Chancellor urged to hold firm on carbon pricing

A group of three major generators, along with the climate change think tank Sandbag, have written a joint letter to the chancellor urging him to “maintain the UK’s robust approach to carbon pricing” in his upcoming budget – the first since the government committed to cutting carbon emissions to net zero by 2050.

The letter, signed by SSE, Orsted and Drax, calls for “much-needed certainty in a potentially turbulent period for businesses across the UK.”

The carbon price paid by generators in Great Britain consists of two components – the cost of EU Emission Trading System allowances, which are currently selling for roughly €25 per tonne (£22), and a top-up payment known as the Carbon Price Support (CPS), which has been frozen at £18 per tonne since 2016 and will remain so until 2020/21.

In his autumn budget in 2017, the chancellor then, Philip Hammond, said the government would seek to maintain the total carbon price at the time of around £25 per tonne. By the time of 2018 budget, the European carbon price had more than doubled from €8 per tonne to €20 per tonne and the chancellor said the government would consider lowering the CPS from 2021/22 onwards if it remained high.

The letter to his replacement, Sajid Javid, implores him to maintain the UK “global leadership” in the fight against climate change, citing its success in phasing out coal generation and encouraging others to do the same. It urges him not to “waver” in his first “net zero budget” and the run up to the COP26 climate summit in Glasgow.

It quotes recent advice to the government from the Committee on Climate Change which said reaching net zero will require “a strong and rising carbon price in order to induce changes to both short-term behaviour and longer-term investment decisions”.

“Given the uncertainty over the UK’s exit from the EU there is little clarity on what the carbon pricing mechanism will be in the near term and this is already impacting on the forward pricing of carbon in electricity markets,” the letters adds.

“Therefore, providing certainty and stability is crucial when the government sets the Carbon Price Support rate for April 2021 and beyond. Any reduction in CPS rates made in isolation of wider clarity on the UK’s carbon pricing arrangements post EU exit risks sending a negative signal to low-carbon investors and undermining the continuing need for a strong and rising carbon price.”

The government’s preferred option for carbon pricing following Brexit is to withdraw from the EU ETS and create a linked scheme in the UK. But the backup plan in the case of a no-deal Brexit is to replace the EU ETS with a new Carbon Emissions Tax (CET).

The rate for 2019 was set in last year’s budget at £16 per tonne. The letter says the rate for 2020 needs to be set as soon as possible, adding: “To minimise the potential divergence between the CET and the EU ETS over 2020 it is vital that the CET is set a level for 2020 that is comparable with recent EU ETS pricing.”

Presenting evidence to the Environmental Audit Committee in December, Treasury minister at the time, Robert Jenrick, said the budget commitment to review the carbon price did not imply that there were plans to cut it, stating: “We would take into account the competitiveness of the British economy and if necessary consider changing the price but have no plans to do so at the moment.”