A coalition of global organisations, led by the CDP, has launched an initiative to investigate carbon pricing and what levels would bring about the decarbonisation of electricity generation between 2020 and 2030. The group, known as “We Mean Business”, is expected to publish its initial findings in the spring and then to expand its research beyond electricity generation to other sectors.
Putting a price on carbon provides an economic signal to the polluter who might decide to change their activity and reduce emissions because it reduces their costs. However, where carbon trading schemes are in place, the price is often too low to encourage low carbon investment. For example, carbon allowances under the EU Emissions Trading System (EU ETS) are currently trading at €5.50/tCO2, significantly below the real cost of carbon which in past studies has been cited as approximately €30/tCO2.
The low EU ETS price is due to an oversupply of carbon allowances in the market, which the EU is aiming to address from 2019 via a new mechanism known as the Market Stability Reserve (MSR). This is designed to remove some excess allowances from the market and therefore support the price. MEPs have recently called to tighten the EU ETS further by both reducing the number of allowances available at auction and by increasing the number of allowances absorbed by the MSR. The proposed legislation will be put to an EU vote in February.
The UK took its own action in 2013 when it introduced the Carbon Price Floor which acts as a top-up EU carbon price. Currently set at £18/tCO2 until 2020, this is one of the factors that has encouraged UK generation away from carbon intensive coal-fired generation. It is not yet known what will happen to the Carbon Price Floor beyond 2020, or indeed whether the UK will continue to participate in the EU ETS once Brexit takes effect. It could be decided that the UK will remain within the EU ETS until the end of 2020 when Phase 3 ends. A decision will need to be made as to whether the UK continues to participate in Phase 4 or if an alternative must be devised.
With a raft of uncertainty surrounding energy and carbon policy, EEF is calling on the government to publish an Annual Energy Statement, which the manufacturers’ association believes would provide clarity to investors and consumers.
