The unnecessary burden of carbon

Energy & Transport
Friday, November 18, 2016
Tony Lodge


Tony Lodge on how the Chancellor can reduce energy bills, avoid a power crisis and boost manufacturing

Conservative candidates are already printing their early election literature. For both new candidates seeking to introduce their credentials and established MPs preparing to defend their record, it is fair and credible to make promises of lower crime, more jobs, and economic growth. But one assertion stands out because it is very hard to defend, namely the promise to lower energy bills.

The fact remains that energy bills are rising and will continue to rise until draconian carbon taxes are stripped out and the consumer is given some genuine relief. Tony Abbott did it in Australia and won last year’s election. Conservatives must now commit to do the same.

Carbon Price Support is not a buzz phrase around Westminster, but it should be. To give it its more commonly known title, the Carbon Price Floor (CPF , or just plain old carbon tax) is slowly shaping up to become a real battleground at next year’s General Election, impacting on the costs of living, specific industries and the economy as a whole. This draconian tax weighs heaviest on the very power stations which are providing the lion’s share of our electricity supply, threatening higher prices, early power station closures and the prospect of thousands of manufacturing jobs being moved overseas.

So what is the CPF, why is it so damaging and why did a Conservative-run Treasury introduce it? Up until April 1st last year, the UK was part of the market based EU Emissions Trading Scheme (EU ETS) and shared the same carbon prices as the rest of the EU. The ETS was launched in 2005 and 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.

The Treasury took the decision that the EU ETS price was too low to encourage investment in low carbon technology. It also saw a unilateral and rising CPF as a useful revenue raising tool. The Treasury assumed and anticipated growth in the Eurozone, which turned out to be false: it failed to model today’s disastrous scenario, in which there is a huge disparity between UK carbon prices and those on the Continent. Because of the rising unilateral UK CPF, electricity generators will soon be paying over £22 a tonne of carbon emitted, compared with just £5 on the Continent.

This is a staggering disparity and represents more than a quadrupling of the carbon price for British power generators, compared with that faced by their competitors across the Channel. As a result, wholesale UK electricity prices could soon be almost double those in Germany or Italy, not only costing consumers and energy-intensive industry dear but adding another layer of market distorting subsidy for already heavily-subsidised renewables.

Many observers had previously believed that the EU ETS price would start to increase as the Eurozone emerged from recession but the reality is the reverse. In recent weeks the EU ETS price has weakened further as Europe remains mired in recession and the disparity between EU and UK carbon prices has widened even further.

The CPF will tax emitters of CO2 in the electricity generating industry. 75% of Britain’s electricity supply industry is fossil fuel-based gas and coal. These extra costs will be passed to consumers. Relative to current (and optimistic) projections for the EU ETS price, by 2020 UK industry and electricity generators could be paying nearly three times as much for their carbon emissions as their EU counterparts.

This is particularly significant given the fact the UK looks to be set to embark on another ‘dash for gas’ for electricity generation, through the exploitation of shale deposits. This will increase further our dependency on fossil fuels in the short- to medium-term as new nuclear plants and commercially deployable carbon capture and storage technology is, at best, a decade away.

A decision by the Prime Minister to abandon Britain’s CPF and return to the EU ETS would:

  • Demonstrate that economic growth is at the heart of his economic strategy.
  • Remove an unnecessary cost on less well-off households and consumers.
  • Have no detrimental impact on investment in future low-carbon generation such as new nuclear power and renewables (these receive their own Contract for Difference in the Energy Bill).
  • Remove a market distortion that is obscuring investment signals for reliable conventional electricity generating capacity.
  • Accept that there should be no cost disparity between Britain and our closest economic competitors – an unnecessary burden for the UK competing in, as the Prime Minister puts it, the “global race”.
  • Show a determination to reduce fuel poverty and help UK manufacturing. Provide international investors with certainty in their international investment decisions.
  • Demonstrate a determination to reform and strengthen the EU ETS price across the Continent with the UK in the lead.
  • Allow the UK to invest is its own fossil fuel resources so that they can be used in future carbon capture and storage (CCS) power plants.

As May 2015 nears, the Conservatives risk being saddled with the blame for a draconian tax which will begin to filter through on bills and industry costs this coming winter. Importantly, the Labour Party has voted against the CPF in the Finance Bill in recent years, so a policy opportunity is clearly theirs for the taking. Let’s hope the Australian election mastermind in Downing Street does all he can to make sure Tony Abbott’s approach is followed here and soon, before it is too late.

Tony Lodge is a Research Fellow at the Centre for Policy Studies and is author of ‘The Atomic Clock – How the Coalition is gambling with Britain’s energy policy’

This article was originally published in Crossbow, the Bow Group Magazine - Conference 2014 on 27/09/2014. Published online 18/11/2016