The European Union's Emissions Trading System (ETS) is failing to deliver vital green investment after a collapse in carbon prices, MPs warn in a report out today.
The environmental audit committee is calling on the government to introduce measures such as a new carbon tax to push the price of carbon from its level of €15 (£13) a tonne to what the MPs see as a more credible price of €100.
Tim Yeo, chairman of the committee, said: "Emissions trading should be helping us to combat climate change, but at the moment the price of carbon simply isn't high enough to make it work. The recession has left many big firms with more carbon allowances than they need and carbon prices have collapsed.
"If the government wants to kick-start serious green investment, it must step in to stop the price of carbon flatlining," the MP added.
The European cap-and-trade scheme has been seen by supporters as a model that should be replicated worldwide. Barack Obama has proposed a project for the US but it is facing heavy opposition, while in Australia the issue has also brought bitter divisions.
Friends of the Earth said the environmental audit committee report was "another nail in the coffin" of the ETS and argued the government should drop its reliance on the scheme in favour of energy efficiency measures and stronger regulation.
Sarah-Jayne Clifton, a climate campaigner at Friends of the Earth, said: "Not only is trading failing to drive down emissions, banks are growing fat developing ever more complex trading systems and this risks another financial crash."