Britain's plan to introduce a price floor for carbon emissions permits from 2013 could push the UK carbon price to €54 a tonne by 2020 and harm UK businesses, Point Carbon analysts said.
Last month, the UK government announced plans to introduce a floor for EU permits of £16 (€18) per tonne from 1 April 2013, rising to £30 (€33.8) per tonne by 2020.
The government hopes the floor will incentivise investment in low-carbon technology.
It will be levied from 2013 on UK firms operating under the EU's Emissions Trading Scheme (EU ETS), which caps the emissions of the bloc's heavy industry.
The level of tax to be applied in any given financial year is based on the UK target carbon price floor of that year and the expected price of carbon for that year, analysts at Point Carbon said in a statement.
The difference between the two will be the tax.
The move could cut emissions from UK power generators by 67 million tonnes, or 5.3% of total UK power and heat emissions, from 2013 to 2020, according to Point Carbon.
€54 a tonne by 2020?
But the cost of a tonne of carbon bought in the UK could rise to €54 a tonne by 2020, while the rest of the EU ETS would see a price of €36 a tonne.
The way the floor is currently being represented – as a €30 target for 2020 – is misleading due to the method used to calculate the tax rate, the analysts said.
"Firstly, the price floors are inflated into future prices, making them higher. Secondly, the expected carbon price is set two years ahead of the time of tax, meaning that intervening increases in the carbon price are not taken into account."
UK businesses will also be faced with additional costs of £9.3 billion (€10.5 billion) due to the carbon tax.
"This carbon tax will indeed change the composition of the UK's power stack, making UK utilities greener," said analyst Sebastian Mankowski.
"However, this tax also represents an additional £9.3 billion burden on UK business not faced by other European companies, impacting UK competitiveness as UK businesses will face higher power prices," he added.
Barclays Capital said this week that the floor would increase prices of both natural gas and power and could create additional incentives for energy efficiency.
"Whether this enough to actually drive a higher uptake of energy efficiency measures is a question, as the barriers to uptake are numerous and not usually focused on variable, but capital costs," said BarCap analyst Trevor Sikorski.
(EURACTIV with Reuters.)
The EU Emissions Trading Scheme (EU ETS) began on 1 January 2005. It was set up to help achieve the EU's Kyoto goal of cutting greenhouse gases by 8% by 2012, by imposing caps on emissions from energy-intensive industries, such as steel, cement and power generation.
The EU ETS allows EU member states to distribute CO2 emission quotas among permitted industries, which can trade 'pollution permits' as long as they respect the country's emissions limit.
The revised directive, adopted as part of the bloc's energy-climate legislative package in December 2008, plans to move from free allocation to full auctioning for electricity companies in 2013.
Some exceptions are foreseen, however, for energy-hungry sectors subject to international competition – such as steel – which could see their costs rise to levels where they could be encouraged to leave the continent (so-called 'carbon leakage').
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