Treasury urged to maintain strong carbon price

The bosses of SSE, Drax and Orsted have urged the Treasury to retain a “strong” and “stable” carbon price in the upcoming budget.

In an open letter to chancellor Philip Hammond, they said the high carbon price in the Great Britain has been “fundamental” to bringing about the huge reduction in coal generation seen in recent years and must be maintained in order to prevent a comeback.

Generators in Great Britain are not only required to buy enough EU Emissions Trading System (ETS) allowances to cover their emissions, but also pay a top-up tax on the fossil fuels used for generation called the Carbon Price Support (CPS).

The CPS was introduced in April 2013 to ensure they faced a minimum price for carbon emissions known as the Carbon Price Floor (CPF). At the time, the price of ETS allowances stood at around €5 per tonne – a level which was seen as too low to drive investment decisions.

From a starting point of £16 per tonne, the CPF trajectory was set to rise to £30 per tonne in 2020 and £70 per tonne in 2030. However, since 2016 the CPS has been frozen at £18 per tonne due to concerns over the competitiveness of British businesses when compared to their EU rivals.

In last year’s autumn budget, Hammond said the Treasury would seek to maintain the total carbon price at its current level – then around £24 per tonne – until the coal phaseout is completed. The government has committed to getting rid of all unabated coal generation by 2025.

In the meantime, the passage of reforms to the ETS to address a chronic oversupply of allowances has led to a massive increase in the EU carbon price.

In September, it briefly surpassed €25 per tonne – the highest level in almost a decade. At the time of writing, the allowances were trading at €19 per tonne, resulting in a total carbon price for generators in Great Britain of nearly £35 per tonne.

The chief executives of SSE, Drax and Orsted have petitioned the chancellor not to reduce the CPS rate in response to the increase.

“In setting a strong carbon price, the UK has become a leader in global efforts to meet the Paris agreement ambition through the Powering Past Coal coalition, and we have made great strides towards meeting our domestic carbon budgets,” they wrote.

“Going forward, a strong total carbon price will be the cornerstone of delivering the ambition set out in the government’s clean growth strategy, while providing billions of pounds in revenue to HM Treasury.”

They noted that a recent rise in gas prices has already led to an increase in coal generation, adding that any increase in emissions “puts pressure on harder to decarbonise sectors such as heat, transport and industry to reduce emissions faster as the headroom in our carbon budgets diminishes.”

They additionally highlighted the uncertainty over the UK’s involvement in the ETS following Brexit: “As part of the total carbon price is derived from the EU ETS, it would be premature to change CPS rates in the Budget given that the details of EU exit will not be known.

“If the UK does leave the EU ETS then CPS rates will need to be adjusted to maintain the total carbon price.”

Climate change think tank Sandbag has also argued against any reduction to the carbon price following Brexit.

Interim managing director Phil MacDonald said: “To keep the UK transition from coal to clean electricity on track, Philip Hammond must target a total carbon price at least at the current levels. If we stay in the ETS, we need at least £18 per tonne Carbon Price Support. If we leave the ETS, we need at least £36 per tonne.

“The UK coal phaseout is assured but meeting the fourth and fifth carbon budgets is not. Increasing our reliance on coal in the upcoming winters will raise UK power emissions – requiring deeper decarbonisation in other sectors.

“More coal now risks crowding out clean investment and a capacity cliff edge in 2025. Brexit or not, the UK’s economic future lies in clean growth.”

In a recently published policy paper, the government stated that the UK will cease to participate in the ETS in the case of a no-deal Brexit. It said involvement in the mechanism would be replaced with an extended carbon tax.