The Energy Intensive Users Group (EIUG) has called for the Carbon Price Floor to be scrapped or frozen beyond 2020 on the basis that it puts the UK at a disadvantage compared to the rest of Europe. The EIUG argues that rather than reducing carbon emissions overall, the carbon tax encourages production to be relocated away from the UK so that the emissions occur elsewhere, known as carbon leakage. Director of the Energy Intensive Users Group, Jeremy Nicholson, said “This measure doesn’t reduce emissions. It just means that more of the emissions reductions occur in the UK and less elsewhere in Europe.”

The Carbon Price Floor, introduced in 2013, was designed to provide a top-up to the price of EU Allowances (EUAs), which trade under the EU Emissions Trading System (EU ETS). The EU ETS is a cap and trade scheme that places a cap on emissions emitted from factories and power plants across the EU, which reduces over time. EUAs, which equate to one tonne of CO2, are issued to the level of the annual cap, and while some are issued freely to participants, others are auctioned. Participants must submit allowances equal to their emissions levels each year, and if more allowances are required, these can be purchased from participants with surplus allowances, or at auction. A higher carbon price makes low carbon technologies more viable as there is a value to the emissions saved.

However, the design of the EU ETS has resulted in an excess of EUAs in the market, particularly during periods of reduced economic output. As a result, the price of EUAs has fallen, as can be seen in the chart below.

A mechanism known as the Market Stability Reserve (MSR) will be introduced from 2019 as a measure to prevent the oversupply of allowances. This will be structured to automatically withdraw emission allowances from the market when oversupply exceeds a pre-defined limit and to release allowances when the surplus falls below a set amount.

In the UK, the Carbon Price Floor was introduced in 2013 to act as a top up to EUA prices and so encourage carbon abatement while the price of EUAs was too low to do so. It is structured as follows:

Carbon Price Floor = EUAs + Carbon Price Support (UK only additional tax for fossil fuels used in electricity generation)

Carbon Price Support (CPS) rates are applied to fossil fuels used in electricity generation as a tax, which feeds through to consumers via the wholesale price of electricity. The CPS rates are scaled according to the carbon intensity of the fossil fuel used to generate.

The intention was for the Carbon Price Floor to rise to £30 by 2020. However, it was not anticipated that EUA prices would fall as low as they have. As can be seen in the chart, prices have fallen from €16/tCO2 in mid-2011, when the scheme was announced, to just below €6.00/tCO2 this year.

In 2014, it became apparent that if the floor price were to continue on its planned trajectory, that the UK would be faced with far greater carbon costs than the rest of Europe.

Therefore, the rates were reformed in the 2014 budget and a cap was set at £18/tCO2 for 2016/17 to 2019/20, effectively freezing 2015/16 levels.

CPS was not mentioned in the recent business energy efficiency tax review, and calls have been made for a decision to be made on its future in the upcoming 2016 budget, although low carbon generators and environmental groups support the tax. A Treasury spokesman has said that no decision has yet been made and that an announcement on rates beyond 2019/20 will be made in due course.