The notion of the ‘carbon price floor’ (fashionable recently) makes at the first glance think of a minimum price for EUAs when traded on the market. And immediately a reservation comes to mind – how could it generally be possible to influence on prices for EUAs by such a rigorous regulatory means when inherent, pivotal component of the EU ETS is a free interaction of the demand and supply? And how could it be made only in UK when emission trading is, as a principle, pan-European? There is also a practical ambiguity, notwithstanding the legal character of the measure at issue, what will be its impact on prices on the European emissions marketplace?
After having only a cursory look at the design documents of the new measure planned to be implemented in UK as from 1 April 2013 (cf. ”Planning our electric future: a White Paper for secure, affordable and low carbon electricity” published in July 2011 and earlier “Carbon price floor consultation: the Government response” (from March 2011 - http://www.hm-treasury.gov.uk/d/carbon_price_floor_consultation_govt_response.pdf )) the situation is more clear – the legislative initiative has the character of a taxation measure applying only in UK.
As follows from the abovementioned White Paper as from 1 April 2013 supplies of fossil fuels used in most forms of electricity generation will become liable either to the Carbon Change Levy (CCL) or fuel duty. Supplies will be charged at the relevant carbon price support rate, depending on the type of the fossil fuel used. The rate is to be determined by the average carbon content of each fossil fuel.
HMRC Tax Impact and Information Note attached to the “Carbon price floor consultation: the Government response” also explains that pursuant to the Schedule 6 to the Finance Act 2000 (which contains the primary legislation for Carbon Change Levy) in most cases, gas, solid fuels (including coal) and LPG used to generate electricity are currently exempt from CCL (with the reservation of the specific rules relating to oils where duty can currently be reclaimed in full by the electricity generator).
So, the enigmatic concept of the ‘carbon price floor’ means simply removing as from 1 April 2013 the current exemption from Carbon Change Levy for solid fuels, gas and LPG used to generate electricity. These commodities will become liable to new ‘carbon price support
rates’ for CCL taking account of the commodities’ average carbon content. These
rates will be different from the main CCL rates levied on consumers’ use of gas,
coal, LPG and electricity, which will be retained.
Formula for Carbon Price Floor
The elaborated mechanisms for the determination of the carbon price support rates are described in detail in the abovementioned documents but their intention is generally to reflect the differential between the future market price of carbon and the floor price determined by the Government.
The carbon price support rates for 2013-14 announced in Budget 2011 are equivalent to £4.94/tCO2.
These rates represent the difference between the Government’s target carbon price (the floor) and the future market price for carbon in the EU ETS in 2013. Future rates will be announced at subsequent Budgets depending on the prevailing carbon price. A sustained increase in the carbon price would reduce the tax rate necessary to meet the floor. The final rates will be determined two years in advance with indicative rates published for two further years. For example, the rates for 2013-14 were announced at Budget 2011, together with indicative rates for 2014-15 and 2015-16. This is to provide greater certainty and to allow generators time to include this in hedging activities.
So, the methodology for calculating the CCL carbon price support rates is summarised by the formula:
Rate = (target carbon price – market carbon price) x (emission factor of the fuel)
The difference between the nominal target price and market carbon prices in a future year gives the equivalent carbon price support rate for that year, expressed as pounds per tonne of CO2. This rate, when multiplied by the standard emission factors of individual fuels (gas, LPG, solid fuel and oils) are used to derive CCL carbon price support rates expressed as pence per unit of energy, weight or volume. Carbon prices (£/tCO2) are converted into tax rates for individual fuel inputs using standard emission factors as published by the Department for Environment, Food and Rural Affairs (DEFRA).
Pursuant to the said Carbon price floor consultation all fossil fuels currently liable in the UK to CCL and fuel duty will be liable to the new carbon price support rates when such fuels are supplied to a person who uses them to generate electricity. For generators who use oil to generate electricity, the amount of fuel duty they can reclaim will be varied.
It is the final supplier of fuel to a generator who will be liable to pay the carbon price support rates of CCL to HMRC. For oils, there will be no changes to the arrangements where the generator reclaims fuel duty. As the UK government remarks, making the supplier the taxpayer is in line with the European framework for the taxation of electricity and fuels – and is the most administratively simple arrangement.
The price floor is limited to UK-based electricity generators. The concept design elements as regards export/import issues are as follows:
- the treatment of imported electricity will not change (electricity imported into the UK will not be liable to the carbon price support rates as electricity is not a fossil fuel),
- fossil fuels used to generate electricity in the UK that is subsequently exported will be taxed at the relevant carbon price support rate,
- imports of fossil fuels that are used to generate electricity in the UK will be liable to carbon price support rates,
- exports of fossil fuels that are used to generate electricity outside of the UK will not be liable to carbon price support rates.
The documents at issue refer to the numerous specific points such as, among others, auto-generators, CHP plants, and CCS. Those interested in details for sure should get acquainted with the source documentation. Let’s mention here only that fossil fuels used in carbon capture and storage (CCS) plants will pay reduced carbon price support rates based on the extent to which the carbon dioxide produced by burning fuel in a CCS plant is captured, stored and not emitted.
Does all this mean that the UK government has lost its faith in the EU ETS? Notwithstanding all doubts one can have about the point, the White Paper declares “We remain fully committed to the EU ETS, and consider it the primary vehicle through which to deliver our carbon emission reduction targets.”
As is also stated in the White Paper, carbon price floor is designed “to complement the EU ETS by strengthening the carbon price signal in the UK electricity generation sector, enabling higher levels of investment in low-carbon infrastructure and therefore a faster rate of decarbonisation.”
The next months (but rather years) will show whether the effects of this policy and the consequent carbon price signal will be relevant only for UK businesses or for all EU ETS participants.
Considering, however, the White Paper at issue also announced the implementation in the UK of the emission performance standard (initially be set at a level equivalent to 450g CO2/kWh (at baseload) for all new fossil fuel plant, except carbon capture and storage demonstration plant), the opinion that UK switches on the ‘turbo’ mode in its climate regulatory policies is really justified.