The carbon price floor: disliked, divisive and about to be frozen
- 17 Mar 2014, 12:45
- Robin Webster
Source: Arnold Paul
A controversial government measure aimed at
increasing the price of fossil fuels looks likely to be frozen in
this week's budget, in a move the Telegraph says will "
reignite the row over green taxes". But
unusually for low carbon legislation, the carbon price floor (CPF)
is unpopular with green campaigners, while attracting support from
some in the energy industry. What is it, and why is it earmarked to
Designed to reduce greenhouse gas emissions from
electricity generation, the CPF first appeared in George Osborne's
budget speech in March 2011. The chancellor announced the
intention to increase certainty for investors in low-carbon
generation by putting a minimum price on the greenhouse gases
emitted by the power sector.
It sounds like it should have been good news for
supporters of low-carbon energy. But the CPF wasn't popular. Last
thinktank IPPR and
manufacturing industry group EEF both called for it to be
Greenpeace says it is costly and ineffective.
But as the possibility of the CPF being reformed has
come closer, the renewables industry has expressed
support for the measure - and worries
about what happens if it's curbed.
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 last 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 in 2013, and could raise £2bn a year
by 2015, according to
Does it reduce emissions?
All this might be worth it - from some commentators'
perspective, at least - if the measure reduced greenhouse gas
emissions. But there's considerable debate over whether that's the
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 long-term.
CPF could reduce emissions in the short term 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. The CPF doesn't raise the price of coal enough to redress
the balance, according to analysis by
Greenpeace last year.
Vincent de Rivaz, chief executive of energy company
EDF disagrees, however. He
writes in today's Telegraph that the
CPF is "working" because "it is tipping the balance away from coal
to lower carbon gas". Head of rival company
ScottishPower agrees that in the longer
term, the CPF will make coal "largely uneconomic" by the middle of
Emissions going down here means they go up
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 the UK.
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 Europe.
IPPR has described this effect as "like squeezing a balloon,
ignoring the fact that it will simply bulge elsewhere."
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 encourage
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
Reform the ETS instead?
Commentators including Parliament's
Energy and Climate Change Committee and
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, told Carbon Brief
year that a lot of problems would be solved if the "UK could
just click its fingers" to get structural reforms of the
Unfortunately, it's not proving as simple as that.
The European Commission
announced the next in a series of reforms to the carbon market
in February. But experts are unconvinced they will be effective. So
far, there isn't much prospect of the carbon price reaching high
enough levels to be significant.
The implications of freezing the
Osborne has decided to use this Wednesday's budget to freeze the CPF at 2015/16 levels,
according to the
Telegraph. This could save households
up to £20 a year on their energy bills by 2020, it says.
Trade industry group Renewable-UK
says it's "deeply concerned" that
scaling back ambition of the CPF will scare off investors of
low-carbon energy. It says cutting the CPF will mean less wind
online between 2015 and 2020. Independent gas generators
warned that freezing the carbon price
floor could mean large gas power stations are forced to close, as
they become less economic in relation to coal.
The CPF is a flawed measure. But to many
environmentalists, it's all that's on
the table - and freezing it is likely to increase the
chances the UK relies on coal, rather
than lower carbon power sources over the next few years.
That might make the government's commitment to
sticking to plans to reduce emissions look even more