Europe must move to 100 per cent auctioning of carbon emissions permits by 2013 as part of ambitious reforms of the EU’s Emissions Trading System (ETS) and the UK should reinvest that money into renewable energy, according to a report by the House of Lords EU Committee.

Fossil fuel-intensive economies such as Poland, which has a high reliance on coal burning to generate power, are concerned about the cost of meeting carbon emission reduction targets and want exemptions to ensure that not all carbon permits in the power industry are auctioned and some are given away.

But the Lords’ report says the EU should aim for 100 per cent auctioning of allowances by 2013 and where exceptions are made for certain member states it should be on the understanding that the time limited transition period is used to develop and trial clean coal technologies.

The report also warns about the risk of “carbon leakage” -  where emissions-intensive production is relocated to countries where regulation is less stringent – but says any decision on free emissions permits to vulnerable industry sectors should be postponed until after the Poznan talks.

Two other key factors that will be critical to the effectiveness of the ETS are robust auditing and enforcement mechanisms, and links with emissions trading schemes in other parts of the world.

The auctioning of the carbon emissions permits are expected to generate a pile of cash for national governments and the report calls on the UK to re-invest these funds into green and renewable energy and other measures linked to climate change.

Lord Sewel, chairman of the House of Lords EU Sub-Committee on Environment and Agriculture, said:

“Ambitious revisions to the EU ETS are necessary if the system is to meet its goals. An auction based approach together with robust enforcement are essential. We accept that some Member States have legitimate concerns about the effect of strengthened ETS on their economies but it is vital the EU work to address those concerns without undermining the potential environmental benefit of the ETS. The EU must back any agreement that is reached with a strong and durable enforcement regime to ensure that agreed targets are achieved.”

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