LONDON (Reuters) – The price of carbon is rising, which is what governments wanted in the fight against global warming, but now it is here no one is quite so sure anymore.

Energy prices have risen sharply in recent months, driving up domestic gas and electricity prices, an effect governments had said would help promote increased energy efficiency and therefore reduce emissions of climate warming carbon gases.

But demand has barely twitched, fuel poverty has mushroomed and instead of carbon emissions falling, they are all set to boom as coal becomes everyone’s favorite fuel once more.

"The paradox here is that what looks like an increase in energy prices is in fact feeding through to an increase in carbon emissions rather than a reduction," said Oxford University economist and government adviser Dieter Helm.

"That is because the oil price is not a genuine carbon tax. Far from cutting demand for carbon, the high energy prices have prompted a rush for coal – the dirtiest fuel," he told Reuters.

While known reserves of oil are expected to last only to around mid-century, and gas is in relatively plentiful but still finite supply, coal reserves are estimated to last for several centuries more.

There are big increases in coal burn in China, India and the United States where even tar sands have started to look attractive to investors again.

Even in Europe, which has set itself the tough target of getting 20 percent of its energy from renewables like wind, waves, solar and biomass by 2020, utility operators are starting to talk about building new coal power stations.

"This is a catastrophe," said Helm. "The big story is that around the world because of the rising price of oil we are driving towards the dirtiest form of fuel available."

Britain last month gave the go-ahead to a new coal-fired power station, the first to be built in the country in quarter of a century.

After strong lobbying by operator E.ON, the plant will be built without carbon capture and storage technology – one of the main but expensive and largely untried techniques of preventing carbon from power plants entering the atmosphere.

"The contradiction is that governments are trying to drive down the price of electricity to maintain competitiveness at the same time they are trying to solve climate change by driving up the price of carbon," said Tom Burke of the E3G environment lobby group.

"There are a lot of unintended consequences. What happened when the price of oil went up from $ 40 to $ 100 a barrel was not a drive to cut consumption it was a massive drive to make megabucks from coal to liquids, biofuels and tar sands."

Scientists say global average temperatures will rise by between 1.4∞ and 4.0∞ Celsius this century due to burning fossil fuels for power and transport, causing floods and famines and putting millions of lives at risk.

While the science and causes of climate change are now largely undisputed, there is no meeting of minds on how to tackle it or, more importantly, who should bear the cost.

By and large the policy from the developed nations is that creating a high carbon price will make all else fall into place.

But many disagree with a view they term simplistic.

"Evidence shows that there are few visible behavioral changes as a result of high prices. Governments need to do more than just rely on the price mechanism," said Jim Watson of the Sussex Energy Group. "You need demand side measures, too."

It is an argument Burke strongly supports.

"It is time that governments became really focused on the fact that price is a necessary but not a sufficient condition to achieve the levels of investment that need to be made to make the transition to a low carbon economy," Burke said.

"They have got to create the investment incentives and the regulatory framework. Those two are going to be much more important parts to making the transition to low carbon than any price signal."