According to recent research, the UK's carbon tax is set to almost double again in its third year of implementation after prices within the EU emissions trading system plummeted to an all-time low. The tax, known as a carbon price support (CPS), may be set at £18.29/t for the financial year 2015/16, IHS CERA said in a note. The CPS was first announced in the 2011 UK Budget and will come into force at £4.94/t next month.
Significant impact on consumers
Commenting on the research Catherine Airlie, an analyst at IHS CERA, said: “This carbon tax was intended to provide long-term certainty to investors in low-carbon power generation in the UK, but the spiraling cost may prove difficult to maintain amid low EU ETS prices. The tax is worked out as a differential from EU permit prices, so given current depressed prices, UK polluters will have to pay a much higher cost in order to meet the government’s pledged minimum carbon price. The policy, which was created at a time of higher EU permit prices, may do little more than raise bills and boost profits at current nuclear power sites and wind farms. Once its effects are felt there may be a public backlash and the government may have little choice than to make drastic changes.”
Airlie continued: “UK power producers may be exposed to much higher carbon costs should the European Commission be successful in its plan to increase permit prices. In essence, the tax raises the cost of fossil-fuelled power production across the country, ahead of costs in neighbouring countries. While the government has promised to alleviate higher costs faced by heavy industry, no steps have been made to reduce the burden on domestic consumers. In its third year, the tax may account for about 10 – 15% of the wholesale cost of electricity, which makes up about half of the average electricity bill. The actual proportion will depend on the efficiencies of power generation and electricity prices at the time. Utilities say their profit margin for supplying electricity to homes comes in at less than 5%. While the UK claims to be doing everything it can to attract low-carbon energy production, the spiraling cost of this tax may prompt a call to ditch it or change it.”
The CPS estimate was prepared by Alun Davies, senior researcher at IHS CERA, using the Treasury's methodology and its December inflation rate assumptions.
Adapted from press release by Jonathan Rowland
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