Prices for the allowances plunged to new lows Monday after the European Commission revealed that emissions covered under the scheme dipped 2.45 percent in 2011.
Analysts had expected a 2.5 percent increase.
In response, benchmark EU carbon prices fell 14 percent from Friday's levels to $8.18, intensifying concerns that a drop-off in economic activity due to the recession and an oversupply of allowances are undermining their effectiveness as a tool to promote investments in green technology.
The EU figures indicated 1.9 billion tons of greenhouse gases were emitted by European polluters eligible for the emissions trading scheme -- some 114 million tons less than the amount they are allowed to produce "for free" without buying the allowances under the program's ceiling.
That meant 163 million excess carbon allowances were issued in 2011, adding to an unused stockpile of 279 million unused credits held by the steel industry and 195 million issued to cement makers, the British environmental group Sandbag said.
The group said the situation heightens the need to "set aside" millions of credits from the open market as part of the upcoming Energy Efficiency Directive being negotiated by the three branches of the EU -- the European Commission, the Council of Europe and the European Parliament.
"The new figures add further pressure to European policymakers to intervene to rescue the troubled scheme before the next carbon budget begins in 2013," Sandbag Senior Policy Adviser Damien Morris said.
"The political conditions have never been better for policymakers to rescue the ETS from the twin legacies of over-allocation and recession."
Jason Anderson, head of European Climate and Energy Policy for the European office of the World Wildlife Federation, similarly warned that unless excess allowances were removed from the market the ETS is doomed to ineffectiveness and the viability of the EC's 2050 low-carbon roadmap endangered.
"WWF believes EU ETS needs to be urgently fixed in order to restore confidence in the policy instrument and avoid further collapse of the carbon price," he said. "This should be done by withholding a significant amount of emission allowances in the short term, in the context of the Energy Efficiency Directive."
The European Parliament last month approved a measure supporting intervention in the carbon market beginning with the ETS's 2013-20 phase.
The measure calls for a "necessary amount of allowances" to be removed from the market to strengthen their languishing open-market price, which has fallen from a peak of $40 per ton of carbon equivalent in 2008.
The measure, however, is vehemently opposed by the industrial users of the allowances who don't want their investments in them to be devalued by market manipulation.
Whether the set-aside language will make it into the final Energy Efficiency Directive is uncertain.
European Council president Denmark is pushing hard to pass the directive during its term but hasn't included it in its draft, while the European Commission itself is reportedly divided on the idea.
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