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The UK's flawed Carbon Floor Price
posted by Rob on 19th Mar 2012

The UK's coalition Government came to power with the promise of committing the government to reduce emissions and provide strong and decisive leadership on green issues. The Prime Minister, David Cameron, pledged to lead the ‘Greenest Government ever’. This looks not to have materialised, and a recent poll shows that just 2% of the UK public believe they live under the "greenest government ever".

One area in which the UK government has led is by introducing a Carbon Floor Price, set to start in April 2013. The UK’s coalition Government has stated that it wishes to introduce a Carbon Floor Price as part of a range of policies to drive investment into low carbon solutions. The stated aim of the policy is to ensure that the price paid for carbon by electricity producers in the UK is around £15.70/tonne CO2e in 2013 rising in a straight line to £30/tonne CO2e in 2020 and £70/tonne CO2e in 2030. The additional sums required to meet the floor price are levied at the point of sale of fossil fuels. This means they are paid by the suppliers of coal and gas sold into the electricity market.

The March 2012 budget will announce the 'top up rate' (i.e. the difference between the floor price and EUA price) to be paid in 2014-15 under the Carbon Floor Price. Sandbag has put together a short briefing explaining what a Carbon Floor Price is and why the UK Government believes it is needed. It also highlights some concerns and briefly explores alternative options.

The UK government is seeking to create a stable carbon price that will drive low carbon investment. Unfortunately the Carbon Floor Price runs the risk of putting UK industry at a competitive disadvantage, undermining European climate policy and providing excessive windfalls to existing operators while neither guaranteeing new investment nor securing additional environmental benefits.

The collapse in the EU carbon price means that there is a real to need recalibrate the EU ETS in order to ensure a competitive carbon price will help drive low carbon investment as intended. To avoid competitiveness distortions and the fracturing of the EU policy this is best achieved through action at the EU level. The Government must work to secure the withdrawal of the necessary quantity of allowances at an EU level, or through partnering with other progressive high-emitting Member States, withdrawing allowances bilaterally.

UPDATE: The UK Government will set 2014–15 carbon price support rates equivalent to £9.55 per tonne of carbon dioxide in line with the carbon price floor set out at Budget 2011.

For more information on the UK Carbon Floor Price please click here

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