Why the carbon price support scheme is bad policy

climate change, energy, finance

Author(s):  Andrew Pendleton
Published date:  29 Jun 2011
Source:  eGov Monitor

We can draw two conclusions from research into public attitudes towards climate change. The first is that people are on the whole not in denial about the issue and do accept that we must act; the second is that taking action is not high on their list of priorities. Any policies designed to reduce the UK’s carbon emissions must therefore demonstrably achieve their environmental goals.

But to ensure that people don’t increasingly turn against climate policy, government must look to achieving other benefits through climate policy – such as bolstering the UK’s energy security – and take extra care to ensure the costs associated with moving to a low-carbon economy are borne as fairly as possible.

In the current climate of austerity in which households face rising energy prices but static or falling incomes, the very worst thing a government could do is introduce a carbon stealth tax. The carbon price support (CPS) scheme, announced in the budget in March, bears exactly these hallmarks and risks giving climate change policy a bad name as a result.

Not all bad policies are made as a result of bad ideas. The price of carbon in Europe’s flagship emissions trading scheme has been critically low since the finance crisis first had an impact on the real economy. There is a good logic to introducing a cut off point below which governments will not allow the price to fall for fear of interrupting investments in low-carbon energy systems. A plethora of studies have shown that floor prices can help increase the integrity of carbon trading schemes.

The CPS, however, takes the essentially sound notion of a carbon floor price and corrupts it.

‘Hot Air’, a new report from IPPR, analyses the CPS scheme. It concludes that its design means that although emitting carbon in the UK will be more expensive, because the market is Europe-wide, a higher price in the UK will lead to a lower price elsewhere and to the same amount of carbon being emitted. Thus the CPS will save no carbon but it will add to the amount consumers pay for their energy.

It will as a result be unfair; the Government’s own data shows that the scheme will force up to 60,000 more UK households into fuel poverty as energy companies pass on the additional costs of paying the tax to consumers. To many, such as the Taxpayers Alliance, it will simply look like a stealth tax which seeks to raise revenue from consumers for little gain apart from in terms of revenue to government.

Perhaps worst of all, the CPS scheme is unlikely to succeed in one of its most clearly articulated aims. The government argues that introducing a floor price for carbon in the UK will provide more certainty to investors looking to put their money into low-carbon energy projects. However, because the CPS was introduced in the Budget, it will be open to annual scrutiny and potential change, in the same way as fuel duty.

IPPR’s report also looks at the potential for a policy that creates a different carbon price in the UK and elsewhere in Europe to create economic waste. Using new modelling, the report argues that the CPS will undermine the economic efficiency of the scheme and could waste up to £1 billion. At a time of austerity, wasting £1 billion is inexcusable; it’s enough to finance a second carbon capture and storage demonstration plant, for instance.

IPPR argues for a different approach to introducing a floor price for carbon that would see the number of permissible emissions in the UK being reduced. However, because the Government has already introduced the measure, ‘Hot Air’ recommends setting the level of the tax low to minimise the economic waste, soften the blow on hard pressed consumers and impact on other European countries and also urges ministers to press European neighbours to introduce similar measures.