Policy Exchange has become the latest organisation to call for the retention of the UK’s carbon price floor ahead of next week’s autumn statement, arguing changes to the policy would seriously undermine the government’s efforts to phase out coal power by 2025.
The influential thinktank joins the CBI and trade body Energy UK in arguing the levy should be kept in place, despite lobbying from some industry groups calling for it to be axed.
Critics of the levy have said it pushes up energy bills and undermines the competitiveness of UK industries – a scenario the government has attempted to address by providing support for industries deemed to be at risk from overseas competition because of environmental policy costs.
However, in a new paper Policy Exchange argues that while the carbon price floor has largely failed in its original goal of mobilising investment in clean energy it has inadvertently become the primary policy mechanism for shifting the energy mix from coal to less carbon intensive gas – a phenomenon that has happened so quickly coal provided just three percent of total power generation in the three months to October this year.
“We recommend that the government retains the carbon price support until the early 2020s, to support the government’s plan to phase out coal generation,” the report states. “Scrapping the carbon price support now … would damage policy credibility and undermine the government’s decarbonisation plans.”
The government last week launched a consultation on its plans to phase out unabated coal power, confirming it wants coal power off the grid by 2025 at the latest.
“The original rationale in 2010 was it would support investment in wind and solar and so on and it hasn’t done that, investment has happened despite the carbon price floor not because of it,” Policy Exchange’s Richard Howard told BusinessGreen. “But what it has done is deliver a massive coal to gas shift, that’s because the price is just sufficient to make coal slightly more expensive than gas at the moment.”
He added that scrapping the carbon price floor would be “nuts” as it would ensure that coal plants were “back in the money”. “It would undermine the carbon budget period we are on now and it would make the coal phase out target harder to achieve,” he said. “You could use an emissions performance standard to still deliver the coal phase out, but using carbon prices is an easier way to do it in the first instance.”
However, the report argues that once coal has been removed from the grid the carbon price floor, which adds an estimated £36 a year to average household energy bills, should be phased out, bringing UK carbon prices back into line with those set by the EU emissions trading scheme (ETS).
“Modelling suggests that this would reduce wholesale energy prices in the UK by around £4/MWh, saving consumers as much as £12.5bn over the period 2019 to 2030,” the report states. “Aligning carbon prices in the UK and Europe would mean that we import less power from the continent through interconnectors, and invest in new generation in the UK instead, increasing jobs and GDP.”
Howard added that further decarbonisation of the energy system could then be achieved through other policy measures and the reform of the EU ETS to deliver a more meaningful carbon price across the bloc as a whole.
“We’re not saying get rid of carbon prices completely, but let’s have the same one across Europe and make it work,” he said. “It’s not clear whether that is where we are heading post Brexit, but there is a lot of support across Europe for reform. “