LONDON (Bloomberg) — Europe needs stricter limits on greenhouse gases and the power to intervene in carbon markets as its cap-and-trade programme fails to encourage investments in cleaner energy, UK lawmakers said yesterday in a report.

Restrictions on factories and utilities in the European Union are too lax, depressing carbon prices and undermining incentives for polluters to give up fossil fuels, the UK Parliament's Environmental Audit Committee said in the report. The EU emissions market, the world's biggest, faces a 2.3 percent oversupply of permits for the five years through 2012 after the recession cut demand, a Bloomberg News survey showed.

"It is imperative that there are mechanisms for reducing the EU cap," the committee said. While the UK alone couldn't change EU caps, the 16-member panel representing the Labour, Conservative and Liberal Democrat parties said "the UK should be prepared to act "unilaterally" to curb its supply of permits and "demonstrate a continuing leadership role on tackling climate change".

The committee, which successfully argued for legislation in 2008 to deepen the UK's carbon-reduction goals to 80 percent from 60 percent by 2050, is now proposing measures to keep CO2 prices at levels that encourage investments in clean energy. Such intervention has been resisted by investors including Barclays Plc, Societe General SA and Citigroup Inc.

"It's certainly not appropriate for blunt intervention in emission prices" Garth Edward, a London-based trader and director of environment products at Citigroup Global Markets Ltd. said by e-mail yesterday.

The UK government will specify proposed changes in the energy market when it presents its budget statement later this year, the Department of Energy and Climate Change said yesterday in an e-mailed statement.

"The carbon price is important, but in the context of our long-term goals, a floor may not be a panacea," it said.

EU carbon permits for delivery in December rose as much as 1.7 percent to 13.49 euros a metric ton yesterday on London's European Climate Exchange. The permits, or rights to pollute, have lost 8.6 percent in the last six months as the economic recession sapped demand and European governments were unable to persuade the US, China and other countries at the Copenhagen meeting to commit to a legally binding treaty to reduce carbon-dioxide emissions.

The EU needs a "full range of fiscal and policy instruments" to limit the supply of permits and keep prices at levels "where renewable and low-carbon investments become economically viable," the committee said.