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UK Carbon Price Floor and Carbon Price Support Mechanism

The UK Electricity Market Reform consultation proposed to introduce a Carbon Price Support (CPS) mechanism from 1 April 2013 to support investment in low-carbon generation.

In the 2011 Budget, the UK Chancellor announced a Carbon Price Support in the Budget, with a carbon price floor (CPF) of £16 per tonne of carbon dioxide in 2013, rising to £30 by 2020 in 2009 prices.  The starting price would be equivalent to £19.16 in estimated 2013-14 prices.  The Treasury estimates that the new tax will raise £3.2bn in the three tax years from 2013.

In the 2014 Budget, the Chancellor announced that The UK-only element of the carbon price floor will be capped at £18 per tonne of carbon dioxide (tCO2 ) from 2016-17 to 2019-20. This will have the effect of freezing the CPS rates for each of the individual taxable commodities across this period at around 2015-16 levels.  The UK introduced the cap to support UK business competitiveness and to restrain increases in household energy bills, while still maintaining the incentive to invest in low-carbon generation.

The CPF is made up of the price of CO2 from the EU Emissions Trading System (EU ETS) and the CPS rate per tCO2 which is the UK-only additional tCO2 emitted in the power sector.  This CPS rate per tCO2 is used as the basis for setting individual CPS rates for each of the taxable commodities.  The CPS rates of CCL apply to fossil fuels used in electricity generation that are taxed under the CCL regime (gas, solid fuels and LPG).  The CPS rates of fuel duty apply to oils and bioblends used in electricity generation.

The CPF is designed to provide an incentive to invest in low-carbon power generation.  The current CPF trajectory reaches £30/tCO2 in 2009 prices by 2020.  However, EU ETS carbon prices are now substantially lower than was expected when the CPF was introduced.  If kept in place, the current CPF trajectory would cause a large and increasing gap between the carbon price faced by UK energy users and those faced abroad.  This would result in UK firms facing significantly higher energy prices than those of competitors abroad, and raise energy bills for households.

The Scottish Government also supported the principle of the UK Government’s Carbon Floor Price as part of Electricity Market Reform, which could strengthen price signals for renewables by setting a minimum CO2 price floor at times of low EU ETS prices.  Given the complementary with the EU ETS, which is devolved, the Scottish Government maintains a strong interest in the operation of CPS and the CPF.