The Sandbag Climate Campaign blamed a crash in the market price of carbon permits under the EU Emissions Trading System last week on an oversupply of the credits.
Sandbag said the market is flooded too many credits. The group released a report Wednesday in London claiming 77 percent of installations covered by the ETS have a surplus of carbon permits and calling for 1.9 billion tons worth of permits being taken off the market.
Prices in the European Union's emissions trading system last week plunged to their lowest levels since a recession-led selloff in March 2009, which some analysts blamed on European infighting over climate change goals.
Futures for the EU carbon allowance fell as low as $16.75 early last week -- a 30 percent drop from levels in recent months. Prices have since rebounded a bit, closing at $18.40 per emissions allowance Wednesday.
"The recent freefall in the price of carbon has a simple, underlying cause -- a huge oversupply of permits," Damien Morris, senior policy adviser at Sandbag and principle author of the report, said in a statement.
"Our climate seat belt is so loose it's almost useless and Europe urgently needs to 'buckle up' and remove at least 1.7 billion permits if it is to get its flagship policy back on track."
The oversupply, Morris said, is equivalent to one full year's worth of emissions covered by the ETS. Permits carried over by heavy industry will "increasingly undermine Europe's flagship climate policy, threatening to derail it if left unaddressed."
The ETS "is potentially powerful but it may do more harm than good with a weak cap undermining other policies and national efforts," added Sandbag Climate Campaign Founder Bryony Worthington. "If Brussels fails to reform the ETS then it is setting up Europe to fail when it could so easily be leading the world."
The energy industry trade journal ICIS Heren blamed the price crash on EU's unveiling late last month of a new energy efficiency directive, predicting that supply of the credits would have to be cut to maintain prices.
Among its provisions is a demand that all EU member countries establish energy-saving plans and that energy suppliers reduce sales volumes by 1.5 percent annually through encouraging conservation among their consumers.
The directive also calls for governments to renovate at least 3 percent of their public buildings every year and for large companies to undergo audits identifying ways to reduce consumption.
The initiative imposes new energy efficiency legislation on the same sectors that are included in the emissions trading system, meaning potential buyers of the allowances probably won't need as many, the journal reported.
"Overlapping climate policies have robbed the emissions trading system of its ability to provide an investment signal for clean technology," ICIS Heren Editor Isabel Save said. "If new EU climate goals kill off demand, the supply of EU allowances will have to fall as well for prices to be sustained."
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