That carbon floor price - now you see it...

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Well we've got a carbon floor price of sorts, or we will have in 2013. And it is going to be, as the chancellor said in his Budget speech "around £16". So let's do the calculations then: it's a floor under the EU Emissions Trading Scheme... so that's the EU ETS trading price (around £15 per tonne CO2 at budget time) plus what it takes to get to £16. Ah, it's a £1 floor then: not much income for the Treasury, but in line with the £1 level that had been talked about in the Treasury Carbon Floor Price consultation document.

Except it isn't going to be £16, unless the EU ETS crashes to such a low price by 2013 that it allows the actual floor 'tax' under to add up with it to £16. Confused? So was I, because the details in the small print accompanying the budget speech set out that the starting 'floor' is to be £4.94 per tonne in the form of a 'tax' levied by removing the exemption on upstream fossil fuel production under the Climate Change Levy (CCL).

So, if we add the £4.94 to the current EU ETS price we get what the real carbon price is
likely to be in 2013, which is around £20 per tonne.

That, of course, does three things:

1. It puts a difference of almost £5 between UK and continental electricity trading prices, raising at least a question on how imports and exports via interconnectors are going to work.

2. It gives 'legacy' nuclear power generators such as EDF a billion pound or more windfall on electricity sales.

3. It nets the government a handy £800m-a-year income (since the floor as it will work is a flat tax, rather than an adjustment to ETS prices).

(2) and (3) were probably irresistible to the Treasury, since it helps to fund new nuclear 'with no public subsidy' and on top of that gains a free new income stream in the guise of saving the planet.

Whether it is wise to start a carbon floor price quite so detached from EU ETS levels just as the mechanism itself is beginning to show that it can work, and will have now have some phase three permits auctioned off (or withheld if the price is too low) is another matter. But (1) most certainly can be a problem, even leading to possible decisions by energy companies to build new gas plant in - say - the Netherlands in order to sell into the UK via the Britned interconnector at a substantially better price than building and bidding in the UK.

Hey, but maybe that hypothetical is a small drawback compared to the free money the measure produces for government and possible new nuclear investors.

As to why George Osborne misled the House and the public by giving us a different likely floor price, I have no idea. The official explanation, I understand, is that the £16 figure was announced because the floor price is based on 2009 figures. No, I don't understand why this should be so either, and it remains unrecorded in Treasury figures and unnoticed by the Secretary of State when I asked him that precise question at DECC questions last week.

Let's be kind and put it all down to confusion between what was going to be the price during the consultation and what turned out to be the price when the income sums were done late in the day. They just didn't reconcile the figures. That must be it, but they might have told DECC.

This post first appeared on Alan's Energy Blog.

Dr Alan Whitehead is the Labour Member of Parliament for Southampton Test.

He is a member of the House of Commons Energy and Climate Change Select Committee, as well as the Environmental Audit Select Committee, and has been on the Public Bill Committees for every major piece of UK energy and climate change legislation in recent years, including the Climate Change Act 2008. He is also chairman of a number of cross-party groups on these issues.

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