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UK Carbon Taxation Post 2020

Dr John Constable: GWPF Energy Editor

The British government’s Clean Growth Strategy has been published today, and taken as a whole expresses the aspiration to co-ordinate all other economic policy through the general and over-riding goal of reducing CO2 emissions. Alongside much that can be dismissed as risible happy talk, or mere virtue signalling, there is a sketchy but very striking suggestion that a new carbon tax focused on, but not limited to, electricity will be introduced in the years 2021/2022. Early warning of such a policy may lie behind the very low bids made by offshore wind in the recent auction for Contracts for Difference.

The GWPF’s recent paper, Offshore Wind Strike Prices: Behind the Headlines showed that capital costs for this technology were not falling, and that the very low bids made by offshore wind in the recent auction for Contracts for Difference (CfDs) were currently uneconomic and would probably still be so in the early 2020s when the contracts become active. The authors suggested that developers had deliberately underbid because they regarded these contracts as low cost, low penalty options giving market position and inhibiting competition. In essence, the GWPF paper argued, such an option is a gamble on the wholesale price of electricity, or on a future policy change, such as the introduction of a carbon tax. Developers would only build if higher prices seemed likely to be sustainable in the longer term, most likely because of policy. In that case they would quickly bail out of the Contracts for Difference to take advantage of the changed circumstances.

This interpretation of the facts has been confirmed by remarks in the British Government’s Clean Growth Strategy, published today, which gives a clear though only sketchy indication that electricity sector policy will move towards carbon taxation post 2020.

Overall the Clean Growth Strategy is positioned as an element within Industrial Strategy, but a review of the 50 key policy proposals (pp. 12–16) shows that it is in fact the dominant element, with policies both minor and major that reach into every corner of economic activity within the United Kingdom. There are policies, for example, for the insulation of one million houses, the abolition of new petrol and diesel fuelled transport vehicles by 2040, for green mortgages and for forest creation, for heat networks and for more nuclear. Much is dubiously realistic, and often there is a striking disproportion between the high cost and the character of the desired outcome: believe it or not, £1.2 billion will be spent “to make cycling and walking the natural choices for shorter journeys”. This might be worthy, but is it worth it? In other cases the proposal is unashamedly propagandist; this government is actually considering an annual “Green Great Britain Week” which will, the Strategy tells us:

Focus on climate and air quality issues across the UK

Share the latest climate science

Demonstrate our progress and successes on climate action

Highlight and promote economic opportunities arising from clean growth especially to international investors (p. 19)

There will be no need to book early, one imagines.

However, in spite of  appearances this is not a trivial document, and no one should be distracted or indeed deceived by the idiocies. There are proposals here that are economically far-reaching in character and genuinely alarming, and foremost in that category are the slight but precise descriptions of heavy carbon taxation. The Strategy observes that:

The Government is considering the UK’s future participation in the EU ETS after our exit from the EU and we remain firmly committed to carbon pricing as an emissions reduction tool whilst ensuring energy and trade intensive businesses are appropriately protected from any detrimental impacts on competitiveness. Specifically in relation to the power sector and Carbon Price Support, starting in 2021/2022, the Government will target a total carbon price which will give businesses greater clarity on the total price they will pay for each tonne of emissions, and we will set out more detail on carbon prices for the 2020s in the 2017 Autumn Budget. (p. 45)

We can infer from this that government recognises that participation in the EU ETS may be impossible after leaving the European Union, and is considering a substitute measure, namely the imposition of a unilateral carbon price focused on the electricity sector but not limited to it.

It is to say the least, deeply regrettable that the UK government appears to be moving strongly to prevent the British economy benefitting from two of the major Brexit dividends arising from independence of EU regulation, that is to say freedom from both the EU ETS and the EU Renewables Directive.

A domestic carbon price could in fact be worse than the ETS, just as the Carbon Price Support was worse. Furthermore, in the light of this announcement recent blarney about “subsidy free” renewables is revealed for the spin that we all suspected it to be. With a market coercion such as a high carbon price no other subsidies for low carbon energy will be required. Low cost sources would be driven from the market, and green generators would have a free run at the consumer.

It would be interesting to know how long the renewables industry has been expecting this move, and it would be particularly interesting to know whether the offshore wind companies that made bizarrely low bids in the  recent auction for Contracts for Difference knew that this announcement would appear in the Clean Growth Strategy and in the Autumn 2017 budget, and if so whether that information was official or not.