Sky News: Why UK shouldn't go alone on climate policy
Karsten Neuhoff
http://blogs.news.sky.com/eyewitnessblog/Post:7fec27b6-ad66-4e03-8c7a-686b8dbc4553
Earlier this month, a little-noticed deadline expired which could have significant implications not only for Britain's climate change commitments, but also its energy policy.
The deadline in question was the closure of the Treasury's consultation over a "carbon price floor" - a plan to set the UK's own minimum price for carbon from 2013.
It would see the Government set a threshold below which the cost of burning fossil fuels to generate power could not fall.
The idea is to encourage investment in expensive sources of power generation that do not produce greenhouse gases by making sure they cannot be undercut by "dirty" supplies.
Up until now, Britain's carbon policy has been tied to the European version of the plan, the Emissions Trading Scheme (ETS) - but Treasury's new proposal would effectively separates Britain from Continental climate and energy strategy.
Nor does it do so, as many in Chancellor George Osborne's own party would wish, to reduce the UK's exposure to high energy prices: quite the opposite, in fact.
Large-scale investments are required in the power sector, but the carbon price in the European Emission Trading Scheme has been too low for major investments in most low-carbon power generation technologies.
Hence the Treasury proposes to increase the carbon price for power generation by adding taxes to coal and gas used for generating electricity.
The objective is to create a price floor set in the range between £20 and £40 per tonne CO2 by 2020.
Relative to current projections for 2020, this could double the carbon price - and consumers could end up footing the bill.
If British support for the ETS is seen to decline, this would undermine the value of ETS allowances EU-wide.
The impact on carbon capture and storage and the wider industry sector is also important.
European utilities and firms will only dedicate their full attention to new low-carbon technologies if they can anticipate, with confidence, a Europe-wide support for such financially intensive investments.
This follows with future nuclear stations in the UK, which the Government is desperately trying to encourage through a streamlined planning system and the carbon price floor, as well as reform of the electricity market.
Once investments in a set of nuclear power stations have been committed, any changes to the carbon tax scheme could have dramatic impacts on the balance sheets of investors and the ability to repay loans.
In the Budget, on March 23, the Chancellor will hopefully demonstrate that he fully understands the implications of going it alone, especially as the Government acknowledges it requires up to £200bn of energy sector investment by 2020.
:: Karsten Neuhoff is Research Director at the German Institute for Economic Research and project leader for the Climate Strategies (www.climatestrategies.org)
