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Lodge Tony 2013Tony Lodge is a Research
Fellow at the Centre for Policy Studies.  He is author of ‘The Atomic Clock – How the Coalition is gambling with Britain’s energy
policy’
published by the CPS.

Australia’s re-heated Prime Minister, Kevin
Rudd, thinks he can win the imminent general election.  His confidence is reflected in an
extraordinary decision announced last Sunday to drop his Labor Party’s previously rock-solid support for a fixed Australian carbon tax.  Introduced by his deposed predecessor Julia
Gillard, Kevin Rudd has studied the polls and realises that this unpopular tax
baggage needs to be urgently jettisoned. 
Could this be a lesson for Britain’s Conservatives?

If the Rudd government is re-elected to another term, it will pledge to
legislate a move from the fixed carbon tax to a market-based emissions trading
scheme effective from next July.  The
move could see a carbon price of $6-$10 (AUS dollars)
a tonne
, significantly lower than the unpopular $24 per tonne of
carbon Australian emitters and electricity generators currently pay for their
carbon emissions under the fixed price legislation.

So where is the lesson for the UK?

Up until April this 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. This 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 far too low to encourage investment in low carbon
technology and also saw a unilateral and rising UK carbon price floor as a
useful revenue -aising tool. 
Anticipating growth in the Eurozone by now they failed to model the
disastrous scenario which they face today – a huge disparity between UK carbon
prices and those on the continent. 
Because of the rising UK carbon price floor, electricity generators are
paying over €18 a tonne of carbon emitted, compared with just €4 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.

But the UK is about to
significantly further increase the minimum floor its electricity generators pay
for carbon emissions.  Having started in
April at £16/tonne, this price will then rise to £30/tonne in 2020 and
£70/tonne in 2030. The money raised will go the Exchequer, which expects
revenues to increase from £740 million in 2013/14 to £1.4 billion in
2015/16.  

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 prices has
weakened further as Europe remains mired in recession; consequently the
disparity between EU and UK carbon prices has widened even further.

Who pays?

The carbon price floor will
tax emitters of CO2 in the electricity generating industry; the 75 per cent
(and growing) of Britain’s electricity supply industry which is fossil fuel
based (gas and coal). Relative to current (and optimistic) projections for the
EU Emissions Trading Scheme 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. 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 carbon price floor 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 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. 
    The PM often reminds us the UK is in a “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.

As the 2015 election 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 carbon price floor in the Finance Bill in recent years, so a policy
opportunity for them is clear. Let’s hope the Australian election mastermind
in Downing Street suggests the Prime Minister, on this one and only occasion,
copies Kevin Rudd and removes Britain’s carbon price barnacle before it is too
late.

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