Carbon floor price freeze should concern investors


March 21, 2014

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We have long expected the UK government to weaken its so-called “pollution tax”. Now it finally has.

On Wednesday, chancellor George Osborne announced in his Budget that he is freezing the UK’s carbon price floor (CPF) from 2016. The announcement is the latest UK government rollback on green policy, and it will force investors to ask tough questions.

The CPF came into force last April as a tax on fossil fuels used to generate electricity. It is a top-up tax that puts a minimum price on how much power generators in the UK have to pay to pollute.

The idea was that it would rise from around £16 per ton at launch to £70 per ton by 2030, and encourage producers of dirty energy to cut their carbon emissions. The policy was also intended to make investing in renewables more attractive. It won’t now.

The government is freezing the CPF at £18 per ton from 2016 in a bid to curb rises in energy bills for businesses and consumers. The freeze is set to cut around £50 from an individual household’s energy bills by 2020, and £50,000 for a mid-sized manufacturer.

Some groups have welcomed Osborne’s announcement and, in many respects, freezing the CPF makes sense. Energy producers are just passing on the extra costs of CPF to customers through their bills, rather than using it as an incentive to become more energy efficient. The freeze helps to protect jobs in energy-intensive industries in the UK.

But freezing the CPF also reduces the incentive for dirty energy producers to change their ways. That is bound to make investors in wind power ask some serious questions.

The first is if the UK government is really serious about moving to cleaner energy. It is hard to believe it is committed to the switch when it tilts the market in favour of coal power.

The second question for investors is whether they should invest in UK wind projects when they see the government is so willing to weaken its own green incentives, and so quickly. It is very difficult for businesses to make long-term spending decisions when policy changes so quickly — although they frequently have to do so.

And the third question is whether investors will take their money elsewhere. The UK is far from the only place for investors in wind to put their money. Trade body Renewable UK warns that £4bn investment in UK wind until 2020 is at risk due to the CPF freeze.

The government clearly doesn’t think the CPF is the best way to achieve energy transition, but what is? We must counterbalance the obstacles to onshore wind, including often-hostile locals.

So will there be an incentive to replace the frozen CPF?

We’re unlikely to see anything significant in the next 12 months. The general election is a little over a year away. Protecting jobs today — even those in energy-intensive industries — will take precedence over greener energy tomorrow.

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