Budget 2011: Experts divided over carbon floor price impact

Experts are divided on whether the carbon floor price announced by chancellor George Osborne in the budget will be sufficient to drive investment in low-carbon technologies.

Osborne confirmed in his budget address that the UK would become the first country in the world to impose a carbon floor price. It is designed to ensure the price on carbon imposed through the EU emissions trading scheme does not fall below a set level.

He said the floor price would start at £16 per tonne in 2013 and rise to £30 a tonne by 2020.

However, experts were divided on the effectiveness of the new floor price. Many warn it will not be high enough to drive significant increases in low-carbon investment, while others predict it will deliver a major windfall in excess of £1bn a year to existing nuclear power plants.

Matthew Spencer, director of green business think tank the Green Alliance, predicted the floor price would prove far too low to drive increases in investment.

"The Treasury has been tying itself in knots trying to keep the floor price to avoid giving a big windfall to nuclear operators," he said. "But that could have been tackled through a windfall tax. There are also no measures to protect people in fuel poverty from the resulting impact on energy prices, so there is a risk this will just be seen as a stealth tax."

Juliet Davenport, chief executive at green energy firm Good Energy, agreed that other subsidy mechanisms would drive investment in renewables far more effectively than the floor price. "The announcement of a carbon price floor should underpin the renewables sector, but it won't do much drive new investment, which will still be reliant on FIT (feed-in tariffs) and ROCs (renewable obligation certificates)," she said.

However, Richard Gledhill, a partner in PwC's sustainability and climate change, predicted that the investment certainty provided by the floor price would help to free up investment for low carbon projects.

"The floor price is largely in line with market projections, but it is not intended to act as a tax to drive up the price of carbon – it is meant to be a floor price that provides greater certainty," he said. He added that the greater degree of carbon price certainty will help to attract investors who previously risked falling carbon prices making their investments uneconomic.

Stuart Wilkinson, KPMG's head of Carbon Taxes, agreed investors would benefit from greater levels of certainty, but also acknowledged the floor price may need to be raised to drive investment.

"Whether the carbon price floor is a good thing depends very much upon who you're asking," he said. "The main benefit of putting a floor price on carbon will be that it creates a stronger, more certain, and more consistent carbon price signal, which should in turn allow businesses to make more effective investment decisions in relation to low-carbon energy and should, therefore, stimulate low-carbon investment... [but] based on economists models and predictions, a carbon price of £16, or even £30, may not be sufficient to stimulate the levels of investment required to decarbonise the UK energy sector."