The Carbon Price Floor is hardly the buzz word around Westminster but it should be. To use a shorter and more descriptive title, this ‘Carbon Tax’ is slowly shaping up to become a real battleground in the run up to the next General Election as its impact is central to the cost of energy and the future of UK industry and jobs.
For it is this draconian Treasury tax grab on the very power stations which are providing the lion’s share of our electricity supply which guarantees higher prices, early power station closures and thousands of manufacturing jobs being lost or moved overseas.
So what is the Carbon Price Floor, why is it so damaging and why did a Conservative led Treasury introduce it?
Up until April 1 last year the UK was a key player in the market based EU wide Emissions Trading Scheme (EU ETS) and shared the same carbon prices as the rest of the EU. Though EU carbon prices were considered too low to effectively penalise big polluters, all of Europe’s emitters were on a level playing field and paid the same prices for their CO2 emissions.
In 2010 the new Conservative led Treasury saw an opportunity to raise billions of pounds in new tax revenue and took the decision to make UK prices higher and add a ‘top up’ on the EU price to meet a fixed rising carbon price trajectory for the UK electricity generating sector, far higher than that faced by similar power plants on the Continent.
But this argument was flawed from the start as new low carbon energy will receive a subsidy to operate anyway through new Contracts for Difference and strike prices announced under Electricity Market Reform; in short low carbon energy does not need the Carbon Price Floor in place.
The Treasury did expect to further justify its policy in the anticipation that EU carbon prices would start to steadily rise and even shadow the new UK trajectory.
But this has not happened.
The Treasury’s own rate for its ‘top up’ in 2014/15 on top of the EU price, to meet its price floor trajectory, is £9.55 for every tonne of CO2 emitted, when the EU carbon price today is just £5.37 (€6.42).
Yesterday it dropped below €6 to new lows.
This level of pricing will deliver a chasm between UK carbon prices and those on the Continent and result in a surge in electricity prices as the generators pass these extra costs to consumers and industry; it is likely to represent 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.
The Carbon Price Floor is set to rise to £30 a tonne in 2020 and £70/tonne in 2030 (2009 prices). The money raised in the ‘top up’ will go the Exchequer which expects revenues to increase from £740 million in 2013/14 to £1.4 billion in 2015/16.
But new analysis shows that if the Chancellor freezes this ‘top up’ at £9.55 for the year ahead (his 2014/15 rate) and not £18.08 (the 2015/16 rate) then although he will lose some revenue (£1 billion to 2021) the benefit to the wider economy will be worth £3 billion to 2021 and £6 billion to 2024.
This is as a result of lower energy prices for consumers and industry which will bring in more tax revenues.
So what are the direct implications if the Carbon Price is not frozen and reduced in the Budget today?:
The now abandoned Carbon Tax in Australia sank the Julia Gillard Labor Government in last year’s general election.
This followed Liberal leader Tony Abbott’s success in linking it with higher bills, lower growth, fewer jobs and no significant reduction in emissions.
Here, the Labour Party has voted consistently against the Carbon Price Floor in the Finance Bill. We Conservatives need to rid this albatross and do it quickly; next week should be a start.
Tony Lodge is a Research Fellow at the Centre for Policy Studies a right-leaning think tank. He is author of ‘The Atomic Clock – How the Coalition is gambling with Britain’s energy policy’
This article first appeared on Conservative Home.