Utility Week expert view: Trevor Loveday

“Carbon support is expected to plunge up to 90,000 people a year into fuel poverty in a couple of years, so the Treasury grab adds insult to injury.”

It was a good thing the government did when it shunted the Warm Homes Discount to general taxation in this year’s Autumn Statement. It addressed the injustice that placing the cost of policy support for the hard up and vulnerable onto energy bills hits hardest the people who need the support in the first place.
Sadly the government’s motives clearly lay in drumming up a fifty quid handout to take the wind out of the opposition’s price freeze ploy.
Meanwhile the green levy that should have been attended to, but somehow escaped the Chancellor’s attentions, was the carbon price support introduced last April that, incidentally, will shortly completely wipe out the £50 shaved off energy bills in the Autumn Statement.
Carbon support is there to shore up the price of permits to pollute under the failing EU Emissions Trading System (EU ETS). Advocates of cap and trade – including the UK government – look to the EU ETS to provide signals for investment in low-carbon technology. While the trading system fails to provide those signals, the UK has imposed a tax to maintain a floor price for carbon.
Carbon price support has topped up the amount high emitters in the UK have to pay for permits to the tune of more than £1 billion to sustain a carbon floor price currently set at £16 a tonne of carbon dioxide. The support payment is £12.50 plus €4 to the EU and could add about £70 to bills next year. The floor price is assumed to hit £30 a tonne by 2020 and £70 a tonne ten years later, so the impact on bills will be huge. It is effectively a tax with all the revenue going to the Treasury – about £2 billion in 2015 – arguably money that could be recycled into energy-efficiency measures such as ECO.
Carbon support is expected to plunge up to 90,000 people a year into fuel poverty in a couple of years, so the Treasury grab adds insult to injury. Furthermore the support is subject to annual review imbuing it with political uncertainty.
So it is unpopular. Its critics include industry, environmentalists, economists and Parliament’s cross-party Climate Change Committee. But critics’ concerns focus largely on the added cost when the reality is that the cost of carbon is significant and still has to be addressed if energy pricing is to provide strong signals to invest in low carbon. Better then to introduce a straightforward tax on carbon and use the revenue intelligently to benefit consumers.
The aims of capping and trading as in the EU ETS and a carbon tax are the same: to reveal the real cost of carbon to incentivise production and use of energy in ways that reduce carbon emissions. Both carry the risk of motivating industry to go elsewhere where there is no price to pay for emissions. Both put pressure on low-income households that has to be offset.
But carbon taxation provides revenue that can be used by government to bolster environmental policy. The EU ETS will not. Money raised from a carbon tax can be recycled into projects that help end users reduce their bills and lessen their contribution to global warming. Or it can be used to cut income tax. Carbon support on the other hand only raises revenue while EU ETS permits remain ineffective. Should the trading scheme recover from its moribund state there will be no revenues for energy efficiency or sustainability programmes.
Carbon tax advocates differ over the merits of using carbon tax to reduce other taxation – the natural inclination of politicians – because it would encourage government to maximise revenue over carbon cutting. Reinjecting the money into sustainable activities could bring on schemes including demand-side projects that exploit smart metering, community generation, carbon capture and consumer energy efficiency schemes.
Denmark’s carbon taxation is currently the benchmark. It returns all the money raised, with 40 per cent used to fund environmental subsidies and 60 per cent returned to industry. The tax has not compromised Denmark’s competitiveness and the country’s emissions have fallen 15 per cent since its introduction. About 50 per cent of its power production is coal fired (but half of that is cogeneration) and 40 per cent is renewable. And despite having Europe’s highest energy prices, the energy sector is viewed by consumers as among Europe’s best on performance and trust.
Why, many have asked, did Osborne not roll back the carbon price support as was speculated? Perhaps it was the prospect of unravelling the complexity created because it was part of the basis for contract for difference strike prices. Or was it the billions it will provide for handouts in the election year 2015?
Political games with energy prices – like price freezes and ruses to drum up handouts – are growing tiresome.
Politicians must demonstrate the will and wit to create incentives for low-carbon investment while protecting the vulnerable. Bolstering a failing trading system is not the way. They might look to Denmark for inspiration, but most of the power there is traded through a pool and retail prices are regulated. But that is another story.