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The Carbon Price Floor is no great loss

Nigel Williams, 20 March 2014

Yesterday’s budget included a reduction in the carbon price floor by 2020 from £30 to £18 per tonne of CO2. It is a further indignity for Chris Huhne, the energy and climate change minister that pressed for its introduction. In prison when it first took force, he has been out less than a year before the scheme has been radically scaled down.

The argument was expressed thus in the regulatory impact assessment:

As such, businesses and investors face a degree of regulatory uncertainty about future carbon prices, which might undermine long-term price signals and incentives. Therefore, there is a rationale for Government to intervene to provide greater support and certainty to the carbon price.

Courtesy of Mr Huhne, businesses enjoyed the certainty of rising costs for less than a year.

The decision is also a vindication of arguments set out for Civitas by David Merlin-Jones in the books Chain Reactions and CO2.1. It may appear incongruous that a carbon-reduction measure should be scaled back even before the last winter flood warning has been rescinded. Nailbourne and Little Stour have endured flood warnings since the end of January and would have attracted more attention but for the more devastating floods elsewhere. There is, however, a difference between acknowledging the scale of the problem and deciding on the best way to deal with it.

In Chain Reactions, Merlin-Jones argues that many of the industries assisting the reduction of the carbon footprint are themselves energy intensive but that well-directed short-term energy use can reduce overall consumption. Some of the most efficient insulation panels can serve to reduce heating costs for years after the energy investment in their production has been paid back. Materials to build wind turbine blades, he calculated, had an energy payback ratio of 123:1.

CO2.1 was a more detailed look at the carbon-trading market. Because greenhouse gas emissions do not respect national boundaries, any economic mechanism to reduce them that is not fully international risks moving production to wherever the regulatory cost is lowest. The EU Emissions Trading System results in a market price for carbon permits. The Carbon Price Floor is intended to exert an upward pressure on that price by preventing British companies from trading below that minimum.  Current ETS permit prices between €6 and €7 a tonne are so far below even the frozen UK price floor that the budget change will make little difference to overall emissions.

Meanwhile the rest of Europe appears to be doing what it can to raise energy prices without intervention from the British government. Even German manufacturing is feeling pressure (£) as a result of abandoning its nuclear power program. That was a response to the tragic Japanese tsunami of 2011, when approximately 16,000 people lost their lives. The stricken power plant at Fukushima is the highest-profile site of that disaster. It has given rise to higher risks of radiation-related diseases and the evacuation conditions contributed to the loss of life. Nevertheless, the major damage was caused by the earthquake and tsunami. The German decision to dispense with nuclear power spares them from a small additional risk on top of their existing seismic exposure. They are much further from any tectonic boundaries than Japan. It does create a large market for anyone wishing to sell them renewable generating equipment.

Imported gas looks less attractive, but more expensive, as a result of Russian action in the Ukraine. Scottish renewables look superficially riskier with the possible vote for independence. In fact energy markets have long been international and Scotland is already competing with European suppliers. When wind farms become too intermittent, National Grid can already count on an interconnector supplying nuclear-rich electricity from France. Other exchanges exist with the Republic of Ireland and the Netherlands. There is even a link-up with Norway’s hydro-electric reserves under consideration. An independent Scotland would welcome England’s ready market to buy its electricity whenever they had any spare. There are plenty of incentives to develop a low-carbon economy, without Chris Huhne’s vision of uniquely high UK energy prices.

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