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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 be chopped? 

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 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. 

It sounds like it should have been good news for supporters of low-carbon energy. But the CPF wasn't popular. Last year, left-leaning thinktank IPPR and manufacturing industry group EEF both called for it to be scrapped. Even 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 Greenpeace

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 case. 

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 sources. But  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 the decade.

Emissions going down here means they go up elsewhere

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 elsewhere. 

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 last year that a lot of problems would be solved if the "UK could just click its fingers" to get structural reforms of the ETS. 

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 CPF

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 power comes online between 2015 and 2020. Independent gas generators have also 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 distant. 

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