Carbon Price Floor: an unfair playing field?

UK manufacturers have told us that climate change legislation is generally seen as a valuable incentive for carbon reduction. But, the widening gap between the price of carbon in the UK compared to costs for European competitors isn't going down well with UK-based businesses. While the rest of Europe pays the market rate as determined by the EU's Emissions Trading Scheme (ETS) – currently trading less than €4/tonne of carbon – UK electricity consumers are now paying an extra £4.94/tonne in carbon price support tax from 1 April 2013, when the government introduced its unilateral Carbon Price Floor (CPF) scheme. As this is a tax on electricity generation, it equates to just under half a tonne – or around £2/megawatt hour. Not an insubstantial sum for a business consuming in the terawatt-hour league. The CPF has a reasonable purpose: to guarantee a more stable environment for investment in low-carbon technologies. However, the issue for many is that there are already measures in place to help achieve this, such as the EU ETS. At first glance, this year's extra cost may seem manageable. But, as the ETS rate has collapsed, the carbon price support tax calculation of CPF minus ETS has shot up much faster than was originally anticipated. This tax is set to almost double to £9.55 next year, and rise again to £18.08 in 2015 – and it's a tax that only the UK will be paying. However, the true cost is how this UK-only tax could disadvantage British businesses trying to compete on an international stage. If UK businesses consider relocating aspects of their operations to stay competitive and avoid additional costs – which we know some manufacturers are considering – it could have a profound effect on the UK's economy. The UK government is aware of this and plans to introduce a package of compensation measures for energy-intensive industries, with £100m earmarked to reduce the impact of the CPF. But it's not going to help everyone. Clearly, to make things fair, it would be helpful if the carbon price was the same across the whole of Europe and set through a strengthened emissions trading scheme. Yet we won't see the outcome of long-term structural reforms to the ETS for some time. So, in the meantime, UK businesses are likely to suffer. For some, moving operations to other countries may be the only way to manage carbon costs.