The EU Emissions Trading Scheme (ETS) is in urgent need of tighter caps on carbon emissions if it is to deliver even modest reductions in Europe's long-term carbon footprint, NGOs warned the Environmental Audit Committee yesterday.

The scheme – which puts a cap on the amount of carbon dioxide firms are allowed emit and requires them to purchase carbon allowances to cover emissions above that cap – has been heavily criticised in recent months as falling levels of industrial output and carbon emissions have led to a collapse in the price of carbon allowances.

Bryony Worthington of environmental charity Sandbag, who has worked in emissions trading for 10 years, said that the caps within the ETS had been set so high that they were giving the entire concept of emissions trading a bad name.

"The fundamental failing of the ETS is that it takes too cautious an approach to caps and that's because of the sectors it has been applied to and the fact that there has been a vocal lobby from heavy industry that has watered down the caps," she said, arguing that tighter caps would have limited the recent fall in the price of carbon.

The recession, an influx of cheap foreign credits and the lax original caps have all led to a collapse in the price of carbon in recent months. It currently costs €11 (£10.18) to emit a tonne of carbon, well below the €30-€45 range needed to make renewables competitive.

The NGOs warned that with the price of EU carbon allowances and carbon credits from outside the EU currently standing at about €11 per tonne, there was little financial incentive for firms to invest in low-carbon technologies.

"At the moment all we have seen is a switch between black and brown coal in Germany," explained Worthington. "Until we get a price signal that is strong enough to get [the cheap abatements options] out of the system, trading will not be used as a driver of alternative [energy] investment."

The EU emissions trading directive is being re-opened next year, giving the European Commission the opportunity to tighten caps for the next phase of the scheme – an opportunity NGOs urged legislators to take.

"Even if we don't get a deal at Copenhagen, let's make sure that re-opening tightens the cap," said Worthington. "That will push prices in the next phase, and the expectation of shortage will drive up prices in this phase."

Recent research from the WWF estimates that based on current caps and after factoring credits from outside the EU into the equation, the ETS could deliver a reduction in emissions of just five to six per cent by 2020, well below the 20 per cent target set by the European Commission and the 25 to 40 per cent target recommended by the International Panel on Climate Change (IPCC).

Keith Allott, head of climate change at the WWF, said the carbon price at the moment was far too low to deliver the investment in renewables required to facilitate the long-term move to a low-carbon economy.

"At the moment the only driver for renewable investment is the Renewables Obligation [incentive mechanism]," he said.

Kirsty Clough, climate change policy officer at WWF, added that even taken together, the ETS and the Renewables Obligation were currently failing to prevent power stations being built that would lock the UK into a high-carbon trajectory.

"We also need supplementary measures such as emissions standards for power stations," she said.

Larry Lohmann of The Corner House said the EU ETS should be scrapped completely as it interfered with these more direct policy mechanisms. "The UK government has already been quite explicit that one of its reasons for reluctance [to provide] support for more renewables is that it is worried it will interfere with the carbon price," he said, arguing that scrapping the scheme would make it easier to develop more direct financial support and legislative measures.