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14 Apr 2011 05:04:00

UK carbon floor price effects

New report claims the UK carbon floor price will cut carbon emissions 5.3% by 2020, but could put the UK at a competitive disadvantage with Europe.

New research released today from Thomson Reuters Point Carbon suggests that the UK’s proposed carbon floor price will cut carbon emissions from the UK energy industry 5.3% by 2020, but could undermine the country’s competitiveness by imposing a £9.3bn burden on British businesses.

The prediction says that the government's plans, confirmed in last month's Budget, will cut carbon emissions by 67million tonnes between 2013 and 2020, a saving equivalent to carbon emissions from six 400MW gas-fired power stations.

Under the proposals, fuel suppliers will be required to pay a 'floor tax' regardless of any future fluctuations in the carbon price imposed through the EU Emissions Trading Scheme (EU ETS).

Supporters of the proposals claim that the carbon floor price will give energy investors certainty about the future carbon price, and as a result will drive investment in low carbon energy technologies. However, critics maintain that it will drive up energy bills and deliver windfalls worth billions of pounds to operators of existing nuclear power plants and wind farms.

Thomson Reuters Point Carbon calculates that, rather than delivering a carbon price in the UK of £30 per tonne, as the government claims, the mechanism could result in a UK carbon price as high as €54 a tonne by the end of the decade, a significant premium on the €36 a tonne price that is expected across the rest of the EU.

According to the report, such a high carbon price will drive a significant increase in renewable and low carbon investment. But, it argues that the relatively immature nature of the UK's nuclear market makes it unlikely that new reactors will come online by 2020. However, it also warns that the high carbon price could put the UK at a competitive disadvantage compared to other European nations.

The government has maintained that the carbon floor price and its wider electricity market reforms are necessary to drive investment in low carbon energy technologies.

Energy and Climate Change Secretary, Chris Huhne, has said that, while the reforms will drive up bills, energy prices would also rise if the government failed to act, arguing that if oil remains above $90 a barrel it is more cost effective to pursue the reforms and drive a switch to alternative energy sources.

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