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UK budget: world’s first carbon price floor announced

23 Mar 2011 19:44:14 | edem

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The UK will become the first country in the world to introduce a carbon price floor for the power generation sector, chancellor George Osborne revealed in the Conservative-Liberal coalition government's 2011 budget on Wednesday.

The forthcoming Green Investment Bank will be capitalised with an additional £2bn (€2.3bn), on top of the £1bn pledged in last year's Autumn spending review (see EDEM 20 October 2010). The bank is to start up in 2012, one year earlier than planned, Osborne announced.

Also, the government will not proceed with a carbon capture and storage levy, Osborne said. It will instead fund its commitment to finance four CCS demonstration plants via general taxation.

Carbon floor

The carbon price floor, intended as a means of boosting cash flow from energy companies into low carbon infrastructure, will come into effect in 2013. It will be set at £16.00/tonne of CO2 equivalent (tCO2e), rising to £30/tCO2e in 2020.

The initial price is €1.60/tCO2e above the average closing price in the EUA over the counter market (Year 2013 contract) so far this year.

"This will provide the incentive for investment in our dilapidated power generation industry," Osborne told parliament.

But Climate Change Capital research and market analysis head Rupert Edwards greeted the news with caution. "Investors will have serious doubts about the long-term credibility of the carbon price floor policy, as it is currently conceived, because it is a tax-based mechanism subject to annual votes in Parliament," he said.

"A policy to reduce uncertainty must itself be certain If the carbon price support was actually guaranteed, it would increase certainty, reduce the incentive for investors to 'wait and see', and lower costs for investors and the economy," he added. (See sister publication EDCM for further carbon floor coverage).

Green Investment Bank

The government's commitment to the Green Investment Bank was a further bone of contention within the energy industry.

The £3bn of initial capitalisation is £1bn more than was originally conceived by the then-ruling Labour Party when it laid the foundations for the bank (see EDEM 24 March 2010). But it falls short of the £4-6bn that sections of the industry have called for (see EDEM 1 October 2010).

The bank will be permitted to borrow from the end of the current parliament in 2015, provided the Treasury's target for debt reduction as a percentage of GDP has been met.

Osborne said the bank would unlock an additional £15bn in funding from the private sector for green infrastructure projects over the coming four years.

"In the current fiscal environment committing £3bn is an achievement, and by allowing the bank to borrow mid-decade, its lending can ramp up quickly when the country's low carbon capital requirements reach a critical point," Climate Change Capital vice chairman James Cameron said.

"In the near term, it must be focused on specific financing challenges," he continued. "For example, attracting the deep pools of low-cost capital held by institutional investors to finance mission-critical green infrastructure such as offshore wind and energy efficiency."

But Friends of the Earth executive director Andy Atkins was less impressed. "The bank should have been a vehicle to drive the UK's economic recovery, but by delaying its borrowing powers, the Treasury has sneaked round the back of the motor and siphoned off the fuel - just as the rest of government is firing up the ignition," he said.

Planning, banking, oil and gas

A range of reforms were unveiled in relation to the planning process, which has continually been cited by the industry as a huge barrier to energy infrastructure development.

The government said it will "ensure a fast-track planning process for major infrastructure applications". An unprecedented land auction system, starting with public sector land, will also be piloted.

The chancellor also announced an increase in the Bank Levy - a permanent tax on banks' balance sheets - to take effect from 1 January 2012. The increase will offset cuts in corporation tax, which are intended to promote higher levels of business investment.

But the announcement once again stoked fears that banks may choose to move overseas: "By increasing the burden faced most by banks headquartered in the UK, the chancellor continues to increase the incentives for banks to migrate," Ernst & Young tax policy head Chris Sanger said.

The government also upped a supplementary charge levied on profits from UK oil and gas production to 32% from midnight on Wednesday. The charge will be reduced on a staged basis if the oil price falls to a "trigger" level, which has provisionally been set at $75/bbl. A final level will be set following consultation with industry. JS

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