive three per cent to help them fund development of low-carbon vehicles.

The remaining 10 per cent would be distributed between carbon capture and storage and other clean tech and emission reduction projects, with only 15 per cent being sold at auction.

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