If you didn't pick this up in the news, you will in your electricity bills.

The UK government's low-carbon strategy is a carrot and stick approach: the carrot being subsidies for renewable and other low-carbon generation, the stick being taxes on high-carbon generation. With effect from 1 April 2013, a big carbon stick is being introduced that will affect all consumers: the Carbon Price Floor.

Although it sounds counter-intuitive, the Government needs to support high carbon prices in order to encourage investment in low-carbon technology. The price of electricity from fossil-fuel generation dictates the market price for all electricity, because of its scale and its flexibility in turning off and on to meet fluctuations in demand. High fossil-fuel generation costs support a high market price, and a high (and certain) market price supports investment in renewable generation.

The EU Emissions Trading Scheme (EU ETS) was intended to prop up the carbon price - by making the industry, including fossil-fuel generators, pay for EU Allowances (the right to pollute) - thereby encouraging alternative low-carbon investment. The price of carbon, however, has collapsed under EU ETS. This is mainly as a result of European failure to control the number of EUAs being allocated in the market, to the point where there is little incentive to "de-carbonise".

The Government response is to impose a tax on the generation of fossil-fuel electricity through new Carbon Price Support rates of the Climate Change Levy. The CPS rates will be set annually in each Finance Act, theoretically being the difference between the market price of carbon and target prices. The target prices start at around £16 per tonne/CO2 and will rise to £30 t/ CO2 by 2020 and £70 t/ CO2 by 2030. Once these prices are factored into the price of electricity, it will mean very substantial increases in energy costs for all consumers - in particular, energy-intensive businesses and public sector consumers.

The Government is consulting on a package of measures to compensate energy-intensive users, with an anticipated cost of £250m. These measures will constitute state aid and so require EU approval.

In an ideal world, the additional revenue from the Carbon Price Floor (which will be substantial) would be hypothecated and re-invested in the renewable sector, but there is no stated intention to do this.

In the meantime, the Government is striking a fine balance between support for a low-carbon future and the threat of "carbon leakage" - an energy-intensive industry making investment decisions based on lower costs overseas.

© MacRoberts 2013


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