Allowances under the European Emissions Trading System are trading at less than €8 per tonne of carbon dioxide. This is far too low to stimulate increased investment in energy efficiency or low carbon energy. The system must be overhauled so that it provides higher prices and greater stability.
As a first step, the cap on the volume of emissions should be lowered, to reflect the fact that the economic recession has led to lower emission levels than expected when the cap was set. A lower cap should be combined with a price floor and a price ceiling.
Without safeguards, an effective emissions trading system would lead to more manufacturing in countries with cheap energy and no carbon price. Therefore, the EU should introduce border tax adjustments, with revenue returned to the country of origin for spending on energy efficiency and low carbon energy.
The Centre for European Reform has now published my paper on this. (see Centre For European Reform: Saving emissions trading from irrelevance).