Yesterday the Chancellor announced a ‘carbon price floor’ for the power sector.
This means that it will add a carbon tax to electricity generation based on the amount of carbon pollution it creates, to take the cost per tonne up to preplanned level – starting at £16 per tonne and aiming to rise to £30 per tonne by 2020.
The need to promote investment in low carbon electricity generation is clear, but is this the best way to do so?
The reason the UK is having to intervene at a national level is the failure so far of Europe’s Emissions Trading Scheme to drive investment into clean electricity generation: the carbon price is too low and the cap too loose.
However, the way the government have designed this intervention does not solve the problem. Yes the floor price will increase costs for high carbon generators, and this will reward EDF and others with significant nuclear and renewables portfolios, but this windfall up front provides no guarantee that they will build new low-carbon plant.
Furthermore, the absolute amount of carbon emissions from electricity generation is controlled by the EU wide cap. The UK’s unilateral raising of the price of carbon will drive down its demand for pollution permits (EU Allowances), freeing them for use elsewhere: the floor price may well export our pollution. In fact if more countries follow our example it could depress the price of carbon significantly – exactly the opposite to the intended effect.
Much better would have been setting a reserve price on the auction of EUA allowances, as this would have increased the cost per tonne in the UK while keeping the unbought permits out of the system.
This floor price is a payment up front with no guarantee of return, neither for a safer climate nor a more secure energy supply. That’s a bad investment for a country on a tight budget.
See our briefing: [Carbon Floor Price Briefing]( “Carbon Floor Price Briefing”)