Carbon Price Floor ‘doesn’t make any sense’

Strong Europe-wide carbon price is the most efficient way to decarbonise, says senior figure at RWE

A senior figure at RWE has criticised the Carbon Price Floor (CPF), claiming the mechanism “doesn’t make any sense” and results in the UK exporting emissions to Europe.

Tom Glover, chief commercial officer at RWE Supply and Trading, told delegates at Energy UK’s annual conference that the CPF is an inefficient tool for combating climate change.

When asked whether the government was right to commit to a complete phase-out of unabated coal generation by 2025, he responded: “The goal should be decarbonisation and I don’t think it’s right that we select specific technologies to say that one there or that one there.

“I think it’s just much better that you just have the goal of decarbonisation and you let the market decide what is the most efficient way of decarbonising.”

He said there is already a market in place in the form of the EU Emissions Trading System (ETS). Although he conceded there have been problems with the EU ETS, Glover said national measures such as the CPF are not the solution.

“I optimise power stations across Europe and I know that when I turn down my gas station in the UK, we turn on a coal station in Europe because of the carbon tax,” he remarked. “If that is sensible carbon reduction, then it doesn’t make any sense to me.”

Glover continued: “You’ve got national intervention that changes the pricing in one market and makes it look like you’ve reduced emissions in the UK. But in reality, you’ve exported those emissions and actually that economic value to other countries.

“We would support a wide – as many sectors as possible – strengthened EU ETS.”

The EU carbon Price

Liberal Democrat MP and former energy secretary Ed Davey agreed that a robust Europe-wide carbon price would be the most efficient way to decarbonise the power sector.

However, he backed government intervention to ensure the phase out of coal, saying he was pessimistic about the prospects for the EU ETS: “One of the devastating impacts on Britain leaving the EU is that we won’t be at the table to champion reform of the EU ETS – and we were the champion – and that’s a real shame.

“It means we won’t get EU ETS reform in the way that it is needed. That’s how damaging Brexit is for climate change,” he added. “It’s a tragedy.”

The EU carbon price has been depressed in recent years by a chronic oversupply of allowances due to curtailed economic activity following the 2008 financial crisis.

As a short-term measure to boost carbon price, the European Commission postponed the auction of 900 million allowances over the past three years – a process referred to as backloading.

The backloaded allowances will be transferred to a market stability reserve (MSR), which will be created in 2018 and become operational the year after. Negotiations are currently ongoing over proposals to increase the rate at which excess allowances can be withdrawn from the market and transferred to the MSR.

The reforms have been led Conservative MEP and recently appointed Lord, Ian Duncan, who also spoke at the Energy UK conference.

“I spent a number of years working to try and bring about the phase IV reform and I think I made some progress in that particular direction,” he told the audience. “But the challenges are very clear for anyone who pays attention.”

Duncan noted that the reforms are not due to come into force until 2021, by which time the UK will have left the EU, adding: “The phase IV reform does not work on the basis of the UK being on the outside. It only works with the UK on the inside and thought must be given to that.”

He said this is not only because the UK represents a significant carbon market, but also because “in truth, much of the delicate balance in that particular area is around the question of equity and funding, whether it be innovation fund or the modernisation fund.

“It is the UK which does a lot of the heavy lifting when it comes to financing those particular important funds. Without them the support of the Eastern European countries is much harder to depend upon.”

Davey had earlier recalled the great efforts the Department of Energy and Climate Change had made to secure support for reforms to the EU ETS from countries such as Poland and Hungary. He joked that he had become so familiar with the Polish energy minister that he “knew his inside leg measurement”.

“The reform on the table isn’t as good as it needs to be but it’s not bad,” added Davey. “I really hope it works.”

“But, I’m looking around to see those member states that are really going to push it forward in the way that Britain is… and I see no evidence”.

The price of European carbon allowances has risen by almost three quarters over the last few months to €8 per tonne, in anticipation of the latest reforms. Analysts at investment firm Jefferies expect the price to rise by a further quarter as the changes are finalised.

The Carbon Price Floor was introduced by the government in April 2013 to ensure that generators in Great Britain paid a minimum price for carbon emissions. The difference between the European carbon and the CPF is paid through a tax on the fossil fuels used for generation known as the Carbon Price Support (CPS).

The CPS rate is currently capped at around £18 per tonne until 2020/21 to ensure that British business can remain competitive with their continental rivals.

A report by Aurora Energy Research published earlier this week concluded that coal generation in the UK is set for a comeback without an increase to the CPS rate.

In its Clean Growth Strategy, the government promised to provide “further details” on the carbon price for the 2020s in the upcoming autumn budget.