1

"#$%&' ()&&$ *$+,- .$+-/+'0

1he CovernmenL announced Loday a consulLaLlon on Lhe deslgn of a 'floor prlce' for Lhe
carbon markeL. 1hls shorL brleflng explalns whaL a carbon floor prlce ls and why Lhe
CovernmenL belleves lL ls needed. lL also hlghllghLs Lhe lssues LhaL need Lo be born ln mlnd
when deslgnlng and evaluaLlng a pollcy lnLervenLlon of Lhls klnd. lL wlll be lmporLanL Lo
conslder noL [usL Lhe deLall of Lhe pollcy lLself buL also how lL flLs ln Lo a broader sLraLegy Lhe
CovernmenL musL deploy Lo creaLe Lhe rlghL condlLlons Lo decarbonlse Lhe 8rlLlsh economy
and grow Lhe susLalnable energy secLor.

12#3 +4 # ,#$%&' /)&&$ 5$+,- #'6 728 +4 +3 '--6-69
CreaLlng a carbon floor prlce ln Lhe uk essenLlally requlres our lndusLrles Lo pay a Lop up lf
Lhe markeL prlce for carbon falls below a cerLaln level.
A carbon floor prlce ls a regulaLory/LaxaLlon pollcy LhaL sLaLes LhaL polluLers musL pay a
mlnlmum amounL of money for Lhe rlghL Lo polluLe. 1hls ls llkely Lo Lake Lhe form of a Lax
LhaL requlres Lhose who quallfy Lo make a paymenL Lo Lhe 1reasury. lL ls expecLed Lo replace
Lhe exlsLlng CllmaLe Change Levy, whlch ls a downsLream Lax on energy use raLher Lhan a
dlrecL upsLream Lax on greenhouse gas polluLlon.
8oughly half of Lurope's emlsslons are covered by a Luropean regulaLlon LhaL caps
emlsslons (Lhe Lu Lmlsslons 1radlng Scheme) requlrlng Lhem Lo submlL sufflclenL permlLs Lo
cover Lhelr emlsslons. ermlLs, known as allowances, can be freely Lraded and Lhe prlce
someone ls wllllng Lo pay Lo acqulre Lhem deLermlnes Lhe prlce of polluLlon. AL presenL
because Lhere are Loo many allowances avallable ln Lhe markeL compared Lo Lhe demand
prlces are relaLlvely low - aL around t13 per Lonne of carbon dloxlde equlvalenL. 1hls low
prlce ls noL necessarlly enough Lo dlssuade polluLers from conLlnulng Lo emlL and does noL
provlde an aLLracLlve enough reLurn for would-be lnvesLors ln low carbon soluLlons. 1here ls
also Lhe rlsk LhaL lL could fall even lower. 1hls lack of prlce cerLalnLy ls seen as a poLenLlally
lmporLanL barrler Lo lnvesLmenL.
Cne way Lo overcome Lhls problem and provlde sLronger lncenLlves would be Lo lssue fewer
allowances so LhaL Lhere ls more scarclLy ln Lhe markeL - Lhls ls besL achleved aL an Lu level
2
where dlscusslons are underway Lo do [usL LhaL
1
, however, Lhls may Lake some Llme and ls
noL guaranLeed Lo happen.
A carbon floor prlce ls Lherefore prlmarlly deslgned Lo aLLracL low carbon lnvesLmenL lnLo a
counLry by maklng Lhe prlce of polluLlon hlgher and lncreaslng Lhe rewards for low carbon
pro[ecLs. As explalned below lL ls noL ln and of lLself an envlronmenLal pollcy and ln Lerms of
value for money lL musL be assessed as an lndusLrlal pollcy.

:&7 7+)) +3 7&$;9
1he uk's coallLlon CovernmenL has sLaLed LhaL ls wlshes Lo lnLroduce a carbon floor prlce as
parL of a range of pollcles Lo drlve lnvesLmenL lnLo low carbon soluLlons. 1he preclse effecL
such an lnLervenLlon wlll have wlll depend on lmporLanL deslgn declslons such as Lhe level aL
whlch Lhe floor prlce ls seL, Lhe Llme perlod over whlch lL operaLes and who lL wlll be applled
Lo. lL wlll poLenLlally lmpacL on lnvesLmenL ln Lhe uk buL lL wlll noL do anyLhlng Lo reduce
overall carbon emlsslons ln Lhe Lu, whlch are seL by Lhe emlsslons Lradlng scheme.

