4 The Carbon Floor Price |
56. The 2011 Budget announced that the Government
would introduce a Carbon Floor Price (or 'Carbon Price Support')
from 1 April 2013 to drive investment in the low-carbon power
sector. The Floor Price will be put in place by reforms to the
Climate Change Levy and Fuel Duty so that they are levied on all
fossil fuels used to generate electricity in the UK.
The Floor will start at around £19 per tonne of carbon dioxide,
(£16, rising to £30 in 2020, in 2009 prices). This would
require an effective levy of nearly £5 per tonne in 2013-14.
The Treasury expects this to raise £740 million in 2013-14,
rising to £1.4 billion in 2015-16.
57. The Energy and Climate Change Committee had
recently reported on the Carbon Floor Price
and we have not sought to duplicate that extensive work, instead
examining the potential effects of the Floor Price on international
competitiveness and the Government's pledge on no new subsidy
for nuclear power.
The impact on competitiveness
58. One of the environmental taxation issues
we discussed in Chapter 2 was that a tax alone will often not
be enough to change behaviour. There is often a role for other
policy instruments alongside to achieve the desired change. Many
of the written submissions provided to our inquiry criticised
the potential impact of the Carbon Floor Price on the international
competitiveness of UK businesses, particularly energy intensive
industries. These industries will require measures to help them
adjust to a low-carbon future. EEF pointed out that the 'implicit
price' of carbon in the UK as a result of the combined effect
of all existing climate policies is 'already significantly higher
than in other major industrialised economies'.
The British Ceramics Confederation recommended that the Government
measure the cumulative costs of all the UK's environmental taxes
through impact assessments to "ensure that the UK does not
just meet its emissions reductions targets by off-shoring manufacturingthe
UK needs to avoid 'carbon leakage' of energy-efficient manufacturing
in the UK to less-regulated economies, exporting GDP and jobs".
It conducted a survey of its members and found that the Carbon
Price Floor will put about half of them "out of business"
as "it was not an option to increase prices to pass on this
cost to customers due to the internationally competitive market
in which they operate".
Ineos Chlor noted an absence of a plan for helping energy intensive
industries to manage the transition to a low-carbon economy.
EEF suggested that the Green Investment Bank could form part of
such a plan.
59. Andrew Leicester told us that without the
EU Emissions Trading System targets being tightened, the Carbon
Floor Price is unlikely to result in less emissions:
Anything that is introduced on energy that is within
the wider context of the EU ETS has very little impact if it does
not result in the ETS's calculations being tightened.
We support the Government's commitment to push for
100% auction of EU Emissions Trading System allowances
and a European emissions reduction target of 30% by 2020.
The Office for Budget Responsibility estimates that £7.7
billion of proceeds will be raised from the auction of EU Emissions
Trading System allowances between 2010-11 and 2015-16,
but the Treasury does not plan to ring-fence these proceeds for
investment in low-carbon infrastructure.
The Government intend to publish a package of measures for the
energy-intensive industries whose international competitiveness
is most affected by energy and climate change policies by the
end of 2011.
60. The Treasury is missing
an opportunity to support low-carbon investment by not ring-fencing
receipts from the EU Emissions Trading System or the Carbon Floor
Price. The Treasury should consider investing a proportion of
these proceeds, perhaps through the Green Investment Bank, to
support energy-intensive industries to take steps to reduce their
carbon footprint, enabling them to remain in the UK, to be greener,
and to be competitive.
61. The Committee on Climate Change recently
concluded that nuclear power currently appears to be the most
cost-effective of the low-carbon technologies, and should form
a greater part of the energy mix assuming safety concerns can
be addressed (up to 40% of the energy mix in 2030). However, it
pointed out that full reliance on nuclear would be inappropriate,
given uncertainties over costs, site availability, long-term fuel
supply and waste disposal, and public acceptability.
In the Coalition Agreement, the Government has said that it is
committed to allowing the replacement of existing nuclear power
stations, provided that they are subject to the normal planning
process for major projects (under a new National Planning Statement)
and provided that they receive no public subsidy.
62. Producers of low-carbon electricity, including
existing and new nuclear generators, will benefit from any increased
Climate Change Levy triggered by the Carbon Floor Price. The Economic
Secretary told the House that the existing nuclear sector will
benefit by an average of £50 million per annum to 2030, whilst
the renewable energy sector is expected to benefit by an average
of at least £25 million a year.
Others have estimated that the benefits to nuclear could be higher
than this. In
its response to this Report the Government should provide its
comprehensive assessment of the possible financial consequences
of the Carbon Floor Price for existing and new nuclear power.
EDF Energy told us that the Carbon Floor
Price will influence investment decisions on extending the life
of the UK's existing nuclear plants.
This raises a question over one of the principles we discussed
in Chapter 2the need for clarity about the objectives of
environmental tax (and for these purposes we regard any Floor
Price levy as an environmental tax).
