Carbon tax will cut 5.3% from power sector emissions by 2020

The planned floor price for carbon should cut emissions from power and heating by 67 million tonnes in 2013-2010

A report by analysts Point Carbon has concluded that the UK’s carbon tax regime will produce a 5.3% cut in CO2 emitted by the power sector from 2013 to 2020.

That is equivalent to 67 million tonnes of CO2, or the greenhouse gas emissions of about six 400-megawatt combined cycle gas turbine plants.

The Treasury’s plans for the carbon floor price emerged late last year, and will apply from 2013 (ENDS Report, December 2010). It will set a target price for carbon, which will be set two years in advance, rising each year. This is likely to be higher than the expected price of carbon in the EU emissions trading scheme. The difference between the two will be taken as tax.

Point Carbon judges that the scheme will raise the UK cost of carbon by up to half by 2020, to €54. This is based on its estimate of an EU carbon price of €36.

According to the analysis, the carbon tax will lead to UK businesses facing additional costs totalling £9.3bn over the period 2013-2020. As the tax will be levied on fuel suppliers (ENDS Report, March 2011), the costs will be spread across the supply chain.

The floor price should deliver the government’s aim of more rapid decarbonisation, through replacing coal-fired plant with gas-fired generation, and more renewable capacity, it says.

Point Carbon analyst Sebastian Mankowski said: “This carbon tax will indeed change the composition of the UK’s power stack, making UK utilities greener.” But he added that the tax “also represents an additional £9.3bn burden on UK business not faced by other European companies, impacting UK competitiveness, as UK businesses will face higher power prices”.