Friday 21st October 2016                 Change text size:

Industry mulls over future of carbon price floor

sheffield star via flickr

The UK’s carbon price floor, a tax on fossil fuels used to generate electricity, should be scrapped, voices from within the industry have said.

As the government reviews [link] the so called ‘green-levies’, of which the price floor is one, in an effort to lower household bills, opponents have called for the unpopular scheme to be abandoned just months after it was launched.

The carbon price floor works to increase the price of carbon for British companies. Before the initiative was launched, these energy companies already had to pay to burn fossil fuels under the EU emissions trading scheme (ETS). Through the ETS, companies have to buy a permit for every tonne of CO2 they emit.

A 2011 report by the London School of Economics laid out the principles behind such carbon pricing, arguing that companies that produce greenhouse gas emissions impose potentially huge costs on other people, through the catastrophic global impacts of climate change.

“However, emitters of greenhouse gas pollution do not have to face the consequences of their individual actions, through markets or other ways, unless policymakers intervene”, it adds. 

“If they can be made to do so, they will ne discouraged from emitting as much and the products they make will become relatively more expensive, discouraging demand for them.”

When the price of ETS permits fell so low that firms simply bought the most polluting fuels and happily paid for the right to burn them, the price floor was put forward as a solution. 

Introduced in April by chancellor of the exchequer George Osborne, it set a minimum price for how much UK electricity producers had to pay. If the ETS permit price drops below this mandated level, the firms must pay the difference to the government.

Supporters say that the price floor convinces companies of the importance of decarbonisation and makes renewable energy projects more viable.

Jim Watson, research director at the UK Energy Research Centre, told Wednesday morning’s BBC Radio 4’s Today programme that the scheme provides “very useful revenue”.

“It is going to bring in, during this financial year, about £1 billion to the UK Treasury. That’s projected to increase to £1.5 billion next year and then £2 billion the year after,” he said

However, Andy Mayer, head of public affairs at the chemical company BASF, told the BBC that he believes the policy should be removed. 

“We think it should be scrapped, and the reason is that by 2015 it will be adding about 20% to our bills. That’s about £1m of extra cost for no particular benefit”, he said.

The environmental initiative also has some surprising critics. The energy and climate change committee has warned in the past that such a scheme could have a “devastating effect” on British industry. 

It argued that the government should instead push for a high carbon price across the whole of the EU, in order to prevent businesses from relocating from the UK.  

Greenpeace also warns that the projected £8.7 billion the scheme will raise over five years will not go to efforts to curb climate change – but directly to the Treasury.

It has also been criticised for its part in pushing up household energy bills, as firms pass on the costs to customers. Consumer watchdog Which? has estimated that the price floor will add between £29 and £68 to the average electricity bill in 2015/16.

“[The carbon price floor is] putting up people’s energy bills for no environmental gain – giving ‘green taxes’ a bad name without achieving anything”, Greenpeace spokesperson Doug Parr said.

A recent report by accountancy firm PricewaterhouseCoopers (PwC) warned of the importance of the decarbonisation of global industry.

It found that the world is on track to use up its carbon budget for the rest of the century – which researchers say must not be exceeded if global warming is to be kept to less than 2C – within the next 21 years.

Further reading:

World on track to see temperatures increase by 3.6C

Government risks discouraging investors with lack of clarity, says renewables industry

World on track to use up entire 21st century carbon budget by 2034

House of Lords blocks 2030 decarbonisation target

UK needs ‘major investment’ to avoid electricity shortages

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