Unpopular but tenacious: A guide to the UK carbon price floor
- 19 Nov 2013, 12:15
- Robin Webster
The UK's carbon price floor is an unpopular policy.
Green campaigners say it's a Treasury money-spinner with little
effect on emissions, while industry says it's disadvantaging UK
companies in the global market. So why is the measure so
universally disliked, and what would happen if the government cuts
Designed to reduce greenhouse gas emissions from
electricity generation, the carbon price floor (CPF) first appeared
in George Osborne's budget speech in March 2011. The chancellor
announced the government's
intention to increase certainty
for investors in low-carbon generation by putting a minimum price
on the greenhouse gases emitted by the power sector.
That may sound like good news for supporters of
low-carbon energy. But the CPF has attracted criticism from a wide
diversity of commentators. In the last few weeks alone,
thinktank IPPR and
manufacturing industry group
EEF have both called for it to be scrapped.
Greenpeace says it is costly and
How the CPF works
The CPF is a top-up tax: it exists to bolster the
existing EU price of carbon. Energy companies already pay to
pollute under the EU emissions trading scheme (ETS), buying permits
to emit greenhouse gases when they generate electricity.
The price of the permits crashed to a
record low earlier this year -
meaning there's much less of a financial incentive for companies to
cut their emissions.
The CPF is meant to solve this by putting a minimum
price on how much power generators in the UK have to pay to
pollute. If the ETS price drops below this level, companies pay the
difference to the UK Treasury.
The CPF is expensive
The CPF may sound like a neat fix for the floundering
carbon market, but commentators have criticised it for a variety of
reasons. First, critics say it puts unfair costs on consumer bills.
Energy generators pay the CPF, but they pass the cost on and it
eventually ends up on energy bills. Consumer group, Which?,
estimates the CPF will add between
£29 and £68 to an average electricity bill in 2015/16.
Adding levies to consumer energy bills is regressive,
because it hurts the poor more than the rich, fuel poverty
campaigners say. What's more, green campaigners point out that none
of the money goes directly to supporting the green economy - it
goes directly into the Treasury's coffers. The measure raised almost £1bn for the
Treasury this year, and could raise £2bn a year by 2015, according
No certainty, no emissions
All this might be worth it - from some commentators'
perspective, at least - if the measure reduced greenhouse gas
emissions. But no-one seems that convinced that it will.
The government argues the CPF will help incentivise
investment in low-carbon technologies, by convincing investors
low-carbon will be more profitable than more polluting power
Which? points out that CPF is an
annually reviewed tax - which could be scrapped or changed at any
point, which isn't that comforting for investors who have to think
CPF could also reduce emissions by making it more
profitable to burn gas rather than keeping polluting coal power
stations open. The problem is, coal is cheap at the moment - so
cheap that even the CPF won't redress the balance, according
So while the CPF adds levies to consumer energy
bills, there's no guarantee that it will encourage power companies
to stop burning coal and start burning gas instead. As a result,
even environmental groups are worried that it's not a good
Greenpeace spokesperson Doug Parr says:
"[The CPF is] putting up people's
energy bills for no environmental gain - giving 'green taxes' a bad
name without achieving anything".
Emissions going down here means they go up
Finally, even if the CPF were to
reduce emissions here in the UK, critics say the measure won't make
a dent in emissions. That's because the emissions
trading system on which the carbon price is based applies the power
sector across the whole of Europe, while the CPF only applies in
A higher carbon price in the UK means fewer emissions
in this country, which means more 'carbon permits' available on the
European power market. This basically means that instead of coming
from the UK, the emissions would come from the rest of
IPPR has described this effect as
"like squeezing a balloon, ignoring the fact that it will simply
It's worth pointing that this is hardly a unique
problem, however. The ETS applies the EU. So any unilateral action
the government takes to encourage a switch from more polluting
power sources - like for example the
Emission Performance Standard, which
limits emissions coal power stations, or policies to
renewable power - will have the
same effect. Power sector emissions will go down here in the UK,
lowering the carbon price in the rest of the EU, and resulting in
more emissions elsewhere.
Reform the ETS instead?
Commentators including Parliament's
Energy and Climate Change
IPPR have argued that the only
logical solution is for the UK to scrap the CPF and push for a high
carbon price across the whole of the EU instead.
That would make sense - and negate any worries about
the CPF making the UK
less competitive due to higher
energy prices. But it's easier said than done, because it means
reaching an agreement to reduce
greenhouse gas emissions across the whole of the EU.
Damien Morris, a researcher from ETS campaign
group Sandbag, tells Carbon Brief:
"A lot of problems would be gone if
the UK could just click its fingers and get a greenhouse gas target
at the EU level for 2030 … and structural reforms to the ETS.
Unfortunately, it's not as easy as that".
The reality of getting rid of the
Extra charges on consumer bills like the CPF are a
hot topic at the moment. Last month David Cameron promised to "roll
back" green levies on energy bills, in response to
publicity from energy companies blaming them for price rises. The
CPF could be on the list of measures to delay or cut, according to
It looks like Cameron's plan will be difficult to put
into practice, and could have unintended consequences, however. For
support measures for renewable and
nuclear power are calculated on the basis that the
CPF exists, according to Sandbag. If
the government got rid of the CPF, it might have to renegotiate
them - causing huge uncertainty for green investors.
In addition, getting rid of the CPF could make
supporting renewables and nuclear more expensive. Scrapping the CPF
would make the average wholesale price of electricity lower - which
would mean the government has to give more money to renewables and
nuclear to make them financially viable. So the government could
take money off consumer energy bills by getting rid of the CPF, but
add more on by increasing the cost of other subsidies.
Attacked from all
sides, the CPF is under pressure.
Despite its unpopularity, however, the policy is likely to be
tenacious. The government may consider relaxing it slightly, but is
unlikely to cut it. Why? Because other measures depend on it, and
it brings cash into Treasury coffers. When David Cameron looks at
the 'green' policy measures on his list, he's likely to factor that
into his calculations.