Treasury faces fresh calls to confirm future of carbon price floor, as EU begins work on post-Brexit emissions trading scheme plan
The government has today faced fresh calls for it to clarify the future of the UK’s carbon price floor, with energy giants SSE and Drax jointly urging the Treasury to deliver a “robust and strong carbon price”.
The energy giants, both of which have plans to develop new low carbon and gas-fired power capacity that will be impacted by the future carbon price, warned the government needed to make good on its pledge to provide more information on the carbon price floor in next month’s budget.
“At the moment the industry only has sight of the carbon price to April 2021,” the companies wrote. “This is welcome but we now need to understand the trajectory of the UK’s carbon price into the 2020s, particularly as without it generators have less clarity as they seek to deliver a new generation of efficient gas plants in the next Capacity Market Auction in February 2018.”
The intervention comes just days after new research suggested that if the government keeps the carbon price floor at current levels beyond 2021 it could result in coal-fired power plants coming back online.
The calls for an increase in the UK’s carbon price follow a rally in EU carbon prices, which are set through the emissions trading scheme. The price of EU allowances has climbed 75 per cent in recent months to around €8 a tonne. However, it still remains well below the UK carbon price floor of £18/tonne – a scenario which has resulted in the government providing significant compensation packages to energy intensive industries who fear the impact on power prices has undermined their international competitiveness.
A report this week from investment bank Jefferies predicted that on-going reforms to the ETS that are likely to lead to higher carbon prices through to 2020 and beyond should benefit companies with a relatively low carbon power mix. For example, it predicts the reforms could push the share price of energy giant EDF up by around 40 per cent to €15.
Meanwhile, the EU last week confirmed it is working on measures to safeguard the ETS should the UK crash out of the bloc without an agreement on continued involvement in the carbon market.
The International Emissions Trading Association (IETA) warned that a hard Brexit scenario could result in a glut of emissions allowances being released on to the market as UK firms that hold allowances look to cash them in before exiting the scheme.
“A hard Brexit scenario poses a risk of approximately 220 million allowances issued by the United Kingdom to be offloaded onto the market between 1 January 2018 and 29 March 2019,” the group warned in a letter to the EU.
It added that in order to avoid any “potential carbon market disruptions”, it would like to see the EU and UK agree on a “continued participation by UK companies in the EU’s carbon market until the end of 2020 at a minimum”.
Committing the UK to the ETS until the end of the current phase would minimise the risk of disruption and also fuel hopes across the market that the country could emulate Norway and remain in the ETS despite being outside the EU.
However, continued involvement in the ETS would raise questions over the jurisdiction of EU courts over UK firms, which some in the UK government remain fiercely opposed to.
Separately, the EU last week confirmed it would continue to exempt international flights from inclusion in the ETS until the end of 2023.
The bloc had signalled it would defer levelling emissions charges on international flights if the International Civil Aviation Organization (ICAO) came forward with proposals for a carbon pricing mechanism of its own. Last year, the aviation body agreed plans for a new international carbon offsetting scheme, which is slated to be introduced in 2021 and will initially cover three quarters of global aviation emissions.