The carbon price floor (CPF) was introduced on 1st April 2013. It affects the fossil fuel based electricity generation market in the UK by increasing the cost they face for each tonne of carbon dioxide emitted over the current price set by the European Union Emissions Trading Scheme (EU ETS).
The EU ETS is an oversupplied market and therefore the price of a European Union Allowance (EUA) is too low to dissuade polluters and does not provide an attractive enough return for would-be investors in low carbon solutions. As a consequence, the UK created a carbon floor price to ensure polluters pay a minimum price for the right to pollute. The CPF is designed to attract low carbon investment into a country by making the price of pollution higher and increasing the rewards for low carbon projects.
The carbon price support (CPS), the UK-only element of the CPF, will be capped at £18 per tonne of carbon dioxide (t/CO2) from 2016-17 to 2019-20. The CPF is made up of the EU ETS price of EUAs + the CPS rate. At current levels the CPF is enough to ensure fuel switching has taken place in UK power generation. The change from coal fired power generation to gas takes place due to the lower cost of carbon from the cleaner gas fired generation.
The UK has faced criticism for implementing the CPF because it failed to include measures to prevent the resulting unused EUAs from being used elsewhere, further weakening the EU ETS price signal for other member states and increasing the over-supply. Additionally, there have been calls from industry to scrap the CPF which they claim raises the energy costs they face and makes them uncompetitive in Europe.
The French Government has recently expressed their desire to implement a CPF in France and has urged nations like Ireland, Netherlands, Belgium, and Norway to follow suit. All are connected, or in the process of being connected to the UK grid, and therefore a floor price in the additional countries would reinforce the efficiency of UK’s price floor and coal phase-out.
