Budget special: Carbon floor price set at £16 a tonne

CCAs are extended while planned CCS levy discarded in the 2011 budget

The carbon floor price (CFP) will be £16 a tonne of CO2 from 1 April 2013, rising to £30 by 2020. It will apply to energy generators, and the government hopes it will help drive investment in the low-carbon power sector.

George Osborne told MPs that the introduction of the CFP is a world first, and that it will provide the incentive for £billions of new investment in the UK’s dilapidated energy infrastructure.

David Porter, chief executive of the Association of Electricity Producers said that the floor price would increase the confidence of energy companies wanting to develop new low-carbon technologies for electricity production. There is concern, however, that the chancellor gave no indication of post-2020 price levels.

“Investors will have serious doubts about the long-term credibility of the CFP policy as it is currently conceived. This is because it is a tax-based mechanism subject to annual votes in parliament,” commented Rupert Edwards, head of policy and market analysis at Climate Change Capital.

The floor price means that power companies will be taxed on their carbon emissions, but will be allowed to pass the cost on to consumers.

Duncan Sinclair, director at Redpoint Energy, estimates that the CFP will add around £5–£6 per MWh or 10% to electricity prices by 2020, and said it will have a significant impact on the earnings of power generators.

Operators of coal and less-efficient gas plants will be hit hardest, potentially accelerating their closure, while operators of renewable-energy sources and nuclear power stations will pay little, but enjoy a windfall from higher electricity prices.

Industries covered by the EU emissions trading scheme (ETS) could also benefit, according to Christian de Perthuis, carbon tax expert and professor of economics at the University Paris-Dauphine. He says that putting a higher-than-EU-market carbon price on emissions (the price of ETS allowances is currently £15), will mean UK utilities spend more on emissions reduction, leading to a fall in the demand for ETS allowances.

“By unilaterally putting a floor price on carbon for utilities in the UK, Osborne will actually increase the constraint on the UK utilities sector but it will reduce for all other non-power utilities players subject to the ETS in the UK and in all other European countries, whatever their economic sector,” said de Perthuis.

With the introduction of a CFP, the chancellor said that the government would now not go ahead with a levy on energy bills to fund carbon capture and storage (CCS) projects. Instead, the government plans to fund CCS from general taxation, which has caused concern in the industry.

Dr Jeff Chapman, chief executive at the Carbon Capture & Storage Association, said: “The problem is that without a dedicated instrument like the levy there is no guarantee the money will be available, which creates uncertainty. It would have been better to retain the levy, at least for the four planned CCS demonstration projects.”

The chancellor extended Climate Change Agreements (CCAs) to 2023, and increased the climate change levy discount on electricity for those who sign up for CCAs from 65% to 80% from April 2013.