What next for the carbon tax?

The carbon floor price is under pressure but a U-turn would hurt investor confidence. Megan Darby asks: is it time for plan B?

When ministers and officials were haggling with energy companies to find £50 of “green levy” cuts in the autumn, they found out just how hard it could be. A reshaping of the Energy Company Obligation (Eco) energy efficiency scheme, a rebate for the Warm Home Discount and a claiming of credit for network cost cuts barely got them over the line. Despite their efforts, there is still bickering about whether those on fixed tariffs will and should benefit.
They missed what many see as the easiest target: the carbon floor price. A tax that drives up costs for UK industry compared with its European rivals, it has been under attack since its inception. The “polluter pays” principle is fair enough in theory, but when energy-intensive industries and hard-pressed consumers squeal in unison, it is difficult for politicians to ignore.
There is an obvious reason for the Treasury to back the measure: it brings in money for the Exchequer. In combination with the funds from allowances sold through the EU Emissions Trading System (EU ETS), it could bring in £63 billion over the next 15 years. This year alone, EU ETS revenues total about £1 billion and the UK top-up £500 million.
Latest reports suggest the Treasury is heading for a compromise: to freeze the carbon floor price from 2016. An announcement is not expected until the Budget speech in March, but a Treasury statement did little to quash the rumour: “Establishing a minimum carbon price sends an early and credible signal to help drive billions of pounds of investment in low-carbon electricity generation. However, ensuring UK industry remains globally competitive is a priority and government acknowledges that rising energy costs is a key issue for many businesses. This is particularly true given the lower-than-expected European carbon price.”
The problem is, any change confirms what those trying to develop low carbon technology have said all along: a tax is an unreliable basis for investment because the chancellor can alter it at whim. Paul Thompson, head of policy at the Renewable Energy Association, says: “The logic of a carbon floor price is to give long-term stability to investors that there is a cost to carbon. So something that involves this kind of haggling and uncertainty rather undermines that point.”
A U-turn could be harmful, warns Renewable UK director of policy, Gordon Edge. Support levels for renewables have been set on the assumption that the wholesale electricity price will be boosted by the carbon tax. If that is taken away, the sector materially loses out. Plus, it will have “a significant impact on people’s confidence in the whole policy agenda”, he says.
Energy suppliers are divided. EDF Energy, whose nuclear fleet benefits from the wholesale price boost, backs it. Tony Cocker, chief executive of Eon, has long called for it to be scrapped. Keith Anderson of Scottish Power agrees, estimating the move would shave £33 off a typical dual fuel bill in 2015/16.
Campaign group Energy Bill Revolution is pushing an alternative that could make the tax more acceptable to consumers. Supported by Eon, Npower and SSE, as well as various charities and more than 200 MPs, it calls for carbon revenues to be invested in energy efficiency measures. Spokesman Ed Matthew says: “The priority should be making this a proper green tax and using the revenue to help us all reduce our energy use.”
Consumer Futures agrees. Audrey Gallacher, the watchdog’s director of energy, says: “Although the introduction of the floor price might have increased the chance of the UK meeting its carbon targets, we believe it has reduced the chance that fuel poverty targets will be met. If the measure is to remain in place, Consumer Futures has consistently called for the revenue it collects to be returned to consumers.”
It would not please everyone. A spending pledge could be hard to pull off in a climate of austerity. It would not answer industry’s complaints. However, it could make up for a drop in insulation rates since Cert and Cesp energy efficiency schemes were replaced by Eco and the Green Deal last year. What’s more, it would allow the government to outflank Labour on the cost of living debate while keeping investors happy.