Europe carbon price plunges to record low; adds heat to Australia's $23tax

By Business editor Peter Ryan and staff

The price of carbon in Europe has plunged after the European Parliament rejected an emergency plan that would have forced companies to pay more for polluting.

European carbon permits fell as much as 45 per cent to as little as 2.63 euros ($3.34) a tonne, and German power prices for next year fell to their lowest level since 2007.

The slump resonates here given that Australia has a fixed carbon price of $23 a tonne until moving to a floating market price linked to the European scheme in 2015.

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The unprecedented slump has raised debate about whether emissions trading schemes are the best way to handle climate change or to make carbon polluters pay.

The problem for the EU scheme is that the eurozone debt crisis and slowing economic growth has meant less industrial output - that means less pollution and, as a result, companies have been buying fewer carbon permits and the price has dived from highs of as much as 31 euros a tonne in early 2006.

Today's proposal to reduce the short term supply of carbon permits as a way of pushing up the price came from France, but was rejected 334 to 315 with 63 abstentions by the EU Parliament.

"We now expect waves of speculative selling, followed by industrials also liquidating their surpluses," Konrad Hanschmidt, an analyst at Bloomberg New Energy Finance in London, told Bloomberg News.

"There is still a theoretical chance that the measure may pass, but that is not looking at all likely."

One man who voted in favour of the proposal is Chris Davies, a Liberal Democrat from Britain, who says it is a dark day for the environment.

"This is a blow against all who want to see Europe leading in the fight against climate change, and it also represents us turning our back on our own industrial future because most of the big engineering companies recognise that we need to develop low carbon technologies," he argued.

"In order to do that we have to put a price on carbon, create the right incentive. If there's no price, there's no incentive, we're not going to develop these new technologies. This decision today is really very bad news for our future."