Electricity sector will suffer from UK’s carbon price floor

UK Chancellor of the Exchequor George Osborne

The UK government’s decision to set a unilateral carbon price floor could have a “devastating effect” on British industry and will artificially raise electricity prices, according to the chairman of the Energy and Climate Change Select Committee.

Tim Yeo slammed the move as “a revenue raising exercise disguised as a green policy” and said the UK could not adopt a got-it-alone policy without the rest of Europe.

He was speaking as the committee released a report into the EU Emissions Trading System, the cap-and-trade mechanism designed to establish a price for carbon and reduce greenhouse gas emissions that opened in 2005 and is now approaching the end of its second compliance period. 

Last March UK chancellor George Osborne announced a carbon price floor of GBP16 per tonne of carbon dioxide, effective from 2013 and applicable only in the UK.

At the Conservative Party conference last October, Osborne said he would not save the planet “by putting the UK out of business”.

But Yeo said: “Ironically, it is the Treasury’s decision to set a carbon price floor that could result in industry and electricity production relocating to other EU countries.

“Unless the price of carbon is increased at an EU-wide level, taking action on our own will have no overall effect on emissions other than to outsource them. A revenue raising exercise disguised as a green policy won’t help anybody— the price of carbon has to be increased at an EU level to kick start investment in clean-energy.”

He claimed energy generators and heavy industry could be subject to an “exorbitant” top-up tax of up to £25 per tonne of CO2 under current plans, because the price of carbon in the rest of the EU is so low.

The select committee reported that the UK electricity sector is particularly at risk from what it called “carbon leakage” – the moving of electricity production to other EU member states.

It stated that because electricity is readily transportable between the UK and mainland Europe and can be traded instantaneously on spot market prices, it is more susceptible to leakage than other sectors, such as goods manufacture, which may be restricted by the difficulties of relocating production.

Yeo added: “Instead of going it alone, the chancellor would be better-off working with other European governments to make the EU Emissions Trading System more effective as a whole.”

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