The UK’s go-it-alone approach of setting a price floor for carbon
dioxide emissions could harm both the country’s industry and consumers, a
parliamentary committee warned Thursday.

The government’s decision to set a unilateral carbon price floor could
have a “devastating effect” on UK industry and will artificially raise
electricity prices for consumers, while having no overall impact on
emissions, lawmakers on the House of Commons Energy and Climate Change
Committee warned.

“The chancellor was right to say we won’t save the planet by putting the
UK out of business,” said committee Chairman Tim Yeo, in reference to
comments by finance minister George Osborne. The minister last year attacked
some of the UK’s green policies for going beyond those of other EU member
states.

“Ironically, however, it is the Treasury’s decision to set a carbon
price floor that could result in industry and electricity production
relocating to other EU countries,” said Yeo in a statement.

“Unless the price of carbon is increased at an EU-wide level, taking
action on our own will have no overall effect on emissions other than to
out-source them,” he said.

“A revenue raising exercise disguised as a green policy won’t help
anybody. The price of carbon has to be increased at an EU level to kick start
investment in clean energy,” he added.

The committee’s comments add to growing calls by investors, power
generators and environmental groups for a more robust carbon price in Europe
to provide certainty on paybacks for low carbon investment.

In the UK alone, the government estimates that up to GBP110 billion
($171 billion) will need to be invested in electricity generation and
transmission by 2020, and much of that investment risks locking in high
carbon generation unless adequate policies are in place to incentivize clean
energy.

WORKING WITH EUROPEAN PARTNERS

In March 2011, the chancellor announced a carbon price floor of GBP16/mt
of CO2 in 2013, rising to GBP30 by 2020, in 2009 prices. The price floor sets
out a minimum price of carbon that would apply only in the UK.

It works by charging a top-up tax on emitters if the price of EU
Allowances under the EU Emissions Trading System falls below the
pre-determined price floor. The government has said it expects to raise
GBP1.4 billion in extra revenue by 2016 from the policy.

In its statement, the committee said the UK would be better off working
alongside its European partners on carbon policy.

“Electricity prices will increase as the price floor keeps the cost of
carbon higher than in other countries, effectively subsidising other [EU]
Member States at the expense of the UK consumer,” the committee said.

“This will cut emissions in the UK, but may not reduce them overall –
as electricity production and industries may simply relocate to other EU
countries resulting in ‘carbon leakage,’” it warned.

“Instead of going it alone, the chancellor would be better off working
with other European governments to make the EU Emissions Trading System more
effective as a whole,” Yeo said.

“Before Phase III starts next year, EU countries must set aside
pollution permits to end the glut that has caused the price of carbon to
collapse,” he said.

LONG-TERM EMISSIONS TRAJECTORY

The committee said the government should push for a strong and stable
carbon price across the EU ETS instead of taking unilateral action.

Problems that have led to an over-allocation of allowances and a
collapse in the carbon price need to be resolved before Phase III begins in
2013, and the overall CO2 cap should be toughened to deliver a 30% emissions
reduction target by 2020, it said.

The committee also said the annual reduction rate for the EU ETS cap
must be adjusted to set out a long-term emissions trajectory that will
deliver a 60%-80% reduction in greenhouse gas emissions by 2050.

“The EU should set aside a significant number of EU Allowances and
Member States should support this move as a necessary short-term fix,” it
said.

The committee also said the UK government should warn that it will
ground flights from any UK-regulated aircraft operators if they refuse to
comply with the terms of the EU ETS.

Under EU legislation agreed upon in 2008, aviation’s CO2 emissions were
brought into the EU ETS on January 1 this year.

“Any country or operator that refuses to accept EU ETS rules on aviation
should also face an increased Air Passenger Duty charge in the UK,” the
committee said.

–Frank Watson, frank_watson@platts.com

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