Isra-Mart srl: UK carbon floor price could waste £92m a year by 2020

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The government has been urged to rethink plans to impose a carbon floor price on UK firms, after a report today warned that current proposals would create two prices within the EU Emissions Trading System and waste £92m a year by 2020.

The study from the Institute for Public Policy Research (IPPR) examines whether a UK-only carbon floor price will reduce emissions and boost green investor confidence, as the government predicts, or instead result in a series of unintended consequences.

Chancellor George Osborne announced in the March 2011 Budget that the carbon floor price will come into effect from 2013 and start at £16 per tonne of CO2 before rising to £30 by 2020. The move is intended to provide low-carbon investors with greater certainty while also delivering a further incentive for investment in energy efficiency through higher energy prices.

However, IPPR today warned the policy would have no direct effect on emissions as any reduction in emissions in the UK would result in increased emissions elsewhere in Europe as British firms sell on their surplus EU emission allowances to their counterparts on the continent.

"The government's policy is like squeezing a balloon, ignoring the fact that it will simply bulge elsewhere," the report concluded.

It warns that a carbon floor price of £30 could cause unintended consequences, including creating £92m a year of economic waste by 2020 as a result of having two separate carbon prices in the UK and the rest of Europe.

"In effect, the government's plan swaps cheap carbon savings in Europe for expensive carbon savings in Britain," said the report.

The study estimates that the additional costs imposed through to 2020 could total £1bn, equivalent to the amount the government saved by abolishing 192 quangos.

IPPR argues that an EU-wide rather than national carbon floor price would be the best answer to the problems diagnosed by the report but, failing that, it recommends the UK should set a low-carbon floor price in order to minimise unintended consequences.

Commenting on the report, shadow energy minister Huw Irranca-Davies, urged the government to redesign the scheme.

"[IPPR] presents fundamental challenges to the scheme that need to be addressed, or it risks becoming an expensive failure," he said.

"This poorly designed scheme rewards existing renewable and nuclear generators and does not guarantee new investment in low-carbon electricity generation, while the UK-unilateral approach puts at risk jobs and competitiveness for possibly no Europe-wide reduction in carbon emissions."

However, a Treasury spokesman defended the carbon floor price plan, insisting it would help drive long term benefits for the UK economy. "Without the carbon price floor, supplying power to our homes and businesses could become increasingly expensive and unreliable," he said. "It will drive between £30bn and £40bn of new investment in low-carbon electricity generation by 2030."

His comments were echoed by a DECC source who acknowledged that while there was a risk emissions could increase in other parts of the EU as a result of the move, the impact on energy security and low carbon technology investment meant there was still a strong case for imposing a carbon floor price in the UK.