Britain urgently needs to develop carbon capture and storage (CCS) technology if it is to achieve its climate targets, and failure to do so would require unforeseen technology breakthroughs and behaviour changes instead, a report said on Wednesday.

Analysts say CCS technology is critical if Britain wants to reach its long-term target of reducing emissions by 80-95 percent by mid-century, and that opting out of CCS would require costly alternatives.

CCS should be demonstrated as a matter of urgency, the government's independent advisory said in a report on Wednesday.

Without CCS, carbon budgets would be significantly more difficult to achieve, and would require currently unforeseen technology breakthroughs or significant behaviour change, it added.

UK climate policy is relying heavily on CCS to help the nation achieve a cut in greenhouse gas emissions by 80 percent by mid century in order to tackle climate change.

The report said that the government should therefore move forward with its proposed CCS demonstration projects without delay in order to provide confidence that these would be delivered on time.

I am committed to working with industry to get CCS deployed as quickly as possible and at best value, Energy and Climate Change Secretary Chris Huhne said.

We are putting all our efforts into launching a process as quickly as possible, but we need to understand the barriers which currently make CCS expensive and bring those costs down as quickly as possible and at best value to the taxpayer.

However, the chairman of the Energy and Climate Change Select Committee has written to Huhne to express concerns that the government's 1 billion pound support for a CCS demonstration project has been borrowed by the Treasury to fill a gap in the present spending round.

We are extremely concerned that the Treasury's short-term fixes will endanger our long-term economic and environmental prospects and these issues are not being given the weight they deserve in Whitehall, MP Tim Yeo wrote in the letter.

PROJECT CANCELLATIONS

Despite these pledges, recent project cancellations mean that CCS technology is unlikely to become operational in the foreseeable future.

In October, the UK government withdrew one billion pounds in funding for Scottish Power's CCS demonstration plant at Longannet in Scotland.

This month, Swedish utility Vattenfall abandoned plans for a 1.5 billion euro (1.28 billion pounds) CCS pilot project in Germany, citing a lack of political support.

Although the government says its one billion pound support for CCS is still available, analysts say the withdrawals signalled that the technology remains too costly, and that low carbon prices gave investors little incentives to invest in a technology that has no benefits beyond carbon reductions.

As a result, Britain is unlikely to see commercial CCS projects before 2020, and the government should devise a plan to reach climate targets by the end of the decade without CCS, a UK parliamentary committee stated in a report.

DWINDLING EU FUNDS

Enthusiasm for developing CCS is also dropping because EU funds for the technology are drying up.

EU officials adopted funding measures to spur a network of pilot projects by 2015, with the aim of having the first commercial plant in operation by around 2020.

But with carbon prices trading near record lows around 7 euros a tonne, there will be less money raised for several planned CCS pilot projects across the 27-nation bloc.

The European Investment Bank (EIB) has the mandate to fund up to half of the start-up cost of at least eight CO2 capture and storage plants projects by selling 300 million carbon permits, with sales expected to start before Christmas.

The timing could not be worse as the price of EUAs is less than half of what the European Commission was expecting when the executive developed the so-called NER300 funding mechanisms back in 2008.

The cost of developing and implementing the complex technology for a single CCS project ranges from $1 to $4 billion (639.9 million pounds to 2.6 billion pounds), according to industry sources.

But even if the 200 million EUAs were monetised at 10 euros a tonne, that would be barely enough to cover the full cost of one or two CCS projects.

(Editing by Jason Neely)