A new report claims reforming Europe's emissions trading scheme would stimulate emissions reductions and growth

A new report argues that reform of the EU emissions trading scheme (ETS) would lead to greater carbon emission reductions, whilst also stimulating economic growth and employment.

With the UN climate negotiations on a post-2012 framework commencing in Bali, the report examines the extent to which emissions trading can stimulate innovation, investment and employment.

The report was launched today by the Aldersgate Group, a coalition including businesses, regulators and the third sector.

Members of the Group include BT, United Utilities, RSPB, the Environment Agency, Friends of the Earth and Johnson Matthey.

Earlier this year the Aldersgate Group highlighted the need for mandatory carbon reporting to consistent standards. The CBI's Climate Change Task Force report, launched on Monday 26th November, reiterated this need to the government. The report called for a shift to a world where carbon becomes the new currency, and highlighted the UK's unique opportunity to prosper in key markets of the future.

Adrian Wilkes, chairman of the Aldersgate Group, said: 'The EU ETS is the central policy framework to combat climate change, and its core design features must be improved. We must ensure a credible and stable long-germ carbon price for investors and business, and harness the scheme's potential to cuts emissions, whilst simultaneously spurring growth and creating jobs. It is imperative that it maximises the vast economic benefits that can flow from higher environmental standards.'

Hilary Benn, Secretary of State for DEFRA, has recently said: 'We knew when we started EU ETS that it would involve a lot of learning. Nothing of this scale or design had ever been tried before. The over allocation of allowances in Phase I showed just how much we had to learn. But we will learn more in Phase II; and we need to think now about how we want the scheme to operate beyond 2012 [3].' The report picks up this challenge.

Ian Dickie, director of the Aldersgate Group, said: 'Only recently, Gordon Brown stated that a global carbon market is at the heart of the UK's approach to combating climate change, building on the foundations of the EU Emissions Trading Scheme and with the City of London at its centre [5]. Europe must lead the way in designing and implementing a more challenging framework that proves to the rest of the world that we can be green and grow.'

The report suggests that the key features of an optimal emissions trading scheme are:

1. A strong policy with a carefully regulated cap on carbon that drives the required reductions in emissions as efficiently as possible;

2. A greater proportion of permits than at present should be auctioned; and

3. A tighter cap on the amount of off-sets permitted, so that this does not become the dominant emissions-reduction approach in the EU.