House of Commons Library

Carbon Price Floor

Published Wednesday, November 23, 2016

An updated brief on the Carbon Floor Price and the Government's freeze of Carbon Price Support until 2021. Further details for beyond 2021 were expected in Autumn Statement 2016. No announcements were made, instead the Government will continue to consider appropriate measures for the 2020's

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Supporting Carbon Prices

The Carbon Price Floor (CPF) is a UK Government policy implemented to support the EU wide Emissions Trading System (EU ETS) which places a price on greenhouse gas emissions. It does this by requiring heavy energy users to acquire permits for every unit of greenhouse gases they emit. These permits are called emission allowances.

The UK’s Carbon Price Floor was introduced to work in conjunction with the EU ETS scheme. They aim is to underpin the price of carbon at a level that drives low carbon investment, which the EU ETS has not as yet achieved.

The Coalition Government committed to introduce a floor price for carbon and published a consultation on Carbon Price Support (CPS) in December 2010. Following this, it announced in the March 2011 Budget that it would be introducing price support via the Climate Change Levy with a target price of £30 per tonne of carbon dioxide in 2020, with a start price of around £16 per tonne.

Support capped

The Treasury confirmed carbon prices three years in advance from April 2013, together with indicative prices up to 2017. These were due to rise every year until 2020, with all revenue raised retained by the Treasury. However in Budget 2014 the Government announced that the Carbon Price Support component of the floor price would be capped at a maximum of £18 per tonne/CO2 from 2016 to 2020 to limit the competitive disadvantage faced by business and reduce energy bills for consumers. This was extended to 2021 in Budget 2016.

Following the implementation of the Carbon Price Floor in the UK, the European Commission considered, but ultimately rejected, a similar system to reform the EU ETS. This option was also considered by France but the proposal has been dropped.

Impacts and Future of the  CPF

The aim of the Carbon Price Floor is to encourage the transition to a low carbon economy. With regards to coal use for electricity generation it has contributed to the large drop in use as part of the generation mix in the last two years. However, the policy itself and how it has been changed also has implications for customers’ energy bills, energy intensive industries and the UK’s attractiveness in terms of renewables investment. The Government had previously stated that it would set out in the Autumn Statement 2016 the long-term plans for the price floor. Instead the Government will continue to consider the appropriate measures for determining the carbon price in the 2020's.

Background on the Climate Change Levy is available in Library Briefing CBF7283

Commons Briefing papers SN05927

Authors: Elena Ares; Jeanne Delebarre

Topics: Climate change, Coal, Energy, Environmental protection, Nuclear power, Oil, petrol and natural gas, Renewable energy, Taxation

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