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 January 26, 2012
"Exorbitant" carbon floor price will not reduce emissions

 The government's carbon floor price is placing an "exorbitant" cost on businesses for little to no emissions reduction, a committee of MPs will say today.

A report by the influential Energy and Climate Change Committee finds the policy will have a "devastating" effect on UK plc and rather than "pushing the UK ahead of the EU", the government should instead work with Brussels to beef up the Emissions Trading Scheme.

George Osborne introduced the idea of imposing a "top-up" tax on emitters if the price of carbon permits, known as EU Allowances, falls below the pre-determined price floor in last year's Budget. The government expects to raise £1.4bn in additional revenue by 2016 through the scheme.

But the report, which contains no evidence from the Treasury, warns the "top up" charges will run to around £10 per tonne of carbon in 2013 and more than double to £25 per tonne by 2030. These higher prices are likely to reduce UK emissions, but create "intra-EU" carbon leakage as UK electricity producers and factories relocate to other member states.

"The Chancellor was right to say we won't save the planet by putting the UK out of business," said committee chair Tim Yeo, referencing George Osborne's pre-Budget report speech in November.

"Ironically, however, it is the Treasury's decision to set a Carbon Price Floor that could result in industry and electricity production relocating to other EU countries. A revenue-raising exercise disguised as a green policy won't help anybody, the price of carbon has to be increased at an EU level to kick start investment in clean energy."

Jonathan Grant, a carbon markets specialist at financial service company PwC, agreed that unilateral measures in the UK would not reduce emissions overall.

"Effectively, higher costs passed on to UK consumers will subsidise coal-fired generation in the rest of Europe, as lower demand for carbon credits in the UK means that those credits will be used by others covered by the EU Emissions Trading Scheme," he said.

"An EU-wide carbon floor price, set through the auction process, would be more effective in stimulating low carbon investment and reduce the risk of outsourcing carbon to another country."

A Treasury spokesman pointed out that in last year's Autumn Statement the Chancellor introduced a £250m support package to help energy-intensive industries remain competitive even with the carbon floor price. He added that Osborne had made it very clear that "the UK should go no slower but also no faster than other European countries in cutting emissions".

"To do this we need to reduce our emissions in the way that works best for circumstances in this country," the spokesman said. "The Carbon Price Floor is vital in reducing uncertainty and creating incentives for investment in low carbon electricity generation now so we have lower emissions in the future."

Carbon prices have plunged below €7 a tonne over the past few months, which has caused many commentators to express concern there is little incentive for heavy emitters to decarbonise.

Echoing last month's call by business leaders, the committee urges the EU to create certainty for investors by setting a 30 per cent emissions reduction target for the bloc and shrinking the cap on emissions to ensure the EU is on a trajectory to a 60 per cent to 80 per cent reduction in greenhouse gas emissions by 2050.

Moreover, it blames the price falls on a glut of permits and says the EU should hold back a number of credits before Phase III trading starts in 2013.

"Unless the price of carbon is increased at an EU-wide level, taking action on our own will have no overall effect on emissions other than to outsource them," Yeo added. "Instead of going it alone, the Chancellor would be better-off working with other European governments to make the EU Emissions Trading System more effective as a whole."

The committee did praise the EU for bringing aviation into the ETS in an attempt to reduce the three per cent of global emissions the industry is thought to contribute. It says that if it proves to be effective in curtailing CO2 output, the ETS could replace the Air Passenger Duty, a levy that is universally loathed by airlines.

However, it criticises the decision to award airlines 85 per cent of the permits they need.

"If the growing emissions from this sector are to be curbed, the EU should move towards 100 per cent auctioning by 2030 at the latest," the report says. "We do not believe that leakage is a serious threat in this sector and so a target of just 15 per cent auctioning by 2020 is disappointingly unambitious."