In parliament: The carbon price floor - a bungle too far?

Alan Whitehead MP criticises the changes to carbon price floor announced in the 2014 budget

There are two instruments in the UK to price carbon – the EU emissions trading scheme (ETS) and the carbon price floor (CPF). I’m a strong supporter of the ETS, but less keen on the CPF. Nonetheless, if the CPF exists it should be related properly to the European carbon price.

In my column last July, I drew attention to the astonishing rises in the indicative future levels of CPF set out by the chancellor in his 2013 budget. In his latest budget (p.5), the chancellor decided to remove some of the proposed rises in the CPF.

The CPF now looks, as it did in 2013, like a ham-fisted piece of financial opportunism in the wake of the troubles of the ETS. Indeed, the reality of the CPF has been the exact opposite of its stated aim of encouraging “further investment in low-carbon generation by providing greater support and certainty to the carbon price”.

Personally, I’m not crying buckets over the freeze in the CPF at £18 a tonne of CO2 to 2019/20. What I think is worrying, however, is the way that the chancellor’s indecision on the price will destabilise investment in energy infrastructure.

Renewable energy projects have been built based on the assumption that the price of carbon will rise on a trajectory that no longer exists. Even investment in new gas-power plants is based on higher coal prices as a result of the carbon price.

New energy investment – particularly in low-carbon technologies – requires reasonably stable conditions over the long-term. The terms of investment do not necessarily have to be great – it just needs to be foreseeable and reliable.

The chancellor’s short-term games with the CPF will further destabilise the investment environment. And that is what will count, long term, for the low-carbon investment policy that the price support mechanism was originally intended to support.