The carbon floor price is under pressure but a U-turn would hurt investor confidence. Megan Darby asks: is it time to consider plan B?

When ministers and officials were haggling with energy companies to find £50 worth of “green levy” cuts in the Autumn, they found out just how difficult it could be. A reshaping of the Eco energy efficiency programme, a rebate for the Warm Home Discount and a claiming of credit for network cost cuts barely got them over the line. After all their best efforts, there is still bickering about whether people on fixed tariffs will and should benefit.

They missed what many thought was the easiest target: the carbon floor price. A tax that drives up costs for UK industry compared to their European competitors, it has been under attack since its inception. While the “polluter pays” principle is fair enough in theory, when energy intensive industries and hard-pressed consumers squeal in unison, it is hard for politicians to ignore. The UK’s unilateral action to ramp up the green tax looks ever more untenable as the European carbon price remains defiantly low.

There is an obvious reason for the Treasury to stand behind the measure: it brings in money for the Exchequer. In combination with the funds from allowances sold through the EU emissions trading system (ETS), it could bring in as much as £63 billion over the next 15 years, by some estimates. This year alone, the ETS revenues total around £1 billion and the UK top-up £500 million.

The latest reports suggest the Treasury is heading for a compromise: to freeze the carbon floor price from 2016.  Any definitive announcement is expected to wait until the Budget speech in March, but a Treasury statement did little to quash the rumour. It said: “Establishing a minimum carbon price sends an early and credible signal to help drive billions of pounds of investment in low-carbon electricity generation.

“However, ensuring UK industry remains globally competitive is a priority and government acknowledges that rising energy costs is a key issue for many businesses. This is particularly true given the lower-than-expected European carbon price.”

The problem is, any change confirms what those trying to develop low carbon technology have said all along: a tax is an unreliable basis for investment as the chancellor can alter it at whim.

Paul Thompson, head of policy at the Renewable Energy Association, says: “The logic of a carbon floor price is to give long term stability to investors that there is a cost to carbon. So something that involves this kind of haggling and uncertainty rather undermines that point.”

While it was never the ideal tool to drive low carbon investment, a U-turn could be damaging, warns Renewable UK director of policy Gordon Edge. The support levels for renewables have been set on the assumption that the wholesale electricity price will be boosted by the carbon tax. If that is taken away, the sector materially loses out. Plus, it will have “a significant impact on people’s confidence in the whole policy agenda,” he says. “At the first whiff of political trouble, they [in government] are meddling with it… Only if they stoutly defend it and see off proposals to mess with it will investors think they can trust it.”

Energy suppliers are divided on the measure. EDF Energy, whose nuclear fleet benefits from the wholesale price boost, backs it. Tony Cocker, chief executive of Eon, has long called for it to be scrapped. Keith Anderson of Scottish Power agrees, estimating that the move would shave £33 off a typical dual fuel bill in 2015/65.

Meanwhile, campaign group Energy Bill Revolution is pushing an alternative that could make the tax more acceptable to consumers. Supported by Eon, Npower and SSE as well as a broad range of charities and more than 200 MPs, it calls for carbon revenues to be invested in energy efficiency measures. This week, it is inviting individuals to show their support by sending in a “selfie” of themselves wearing a scarf, as part of its “cold homes week”. Spokesman Ed Matthew says: “The priority should be making this a proper green tax and using the revenue to help us all reduce our energy use.”

Consumer Futures also backs recycling the funds for consumer benefit. Audrey Gallacher, director of energy at the watchdog, says: “Although the introduction of the floor price might have increased the chance of the UK meeting its carbon targets, which is important, we believe it has reduced the chance that fuel poverty targets will be met, watered down disposable incomes have diluted the international competitiveness of our economy. 

“If the measure is to remain in place, Consumer Futures has consistently called for the revenue it collects to be returned to consumers.”

It would not please everyone. A spending pledge could be hard to pull off in the prevailing climate of austerity. It would not answer industry’s complaints. However, it could make up for a drastic drop in insulation rates since Cert and Cesp energy efficiency schemes were replaced with Eco and the Green Deal last year. What’s more, it would allow the government to outflank Labour on the cost of living debate while keeping investors happy.