To Tax or Not to Tax – UK’s Carbon Price Floor

Posted on June 9, 2011 by

The UK government announced in their 2011 budget that from 1 April, 2013, an additional carbon tax known as the “carbon price floor” will be introduced. This carbon priced floor is specifically aimed at electricity generators that use fossil fuels. The government hopes that the introduction of this tax will provide certainty for low carbon investments, including the controversial nuclear power. The Office of the Gas and Electricity Market (OFGEM) declared that this is necessary to generate the £200 billion of investments required to secure a low carbon-energy future by 2020.

The entire proposal is based on the principle that the “polluter pays” under which generators would be liable for emissions caused by the use of fossil fuels and would have to pay for it. Currently, there is now climate change levy imposed on such generators. The taxed will be specific to different fossil fuel types and the rates be based on their carbon content. These rates will be known as “CCL carbon price support rates”. The rates will start at £16/tonne CO2 in 2013 and will increase in a straight line to £30/tonne CO2 by 2020.

However, there are arguments that while the tax is meant to put pressure on the generators using fossil fuel, so as to drive investments towards low carbon investments, the real payers will be the final consumers. The wholesale prices of electricity may be around £5-£6/MWh, which is about 10 per cent higher, by 2020. This means that while renewable and nuclear energy generators will benefit from these higher prices, fossil fuel plants will have to pass on their extra cost of electricity generation to the consumers.

The British Confederation of industries too have criticized the proposal stating that the government failed to take into account the nature of UK’s energy intensive heavy industries. The application of a carbon tax would cripple the industries’ competitiveness within the EU or at a global level. Companies engaged in the steel, chemical, cement and aluminium industries are already complying with the EU emission trading scheme. The extra tax will jeopardize their ability to compete with other EU counterparts who do not have to bear the same financial burden.

There is still a glimmer of hope for the UK industries though. On 24 May, the Environment Committee of the European Parliament (comprising of some 60 MEPs) voted to urge European leaders to put in place legally binding emissions cuts of 30 per cent by the end of the year. This is 10 per cent more than the previously agreed 20 per cent reduction over the 1990 levels by 2020. Should this target be adopted by the EU, it will level the playing field for industries across the EU, reducing the burden on UK companies.

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