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

The Carbon Price Floor is hardly the buzz phrase 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 election, since 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 penalise big polluters effectively, 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.  The Treasury spun its new tax grab as a decision based around the EU price for carbon being far too low to encourage investment in low carbon technology.

The UK would take the moral lead to penalise big carbon emitters and encourage them to make cleaner investments.  But this argument was flawed from the start, since 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 further to justify its policy in the anticipation that EU carbon prices would start to rise steadily, and even shadow the new UK trajectory.  But this has not happened – disastrously for the packaging and presentation of the tax policy.  Indeed, the scenario that the Treasury and country faces today is indeed stark.  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).

This is, of course, already a big enough disparity, but in 2015/16 the Treasury’s ‘top up’ tax will rise to £18.08 per tonne of CO2 emitted, on top of the EU price.  This 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 a 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.

The Carbon Price Floor taxes emitters of CO2 in the electricity generating industry – namely the 75 per cent of Britain’s electricity supply industry which is fossil fuel based (coal and gas). Relative to current (and optimistic) projections for the EU carbon price UK electricity generators could, by 2020, be paying more than five times as much for their carbon emissions as their EU counterparts.
So what are the direct implications if the Carbon Price is not frozen and reduced in the Budget next week:

  • No new investment in existing coal fired power stations which are presently generating around 40 per cent of electricity;  a high carbon price floor will make such investment (to comply with new EU pollution rules) uneconomic so these plants will close early when many were planned to run through to the mid to late 2020s.
  • A reduction of the likelihood of coal with carbon capture and storage, or “clean coal”, in the future, since  there will have been no bridge from old to new coal technologies and no skills transfer.
  • The collapse of the home coal industry and its customer power stations costing up to 12,000 jobs by 2020 and thousands more in the skills chain
  • Security of supply diminished as the UK becomes over-dependent on imported gas for electricity generation
  • Increased costs for consumers and more fuel poverty
  • Increased costs and some overseas relocation (known as carbon leakage) for the steel, paper, cement, lime, aluminium, basic inorganic chemicals, glass, ceramics and industrial gases industries (alongside general manufacturing) which currently employ some 225,000 workers.  These industries are highly energy efficient but nevertheless consume large quantities of energy, which can account for 20%-70% of their production costs.
  • Huge market distortion, as more and more coal and gas generated electricity from the Continent is imported to the UK via interconnector, where European generators have only had to pay the low EU carbon price, unlike the British generators.
  • The need to encourage and subsidise the fast build of up to £13bn worth of new power plants to replace the baseload coal plants which are forced to close early.  With a lower Carbon Price Floor coal plants can be modernised for just £2.6 billion and run on well into the 2020s.

The now abandoned Carbon Tax in Australia sank Julia Gillard’s Labor Government in last year’s general election. This followed the success of Tony Abbott, the Liberal leader, in linking it to 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; this week should be a start.