Oslo, 14 April 2011

Price of carbon could rise to €54 per tonne, costing UK business £9.3bn: The UK’s carbon floor tax, announced at the end of March, could see emissions from power generators in the UK cut by 67Mt, equivalent to 5.3% of total UK power and heat sector emissions from 2013 to 2020, or roughly equal to the emissions of six 400 MW gas (CCGT) plants over that period.

The tax, designed to incentivize investment in low-carbon technology, will be levied from 2013 on fuel suppliers. The level of tax applied in a given financial year is based on the UK target carbon price floor of that year and the expected price of carbon for that year. The difference between the two will be the tax.

Fuel suppliers will be forced to pay the floor tax regardless of fluctuations in the price of carbon allowances in the EU ETS.

Thomson Reuters Point Carbon estimates that, by 2020, the cost of a tonne of carbon bought in the UK, including the tax, could be as high as *€54. Elsewhere within the EU ETS the price would be €36.

The way that the carbon price floor is currently being represented, as a £30/t target for 2020, is misleading given the design of the tax rate calculation. Firstly, the price floors are inflated into future prices, making them higher. Secondly, the expected carbon price is set two years ahead of the time of tax, meaning that intervening increases in the carbon price are not taken into account.

This means that by the time the tax is actually levied the ‘effective carbon price’ will most likely be greater than the price floor.

According to estimates by Thomson Reuters Point Carbon, UK businesses will be faced with additional costs of £9.3bn due to the carbon tax. According to Sebastian Mankowski, an analyst at Thomson Reuters Point Carbon “Since this tax is applied to the sellers of fuel we expect the cost to be spread across the whole supply chain”.

This extra cost to business could give rise to more rapid development of renewables in the UK and the replacement of coal plants with gas plants. Since the development of new nuclear capacity in the UK is still at an early stage, it is unlikely, however, that the tax will lead to the commissioning of new nuclear plants before the end of phase 3. “This carbon tax will indeed change the composition of the UK’s power stack, making UK utilities greener. However, this 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”, Mankowski concluded.

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*The ‘effective carbon price’ of €54/t in 2020 is composed of our price forecast of €36/t in 2020, plus our estimate of the UK carbon tax of €18 which is derived from the government methodology using our price forecasts.

www.pointcarbon.com