In this context, the issue is whether the Floor Price arrangement
is intended to support low-carbon power or to support non-nuclear
63. The Secretary of State for Energy and Climate
Change told the House that:
there will be no levy, direct payment or market support
for electricity supplied or capacity provided by a private sector
new nuclear operator, unless similar support is also made available
more widely to other types of generation. New nuclear power will,
for example, benefit from any general measures that are in place
or may be introduced as part of wider reform of the electricity
market to encourage investment in low-carbon generation.
64. We asked the Treasury (without success) to
set out for the purposes of our inquiry a general definition of
a subsidy. Nevertheless,
the International Energy Agency defines energy subsidy broadly
as 'any government action that lowers the cost of energy production,
raises the price received by energy producers or lowers the price
paid by consumers'.
The effect of the Carbon Floor Price will be to reduce the cost
of nuclear energy generation when compared to CO2-emitting generation
sources. On that basis, the Carbon Floor Price could be considered
a subsidy for nuclear power when compared with fossil fuel energy
the Government considers that it will not break its promise in
the Coalition Agreement on no subsidy for nuclear if any subsidy
is not "specific" to the nuclear industry.
The Economic Secretary told
us that she saw the Carbon Floor Price as "putting in place
a level playing fielda floor on the carbon price that will
encourage a shift away from high carbon power generation".
65. The Energy and Climate Change Committee recently
recommended that the Government should address the advantages,
risks and challenges of promoting new nuclear generation head-on
and honestly: 'It should not distort the market merely to save
political face about the precise meaning of the Coalition Agreement
The Government's definition
of a 'subsidy' in relation to nuclear is not robust and does not
hold up to scrutiny. The Carbon Floor Price will subsidise nuclear
in the same way as renewable energy sources, which have no adverse
environmental impacts, and nuclear will benefit the most from
the Carbon Floor Price mechanism. As the Energy and Climate Change
Committee recommends, the Government should recognise the issues
related to new nuclear head-on and honestly.
66. We questioned the Minister on whether she
had considered a clawback tax on existing nuclear generators (so
that they pay the same tax as oil and gas generation).
She told us that it was not possible to make nuclear power generators
pay back the hidden subsidy in the Carbon Floor Price because
that would raise "issues of State aid" benefits "for
one particular sector more than another". She also argued
that, to maintain 'fiscal neutrality', "we can't suddenly
unilaterally tax one particular area in a way that is deemed unfair
to other areas; so we don't have perfect freedom to do that".
A more compelling case will have to be made before we can accept
the Treasury's rationale barring such a clawback tax. We note,
for example, that the Government increased the tax rate on domestic
oil and gas production to pay for the cut in Fuel Duty. In
its response to this Report, the Government should explain clearly
whether, and on what legal basis, it would be possible to levy
a clawback tax on existing nuclear generators so that they pay
the same tax as oil and gas powered generation. If in fact legally
permissible, the Government should require nuclear power generators
to pay such a clawback tax to fulfil its promise to provide no
155 HM Treasury, Reform of Air Passenger Duty: a
consultation, March 2011, page 18, Box 4.A. Back
Budget 2011, op cit, pp 32 and 43, table 2.1; Carbon
Floor Price Consultation: the Government response, op cit,
page 16. Back
Energy and Climate Change Committee, Fourth Report of Session
2010-12, Electricity Market Reform, HC 742. Back
Ev w78 Back
Ev w68 Back
Ev w14 Back
Ev w78 Back
Q 7 [Andrew Leicester] Back
Q 86 Back
HC Deb, 17 May 2011, col 177. Back
Budget 2011, op cit, page 92, table c.3. Back
Qq 87 and 88 Back
HC Deb, 17 May 2011, col 176. Back
Committee on Climate Change, The Renewable Energy Review,
May 2011. Back
HM Government, The Coalition: our programme for government,
May 2010, page 17. Back
HC Deb, 9 May 2011, col 1024W. Back
Ev w3; Electricity Market Reform, op cit, page 43. Back
Ev w39 Back
The Office for National Statistics already counts the Climate
Change Levy as a 'tax on non-domestic use of energy' in the National
Accounts but was still to determine the treatment of the Carbon
Floor Price (Office for National Statistics, UK Environmental
Accounts, page 70). Back
HC Deb, 18 October 2010, col 42-6WS. Back
Ev 46 Back
UNEP and IEA, Reforming Energy Subsidies, 2002. Back
Ev w104 Back
The Secretary of State for Energy and Climate Change told the
Energy and Climate Change Committee during its inquiry on Electricity
Market Reform that a subsidy for nuclear generation would be "something
which is specific to the industry"; Electricity Market
Reform, op cit, paragraph 125. Back
Q 69 Back
Electricity Market Reform, op cit, paragraph 132. Back
Q 10 Back
Q 74 Back