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Will UK Government Back-Track On Carbon Floor Price?

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ICIS News

UK energy market participants have told ICIS they expect the UK government to back-track on controversial plans to introduce a carbon floor price because the burden on the country’s already flailing economy will be too much to bear.

“The pressure to ditch could start as early as next month with the budget announcement,” said independent utilities analyst Lakis Athanasiou. “As soon as consumer groups get an understanding of the impact of this on domestic bills, there will be uproar.”

The carbon floor price is an emissions tax on the electricity generation sector set to be introduced by the UK from 1 April. It was announced in 2011, and carries the aim of deterring emissions by imposing a premium payment on top of the EU Emissions Trading System (ETS) allowance price.

The treasury has said the tax will be introduced at a rate of £4.94/tonne CO2 equivalent (tCO2e, €5.72/tCO2e). One tonne roughly accounts to the generation of one megawatt hour by coal-fired plants.

However the level is planned to increase in yearly increments. In 2014, the tax will be £9.55/tCO2e; in 2015 it will be £12.06/tCO2e. The tax is intended to climb to £30.00/tCO2e in 2020 – about £40.00/tCO2e in real money during that time – before reaching £70.00/tCO2e in 2030.

“The banks seem doubtful over whether the carbon floor price will be introduced,” said a UK power trader. “However, nobody is debating it in parliament because criticising it will make you look anti-green.”

Chancellor George Osborne has long stood by the policy. In a speech late last year he said it helps to create “a clear and stable investment regime, which allows investors to commit funds with confidence”.

“The carbon price floor provides a clear cost trajectory for gas and coal generators,” Osborne said.

Detriment

In 2011, Summer ’13 Baseload prices on the forward power curve gained £4.60/MWh, or 8%, in just three sessions after the carbon floor was announced (see EDEM 23 March 2011), sharpening the contango on seasonal contracts and offering the first indication of the effect on major energy users of price rises going forward.

But later that same year, evidence emerged that traders were betting against the government following through with the scheme as the contango on the far-curve was squeezed back (see EDEM 25 November 2011).

Several sources voiced concern that the carbon tax could be to the detriment of the economy, especially in the long term, after the level begins to rise.

“The 2013 price won’t be a deal breaker. The UK will start to look increasingly exposed as the years go on and [electricity] prices increase. It will become isolated from European markets,” said Peter Emery, chairman of the generators division of Energy UK, a trade association group.

“If you are worried about the competitiveness of UK industry, you might issue a backlash. Is there the political will to progress it to 2020 and beyond? Nobody knows how long it will last.”

Isolation

With implementation imminent, the carbon tax continues to incite impassioned debate among power traders.

Some have argued that the levy will price the UK out of the European markets, severely hampering cross-border trading. Many said they believe the UK will become increasingly exposed as the years progress and will become isolated from other European markets.

“The carbon tax will make the UK uncompetitive and we’ll end up exporting a load of jobs from heavy industry. I’m not sure the chancellor will find this palatable,” said one UK trader.

“How can we impose a tax on an economy that isn’t recovering? The right thing to do is to reduce emissions. However the issue is, if the rest of the EU isn’t willing to do it, why should we?” asked another trader. “Emissions allowance back-loading hasn’t been stamped because the EU doesn’t want to hurt [economic] recovery.”

The UK would have to import power heavily from France as a result of the carbon tax, he added.

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