Europe's emissions trading scheme has failed to create incentives for utilities to use cleaner energy fuels, meaning that governments will have to switch to simpler tools, such as subsidies and regulation, to enforce emissions reduction targets.
One of the most effective steps to reduce emissions would be to switch from coal-fired power generation to gas, which produces about half the emissions of coal.
The European Union's emissions trading scheme (ETS) puts a price on allowances to emit greenhouse gasses into the atmosphere. But since the scheme's launch in 2005, the system has failed to create a sufficient incentives for industry and power generators to switch to cleaner energy sources, Reuters data shows.
At current market prices for power, gas and coal, a tonne of CO2 emissions would have to cost almost 40 euros ($50.39) to make gas more attractive than coal-fired power generation, Reuters data shows. The actual price for CO2 emissions is less than 7 euros a tonne.
"What is becoming clear is that the result of the inherent inefficiencies in gas pricing are limiting the market-share gains of that commodity and are pushing users in high gas price regions (Europe and Asia) to continue using coal," Barclays Capital said in a research note on Thursday.
"This is locking the world into a much higher emissions path (and) we estimate that global CO2 emissions from primary energy consumption were up by 2.9 percent year on year.