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 it?
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, left-leaning thinktank IPPR and manufacturing industry group EEF have both called for it to be scrapped. Even Greenpeace says it is costly and ineffective.
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 Â£29 and Â£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 Â£1bn for the Treasury this year, and could raise Â£2bn a year by 2015, according to Greenpeace.
No certainty, no emissions reductions
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 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 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 to Greenpeace.
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 idea.
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 elsewhere
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 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, 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 â?¦ and structural reforms to the ETS. Unfortunately, it’s not as easy as that”.
The reality of getting rid of the CPF
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 some media coverage.
It looks like Cameron’s plan will be difficult to put into practice, and could have unintended consequences, however. For example, financial 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.