The UK is currently part of the EU Emissions Trading Scheme. This was launched in 2005 and now covers more than 11,000 factories, power stations, and other energy-intensive installations in the EU. These high energy users currently receive a “trading credit” which determines the upper limit of their carbon emissions. If a high energy user’s carbon emissions exceed what is permitted by its credits, it can purchase trading credits from other energy users or countries. On the other hand, if an installation has reduced its carbon emissions, it can sell its remaining credits to other energy users.
At present the EU ETS price for carbon has averaged about €7.80/tonne of CO2 (or £6.30) in recent weeks.
But the UK is about to significantly ramp up the price its high energy users pay for carbon emissions. For, in the March 2011 Budget, the Chancellor announced a new unilateral UK carbon price floor (to be known as the Carbon Price Support). This is scheduled to start on April 1 2013 and will, if introduced as currently planned, more than double the price paid from the current level of £6.30/tonne to £16/tonne in 2013 – an increase of 156%. This price will then rise to £30/tonne in 2020 and £70/tonne in 2030. The money raised will go the Exchequer which expects revenues to increase from £740 million in 2013/14 to £1.4 billion in 2015/16.
The chart below compares the UK price for carbon with that expected to be paid by high energy users in other EU countries (note that the EU ETS is market-based so forward prices cannot be forecasted accurately, but it is widely expected to remain depressed in the foreseeable future due to Eurozone recession).
The carbon price floor will tax the 75% (and growing) of Britain’s electricity industry which is fossil fuel based (gas, coal and oil). Relative to current projections for the EU Emissions Trading Scheme price, by 2020 UK electricity generators would be paying nearly twice as much for its carbon emissions as its EU counterparts.
This is particularly significant given the fact the UK looks to be set to embark on another “dash for gas”. This will increase further our dependency on fossil fuels in the short to medium term (new nuclear plants are at best eight years away).
Impact on electricity bills
The Coalition’s own figures estimate that the carbon price floor will add between 1% and 2% to electricity bills in 2013, rising to around 6% by 2016. With many people already struggling to pay their energy bills, this could be damaging, especially for those on low and medium incomes: a rise of six per cent on household energy costs will add £25 to the average family bill. This would push another 30,000 to 60,000 households into fuel poverty from 2013.
What is the alternative?
The UK should scrap the Carbon Price Support. If we are to have a carbon reduction strategy, we should concentrate on a pan-European strategy of strengthening the price of EU Allowances in the EU Emissions Trading Scheme. Why?
A decision by the Chancellor to abandon this unnecessary measure would: