The Environmental Audit Committee (EAC), which analyses whether the UK is on track to meets its various environmental commitments, has called on the government to consider alternative measures to give backbone to ETS carbon prices, including a carbon tax.

The EAC says carbon prices need to be in the neighbourhood of €100 ($137) a tonne in order to drive large-scale investment into renewables. Current prices, around €13 a tonne, are “too low to pull through the required investment”.

“If the government wants to kick-start serious green investment, it must now step in to stop the price of carbon flat-lining,” says EAC chairman Tim Yeo, a Conservative member of parliament.

“Ministers should seriously explore the possibility of a carbon tax and must press the EU to tighten up the overall caps in the ETS,” Yeo says.

The EU ETS has been dogged with criticisms during its five-year history. The system saw a catastrophic collapse in permit prices near the end of its first phase, which ran from 2005-2007, due to a frenzied sell off as a result of an over-allocation of allowances.

Even more damaging for the system’s reputation was its failure to curb carbon emissions during Phase I, which actually rose by 38 million tonnes between 2005 and 2007.

Many financial and environmental analysts were bullish about Phase II given its tighter overall emissions cap. Moreover, firms will be able to bank any unused permits into Phase III, set to begin in 2012 -- a feature which in theory will prevent another price collapse.

By mid-2008 permit prices had climbed to more than €30 a tonne. But then came the recession, and with it a greatly reduced demand for power-generation across many European countries.

Many firms once again find themselves with more permits than they need. Since bottoming out in early 2009 at around €8 a tonne, prices have since hovered around €15.

The EAC acknowledges that Phase II permits are unlikely to suffer the same price collapse given their bankability into Phase III, set to begin in 2012. But the ability to carry permits over will also artificially expand the cap in Phase III – so-called ‘hot air’.