Two years ago, Britain enjoyed the best of all worlds. Economic growth outstripped most of our competitors, our energy prices were below the European average and our carbon emissions were falling while many others were struggling to prevent theirs from rising. This year, economic growth has fallen below trend, our energy prices have risen rapidly to among the highest in Europe and carbon emissions have started to rise again. Stories of potential power shortages this winter causing factory shutdowns that once seemed alarmist now have a ring of credibility.

We therefore need to ask ourselves some questions. How did we get here? Do our targets to reduce carbon emissions still make sense? And what should we do now? Much can be explained by what has been happening with gas. Over the past year, Britain has become far more dependent on imports of gas, exposing us to distortions in largely unliberalised energy markets on the continent that leave us paying more for their gas than they charge their own customers.

Rising gas prices have led to increasing use of coal to generate power. Coal generates far more carbon emissions than gas, causing the price of carbon in the European Union’s emissions trading scheme to rocket from around €8 per tonne to close to €30, although it has fallen back. In Britain’s more liberalised energy markets, power prices are much more sensitive to movements in the value of carbon emissions than in much of the rest of Europe. Our power prices have therefore risen much faster with business reporting year-on-year price rises of 50-80 per cent.

This is bad news for the government, which included emissions targets that go beyond the Kyoto protocol in its election manifesto despite evidence that they were looking increasingly unrealistic. The recent rise in coal use has exposed how much the government relied on the dash for gas to reduce our emissions and how little the rest of its strategy contributed. The UK has done little to tackle emissions from either households or road users, while progress on the renewables obligation – which commits energy producers to increase their reliance on renewable technology – has been slower than the government forecast.

We are concerned that the government will react to this by looking for a crash diet to bring its weight-loss programme back on track, but with severe side-effects. It might, for example, heed some of the more extreme calls to double the rate of the climate change levy. More sensible would be to set a realistic timeframe for achieving its targets and to outline a balanced programme that will enable it to get there. This must include a greater focus on reducing emissions from the residential and transport sectors. It should also examine how it can engage with business more effectively on energy efficiency. We suggest that it channels more of its efforts through the Manufacturing Advisory Service, which has established a track record of delivering credible and understandable advice to business. Measures to encourage investment in new equipment and research and development in products and processes that promote lower energy use and emission levels should also be made more accessible to business.

It should also review the role played by the climate change levy. Longer-term, there must be questions as to whether emissions trading makes the levy redundant. In the meantime, it should heed evidence that climate change agreements that set business targets in return for a discount on the levy are more effective in reducing emissions than the levy itself. It is also time for a long-term energy strategy that looks seriously at what will deliver reductions in carbon emissions for the least cost, while also delivering a secure and reliable supply of energy.

Tough decisions lie ahead, including whether to replace the current generation of nuclear power plants – an issue raised at this week’s Labour party conference. Nuclear power emits no carbon, contributes to security of supply and has become more competitive on price. Yet if we are to build a new generation of nuclear plants, the government must resolve some difficult issues. It must develop a strategy for long-term waste management. It will need to address planning, licensing and liabilities issues that will make a difference to the economics of nuclear power. It could start by exempting nuclear power from the climate change levy, as it emits no carbon. This would assist the economics of nuclear but, more importantly, send a powerful signal about the direction of energy and environmental policy.

The writer is director-general of EEF, the manufacturers’ organisation