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Friday, March 22, 2013

UK Carbon Price Floor - Budget 2013

Extracts from UK "Budget 2013 documents",
20 March 2013

Chapter 1 - Budget Report

- at

Support for private investment in infrastructure

(Chapter 1, page 35-36)

1.90 The Government is acting to give private investors the confidence to invest in the UK’s energy sector. From April 2013 the carbon price floor announced at Budget 2011 will come into effect, providing a clear and credible long-term signal to support investment in low carbon electricity generation.

1.91 The Energy Bill, currently making its passage through Parliament, will introduce Electricity Market Reform. By providing stable revenues for investors at a fixed level known as a strike price, Contracts for Difference, as set out in the Bill, will provide long-term certainty for investors in low carbon generation. This will lower the cost of capital and help developers secure the large upfront amounts of capital investment required. Support available for low carbon electricity investment through the Levy Control Framework up to 2020 will rise to £7.6 billion a year (in 2012 prices), more than triple the £2.35 billion available in 2012-13. Together with the Government’s Energy Bill and Gas Generation Strategy, published in 2012, this will provide the framework needed for new energy investment.

1.92 The Government intends to take forward two Carbon Capture and Storage projects to the detailed planning and design stage of the competition. This represents the next step in the £1 billion Carbon Capture and Storage commercialisation programme and follows a period of intensive commercial negotiations with a number of bidders. The Department for Energy and Climate Change will set out the details of the preferred bidders, next steps on these front end engineering and design studies, and the process to final investment decision.

Chapter 2 - Budget policy decisions

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Carbon Taxes

(Chapter 2, page 85)

2.159 Climate change levy (CCL) rates – CCL rates will increase in line with RPI from 1 April 2014. (Finance Bill 2013)

2.160 Carbon price floor (CPF) rates – The Government will set 2015-16 carbon price support rates equivalent to £18.08 ($AUD33.83) per tonne of carbon dioxide in line with the carbon price floor set out at Budget 2011. The Government will continue to provide support to energy-intensive industries to compensate for the indirect cost of the CPF in 2015-16. Further details will be announced at the next spending round. (Finance Bill 2013)

Carbon Price Floor - Briefing Paper

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Fluctuations in the price of carbon in the form of EU ETS allowances have resulted in uncertainty for investors in low carbon technologies. This has contributed to a lower level of investment in these technologies, below what is required to meet UK carbon reduction and renewable targets.

To address this, the Coalition Government committed to introduce a floor price carbon and published a consultation on carbon price support in December 2010. Following this it announced in the March 2011 Budget that it would be introducing price support via the Climate Change Levy and fuel duty with a target price of £30 per tonne of carbon dioxide in 2020. The floor price will start at about £16 per tonne. At the time of the announcement the trading price was around £15 per tonne, but by January 2013 it had fallen to under £4.

Detailed proposals for the carbon price floor were published by HMRC in December 2012 as part of the draft Finance Bill 2013.

1 Background

1.1 The EU ETS

The EU Emissions Trading Scheme (EU ETS) is a mandatory cap-and-trade scheme for carbon dioxide, which is central to the EU’s climate change target of reducing emissions by 20% by 2020. It sets a decreasing cap for emissions from energy intensive sectors, and allocates or auctions emissions allowances (EUAs) which can be traded on the open market. It is currently in Phase II, which imposes reductions of 6.8% compared to 2005 emissions.

1.2 Is the price of carbon too low?

Over allocation of permits in Phase I led to the price falling to only a few cents. The consensus is that an allowance price of at least €30 a tonne is needed to drive investment. For Phase II the price reached €29 in 2008. However prices have fallen significantly since and at the end of January 2013 were hovering around €4.

The response from the Commission has been to consider raising the emissions reduction target for 2020 from 20% to 30%. This has full support from the UK Government and most Member States, although it has so far been strongly resisted by Poland. The EU Commission has also proposed holding back future credits due for auction – or backloading – but there is opposition to this from the EU Parliament.

3 Coalition Position

The Coalition Agreement made the following commitments with regard to the EU ETS:
  • We will push for the EU to demonstrate leadership in tackling international climate change, including by supporting an increase in the EU emission reduction target to 30% by 2020.
  • We will introduce a floor price for carbon, and make efforts to persuade the EU to move towards full auctioning of ETS permits.
Further details on a floor price were provided in July 2010 in response to a written parliamentary question:
The creation of a floor for the carbon price is an important commitment in the Programme of Government. As announced in the Budget, the Government will publish proposals in the autumn to reform the climate change levy in order to provide more certainty and support to the carbon price. Further detail will be published as part of the consultation process.

4 Government Budget Announcement

The Government announced its decision in the March 2011 Budget:
Carbon price floor – The Government announces a floor price for carbon in the power sector from 1 April 2013 to target a price for carbon of £30 ($AUD56.13) per tonne of carbon dioxide in 2020. The floor will start at around £16 ($AUD29.94) per tonne of carbon dioxide and the carbon price support rates for 2013-14 will be equivalent to £4.94 per tonne. The Government intends to introduce relief for carbon capture and storage and combined heat and power (CHP), and remove an existing exemption in the climate change levy for electricity CHP plants supply indirectly to an energy consumer. Anti-avoidance provisions will be introduced to prevent forestalling with effect from 23 March 2011. (Finance Bill 2011)
The then Energy and Climate Change Secretary, Chris Huhne, welcomed the decision, together with the commitment in the Budget to a Green Investment Bank:
“There’s a clear, long term signal to energy investors in today’s Budget. A Green Investment Bank with substantially more capital and borrowing capacity and a stronger, more stable carbon price put investment in green energy technologies at the heart of the coalition’s strategy for sustainable, balanced economic growth.”

4.1 Costs and Benefits

The costs and benefits for a target price of £30 for 2020 were set out in the regulatory impact assessment. This concluded that the resource cost – investment in new technology – would be around £6.1bn for 2013-2030. Over the same period there would be a carbon saving of £7.2bn and savings due to improvement in air quality of £0.9bn. This results in a total benefit in net present value of £1.9bn.