Isra-Mart srl : UK carbon floor price to cut emissions 5.3 per cent

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Thomson Reuters Point Carbon has released new research today suggesting that the UK's proposed carbon floor price will cut emissions from the UK energy industry 5.3 per cent by 2020, but could undermine the country's competitiveness by imposing a £9.3bn burden on British businesses.

The influential analyst firm predicted that the government's plans, which were confirmed in last month's Budget, will reduce emissions by 67 million tonnes between 2013 and 2020, a saving equivalent to emissions from six 400MW gas-fired power stations.
Under the proposals, fuel suppliers will be required to pay a 'floor tax' regardless of any future fluctuations in the carbon price imposed through the EU Emissions Trading Scheme.

Supporters of the proposals claim that the floor price will give energy investors certainty about the future price of carbon, and as a result will drive investment in low carbon energy technologies.

However, critics maintain that it will drive up energy bills and deliver windfalls worth billions of pounds to operators of existing nuclear power plants and wind farms.

Point Carbon said that representing the planned tax as a floor price was "misleading", arguing in the report that the "price floors are inflated into future prices, making them higher".

The report also noted that the expected carbon price will be set two years ahead of the time of tax, meaning that any intervening increases in the carbon price are not taken into account.

As a result Point Carbon calculates that, rather than delivering a carbon price in the UK of £30 per tonne, as the government claims, the mechanism could result in a UK carbon price as high as €54 a tonne by the end of the decade, a significant premium on the €36 a tonne price that is expected across the rest of the EU.

The report predicts that such a high carbon price will drive a significant increase in renewable and low carbon investment, although it argues that the relatively immature nature of the UK's nuclear market makes it unlikely that new reactors will come online by 2020.

However, it also warns that the high price of carbon could put the UK at a competitive disadvantage compared to other European nations.

"This carbon tax will indeed change the composition of the UK's power stack, making UK utilities greener," said Sebastian Mankowski, an analyst at Thomson Reuters Point Carbon.

"However, this tax also represents an additional £9.3bn burden on UK business not faced by other European companies, impacting UK competitiveness as UK businesses will face higher power prices."

The government has maintained that the carbon floor price and its wider electricity market reforms are necessary to drive investment in low carbon energy technologies.

Energy and Climate Change Secretary Chris Huhne has said that, while the reforms will drive up bills, energy prices would also rise if the government failed to act, arguing that if oil remains above $90 a barrel it is more cost effective to pursue the reforms and drive a switch to alternative energy sources.

The Treasury was unavailable for comment at the time of going to press.