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The UK’s carbon price floor (CPF) has been frozen at 2015’s level of £18.08 per tonne as part of the government's annual budget, announced this week by Chancellor George Osborne.
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The CPF is paid by power generators on top of their obligations under the EU's Emissions Trading System (EU ETS) to acquire carbon permits for every tonne of carbon dioxide they emit. It is intended to offset the unexpectedly low cost of EU ETS carbon permits in recent years.
The CPF came into effect in April 2013 to help provide the price incentives originally intended from the EU ETS to spur investment in low carbon technology and encourage utilities to switch to cleaner generation.
The freeze means the CPF will remain at £18.08 per tonne of carbon dioxide until the end of the decade, a dramatic write down of the previous target of at least £30 per tonne by 2020 and likely implying the abandonment of the further target of £70 per tonne by 2030.
Energy intensive industries had been hit particularly hard by the green measure, and Britain's largest coal-fired power producer, Drax, said its carbon costs rose by £120 million in 2013 due to a combination of the CPF and changes to EU ETS rules. Drax shares rose 1 per cent soon after the budget announcement.
Roland Vetter, Head of Research at investment firm CF Partners claimed the move would shave £6.1 per MWh off of wholesale electricity prices by 2020, but felt the measure will do relatively little to help cut consumers energy bills.
"In the best case scenario, an average household could save around £20 per annum on the electricity bill in 2020 on the back of the potential changes," Vetter said.
Environmental campaigners had been cool on the CPF when it was introduced, preferring EU wide price floors or explicit carbon taxes. Now that it has been watered down so dramatically it is uncertain whether the UK will see any green benefits at all from the extra effort.