As Australia drops its unpopular carbon tax, how long before Britain’s own carbon price floor is axed? (ConHome)

Australia’s re-heated Prime Minister, Kevin Rudd, thinks he can win the imminent general election.  His confidence is reflected in an extraordinary decision announced last Sunday to drop his Labor Party’s previously rock-solid support for a fixed Australian carbon tax.  Introduced by his deposed predecessor Julia Gillard, Kevin Rudd has studied the polls and realises that this unpopular tax baggage needs to be urgently jettisoned.  Could this be a lesson for Britain’s Conservatives?

If the Rudd government is re-elected to another term, it will pledge to legislate a move from the fixed carbon tax to a market-based emissions trading scheme effective from next July.  The move could see a carbon price of $6-$10 (AUS dollars) a tonne, significantly lower than the unpopular $24 per tonne of carbon Australian emitters and electricity generators currently pay for their carbon emissions under the fixed price legislation.

So where is the lesson for the UK?

Up until April this year, the UK was part of the market based EU Emissions Trading Scheme (EU ETS) and shared the same carbon prices as the rest of the EU. This was launched in 2005 and covers more than 11,000 factories, power stations, and other energy-intensive installations in the EU. These high energy users currently receive a “trading credit” which determines the upper limit of their carbon emissions. If a high energy user’s carbon emissions exceed what is permitted by its credits, it can purchase trading credits from other energy users or countries. On the other hand, if an installation has reduced its carbon emissions, it can sell its remaining credits to other energy users.

The Treasury took the decision that the EU ETS price was far too low to encourage investment in low carbon technology and also saw a unilateral and rising UK carbon price floor as a useful revenue -aising tool.  Anticipating growth in the Eurozone by now they failed to model the disastrous scenario which they face today – a huge disparity between UK carbon prices and those on the continent.  Because of the rising UK carbon price floor, electricity generators are paying over €18 a tonne of carbon emitted, compared with just €4 on the Continent.  This is a staggering disparity and represents more than a quadrupling of the carbon price for British power generators, compared with that faced by their competitors across the Channel.   As a result wholesale UK electricity prices could soon be almost double those in Germany or Italy, not only costing consumers and energy intensive industry dear but adding another layer of market distorting subsidy for already heavily subsidised renewables.But the UK is about to significantly further increase the minimum floor its electricity generators pay for carbon emissions.  Having started in April at £16/tonne, this price will then rise to £30/tonne in 2020 and £70/tonne in 2030. The money raised will go the Exchequer, which expects revenues to increase from £740 million in 2013/14 to £1.4 billion in 2015/16.

Many observers had previously believed that the EU ETS price would start to increase as the Eurozone emerged from recession, but the reality is the reverse.  In recent weeks the EU ETS prices has weakened further as Europe remains mired in recession; consequently the disparity between EU and UK carbon prices has widened even further.

Who pays?

The carbon price floor will tax emitters of CO₂ in the electricity generating industry; the 75 per cent (and growing) of Britain’s electricity supply industry which is fossil fuel based (gas and coal). Relative to current (and optimistic) projections for the EU Emissions Trading Scheme price, by 2020 UK industry and electricity generators could be paying nearly three times as much for their carbon emissions as their EU counterparts.

This is particularly significant given the fact the UK looks to be set to embark on another “dash for gas” for electricity generation. This will increase further our dependency on fossil fuels in the short to medium term as new nuclear plants and commercially deployable carbon capture and storage technology is at best a decade away.

A decision by the Prime Minister to abandon Britain’s carbon price floor and return to the EU ETS would:

• demonstrate that economic growth is at the heart of his economic strategy;

• remove an unnecessary cost on less well-off households consumers;

• have no detrimental impact on investment in future low-carbon generation such as new nuclear power and renewables (these receive their own Contract for Difference in the Energy Bill);

• remove a market distortion that is obscuring investment signals for reliable conventional electricity generating capacity;

• accept that there should be no cost disparity between Britain and our closest economic competitors.  The PM often reminds us the UK is in a “global race”;

• show a determination to reduce fuel poverty and help UK manufacturing;

• provide international investors with certainty in their international investment decisions;

• demonstrate a determination to reform and strengthen the EU ETS price across the Continent, with the UK in the lead.

As the 2015 election nears, the Conservatives risk being saddled with the blame for a draconian tax which will begin to filter through on bills and industry costs this coming winter.  Importantly, the Labour Party has voted against the carbon price floor in the Finance Bill in recent years, so a policy opportunity for them is clear. Let’s hope the Australian election mastermind in Downing Street suggests the Prime Minister, on this one and only occasion, copies Kevin Rudd and removes Britain’s carbon price barnacle before it is too late.