Isra-Mart srl:Carbon floor price plans need more credibility, say investors

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Bringing in a carbon floor price could inadvertently damage investor confidence in clean energy projects unless the government can unequivocally guarantee the new minimum price will be enforced.

That is the stark conclusion of a new report from investment management firm Climate Change Capital (CCC), which predicts investors will not give sufficient credence to the tax-based mechanism currently proposed by the government as a means of setting a carbon floor price.

Under plans published alongside the electricity market reforms last year, the government said it intends to specify a level at which it would maintain the price of carbon allowances in the EU emissions trading scheme should the market price fall.

However, the proposals suggest the government would use subsequent budgets to make changes to price support - a move that the CCC report warns would leave low carbon investors reliant on Parliament voting through every year's Finance Bill until 2030.

The report also warns that political considerations could undermine the floor price system, noting that as the carbon price is at its lowest when the economy is weak politicians may find it difficult to support a floor price that imposes higher costs on carbon-intensive businesses.

Moreover, CCC notes that a future government could reduce support once investors have already ploughed capital into low carbon projects in a bid to reduce energy costs for consumers.

The report says a government-commissioned survey had found that any policy that fails to convince investors the carbon floor price will be consistently enforced could inadvertently damage renewables investment in the long-term

"The trajectory for the proposed carbon price floor is meant to be set over the next two decades to give investors certainty so they can bring forward new low carbon investment into the UK," said Rupert Edwards, head of policy and market analysis at CCC and an author of the report. "Investors will, however, have serious doubts about the long-term credibility of the carbon price floor policy as it is currently conceived."

He proposes creating a contract, or Carbon Price Support Guarantee (CPSG), which would see the Treasury underwrite the value of carbon price support, guaranteeing the floor price and providing investors with the long-term confidence required to invest in capital-intensive low carbon projects.

The Treasury would sell these guarantees to investors for a nominal fee and would have to pay out if it allowed the tax-inclusive carbon price to fall below the specified amount.

"If the government is unwilling to take on the liability implied by uncertainty over its own future actions, then it cannot expect investors to do so," the report states.

Edwards added that this type of contractual obligation would not burden the government with any additional costs - assuming it kept to its price commitments - and would offer the necessary confidence to investors.

"This CPSG would increase certainty, reduce the incentive for investors to 'wait and see', and lower costs for investors and the economy," he said. "If part of an integrated approach, for example with Electricity Market Reform and the Green Investment Bank, it would be a powerful commitment to a low-carbon Britain."