The government is pushing on with plans for a pioneering carbon floor price, despite criticism from business and green NGOs.
Chancellor George Osborne’s 2011 Budget confirmed the UK will introduce the floor price on 1 April 2013, set at £16 per tonne in 2013 and rising to £30/t by 2020.1
His speech, and the raft of accompanying documents, had several major environmental elements, including a significant weakening of the low-carbon standard set for ‘zero carbon’ new homes in 2016.
Using Treasury figures, ENDS estimates the changes in environmental and road transport taxes announced in the Budget will generate an extra £1.2bn a year in government revenue by 2015/2016.
The floor price is a major plank of the government’s plans to secure massive private sector investment in low-carbon generation by 2020 (ENDS Report 431, p 5).
The thinking is that investment will flow if investors are given the certainty of a steadily rising carbon price, making conventional fossil fuel generation less and less competitive against renewables, nuclear and carbon capture and storage.
But EU emissions trading scheme allowances for delivery in 2014 were trading at over £17 as ENDS went to press, according to Point Carbon. This suggests the new top-up carbon tax, delivering the floor price, may not be triggered – at least initially.
It will operate by limiting fossil-fuel generators’ existing exemption from the climate change levy on gas and coal, and from fuel oil duty. The Treasury says it will add about 1-3% to electricity bills.
In opposition, the Conservatives said money from this new carbon tax would go back to electricity consumers. The Budget now says it will “support the long-term sustainability of public finances”, raising £740m in 2013/14 and £1.4bn in 2015/16.
Several energy utilities have called for the floor price’s introduction to be delayed until 2018 (see pp 15-16). Given project development timelags, any new low-carbon infrastructure it brings into being will not be operational until at least that year.
Along with green groups, they complain it simply provides windfall profits to existing renewable and nuclear generators. Centrica and EDF, Britain’s existing nuclear generators, welcomed the Chancellor’s announcement.
Matthew Spencer, director of thinktank Green Alliance, called for these windfall profits to be taxed. He and others want the steadily rising floor price underwritten by long-term contracts with generators, to give investors certainty and to remove the risk that a chancellor could change the floor price’s preordained trajectory from year to year. Some argue that the revenues should be used to tackle fuel poverty and boost energy efficiency.
The chancellor had some comfort for industries which, as heavy electricity consumers, could be hard hit by the new floor price. He said climate change agreements (CCAs), which enable 54 energy-intensive sectors to partially escape the climate change levy (CCL), are now to be extended until 2023. The current agreements had been due to expire in 2013, and government had been considering scrapping them (ENDS Report 432, pp 43-44).
The level of relief from the CCL for electricity use will also rise to 80%, from 65%, in April 2013. A consultation on simplifying CCAs will be published in the summer.
• Green Investment Bank: The government’s new lender and investor for low-carbon projects will have an extra £2bn of state funding on top of the £1bn announced in October’s comprehensive spending review, said Mr Osborne. The extra money will come from sales of state assets.
He said a further £15bn could be secured from the private sector during the current spending review period, which ends in 2014/15. The Green Investment Bank (GIB) will now start operating in 2012.
But the chancellor said the GIB will not be able to borrow money by issuing green bonds until 2015/16, and only if the government’s overall target to rein in rising public debt had been hit. The Aldersgate Group, the CBI and major green NGOs criticised this three-year delay in the GIB becoming a fully functioning investment bank.
Ed Matthew of green investment campaign group Transform UK, told ENDS: “The decision… is a massive mistake, because it will constrain the ability to achieve a low-carbon recovery.”
• Carbon capture and storage (CCS): The budget reaffirms that government will fund four CCS demonstration plants for coal or gas-fired power stations, but it will not use a levy on electricity bills to fund them, as had been proposed by the previous government.
The spending review set aside £1bn for the first demonstration plant (ENDS Report 429, pp 5-7), to be chosen through a competition among power generators. But only one would-be CCS prototype has chosen to stay in the competition: Scottish Power’s Longannet coal-fired plant in Fife (ENDS Report 431, p 8).
• Zero-carbon homes: The government has weakened its policy to require housebuilders to construct all new homes to a new zero-carbon standard by 2016. As a result, new homes will only be two thirds of the way to being zero-carbon.
The zero-carbon concept relied on builders delivering highly energy efficient homes with on-site renewable energy generation, and compensating for the remaining emissions through off-site emissions savings known as allowable solutions.
The budget says the government will introduce “more realistic” requirements. Housebuilders will only be accountable for CO2 emissions from energy use for heating, hot water, fixed lighting and building services, and not those from plug-in appliances and cookers. This means there will be reduced requirement for allowable solutions, such as housebuilders paying into a fund for local renewable energy.
But the government endorses recommendations from the Zero Carbon Hub, an industry-government expert body, for on-site carbon reductions for zero-carbon housing developments as the starting point for future consultation (ENDS Report 413, p 15).
• Other measures: The chancellor’s most populist move was to replace the gradual road fuel duty escalator (ENDS Report 398, pp 4-5) with a “fair fuel stabiliser”. When global oil prices are high fuel duty will be lowered, with the loss of revenue compensated for by extra tax on profits for companies producing UK North Sea oil and gas. The fuel duty escalator will resume when prices fall below $75 a barrel.
Mr Osborne scrapped the coalition’s pledge to replace air passenger duty (APD) with a green tax on entire flights rather than individual passengers. And he delayed an increase in APD due in April.
The Budget accelerated the coalition’s reform of the planning system, with a number of measures to encourage more construction of homes and workplaces. These drew angry protests from planning organisations and the Campaign to Protect Rural England.