*&3-'3+#) )-<-)4 #'6 3+=- )+'-4
1he Luropean Commlsslon assumed LhaL carbon prlces ln Lhls Lradlng perlod (2008-12)
would be around Lwlce whaL Lhey are Loday, however, Lhe lmpacL of over allocaLlon of
permlLs Lo cerLaln secLors and Lhe huge Lhe susLalned economlc recesslon have comblned Lo
reduce prlces Lo almosL half Lhe anLlclpaLed value.
1he uk could declde Lo lmpose an lmmedlaLely effecLlve floor prlce, whlch Lakes Lhe prlce of
polluLlon all Lhe way up Lo Lhls pro[ecLed level of cosL. 1hls would however have a very
slgnlflcanL lmpacL on Lhe compeLlLlveness of uk lndusLry relaLlve Lo compeLlLors ln Lhe resL
of Lurope. lL ls much more llkely LhaL Lhe floor prlce wlll lnlLlally be seL elLher aL Loday's
markeL levels (around 13-14 per Lonne) or sllghLly above, lncorporaLlng Lhe cosL of Lhe
CllmaLe Change Levy whlch ls currenLly equlvalenL Lo around 4-6 per Lonne. A prlce
escalaLor may also be bullL-ln Lo sLeadlly lncrease Lhe floor over Llme.
1he Llme perlod ls llnked Lo Lhe quesLlon above. lf lL ls slgnlflcanLly above Lhe currenL markeL
prlce for carbon, lL should noL be lnLroduced now as Lhls wlll creaLe large wlndfalls for
exlsLlng low carbon generaLors. 8eneflLLlng prevlous lnvesLors whose declslon were already
[usLlfled by Lhe markeL condlLlons under whlch Lhey orlglnally lnvesLed ls noL a very falr or
efflclenL way Lo lncenLlvlse fuLure lnvesLmenL by new enLranLs Lo Lhe markeL. lL would be
far more efflclenL Lo lnLroduce lL Lo apply ln fuLure, say from 2016, when slgnlflcanL volumes

1
ln May Lhe Commlsslon lssues a communlque where as parL of a package of pollcles Lo Lake Lu emlsslons Lo
30 below 1990 levels by 2020 lL proposed Laklng 1.4bn permlLs ouL of Lhe markeL Lo LlghLen caps.
3
of new capaclLy wlll be needed. 1he CovernmenL has sald LhaL once lnLroduced lL would be
expecLed Lo sLay ln place for a mlnlmum of 23 years.

12& 7+)) +3 #55)8 3& #'6 72& 7+)) 5#89
A llkely conflguraLlon of a floor prlce ls LhaL lL would be applled Lo uk parLlclpanLs ln Lhe Lu
emlsslons Lradlng scheme - meanlng Lhe elecLrlclLy generaLlng secLor and Lhe heavy
lndusLrlal secLors such as lron and sLeel, chemlcals and oll reflnlng. Cne deslgn opLlon would
be Lo requlre anyone buylng permlLs from Lhe markeL Lo meeL Lhelr cap Lo pay an addlLlonal
sum on Lop of Lhe currenL markeL prlce Lo meeL any dlfference beLween lL and Lhe floor
prlce. Slnce by and large only power companles have been glven LargeLs LhaL requlre Lhem
Lo buy spare permlLs, Lhls would, ln Lhe shorL Lerm, only affecL elecLrlclLy companles. 1hls
would dlsadvanLage generaLors uslng hlgh carbon fuels such as coal and provlde a subsldy Lo
renewables, nuclear and oLher low carbon generaLlon. AnoLher poLenLlal conflguraLlon ls
LhaL Lhe floor prlce ls applled Lo all emlsslons by an lnsLallaLlon wlLh a rebaLe belng applled
on Lhe cosL of permlLs purchased Lo meeL Lhe cap.
lL seems llkely LhaL whaLever Lhe exacL mechanlsm, Lo proLecL heavy lndusLry secLors from
Lhe lmpacLs of Lhe hlgher prlces, Lhey wlll be exempLed from Lhe pollcy.
As wlLh Lhe CllmaLe Change Levy Lhe CovernmenL ls llkely also Lo lnLroduce exempLlons for
cerLaln energy uslng secLors ouLslde Lhe Lu L1S LhaL lL conslders wlll be unduly lmpacLed by
Lhe hlgher energy cosLs lmplled by Lhe pollcy. 1hls would requlre some form of rebaLe belng
made avallable vla elecLrlclLy bllls.

1+)) +3 2#<- #' -'<+$&'=-'3#) +=5#,39
1he uk's floor prlce wlll hopefully lmprove Lhe aLLracLlveness of Lhe uk as a desLlnaLlon for
low carbon lnvesLmenL, and Lherefore reduce Lhe carbon lnLenslLy of Lhe uk's energy
sysLem, however, lL wlll noL save any addlLlonal Lonnes of carbon. 1he overall number of
permlLs allocaLed across Lurope deLermlnes Lhe level of polluLlon LhaL wlll occur over Llme.
Slmply changlng Lhe prlce does noLhlng Lo alLer Lhls. ermlLs can be banked lndeflnlLely and
every one wlll be Lo allow an emlsslon Lo occur somewhere ln Lurope. lL ls lncredlbly
lmporLanL Lherefore LhaL a floor prlce does noL become a subsLlLuLe for ensurlng LhaL Lhere
ls enough demand for emlsslons reducLlons ln Lhe markeL. 1hls can only be effecLlvely and
efflclenLly achleved by LlghLenlng Lhe caps on emlsslons. lf oLher large counLrles llke Lhe uk
were Lo follow sulL and lnLroduce floor prlces lL could have an overall negaLlve lmpacL across
Lurope. ConslsLenLly over-paylng for emlsslons reducLlons would lncrease Lhe number of
spare permlLs ln clrculaLlon depresslng Lhe markeL prlce even furLher and reduclng
lncenLlves across Lhe whole of Lurope.
4

12-$- 7+)) 32- =&'-8 0&9
1he CovernmenL ls llkely Lo seek Lo make Lhe overall lmpacL of Lhe lncreased Lax Lake
revenue neuLral for Lhe CovernmenL le Lhey would noL see lL as a money ralslng exerclse Loo
boosL publlc accounLs. 1hls would requlre LhaL revenues were pald back ln one way or
anoLher. lf Lhe model of Lhe CllmaLe Change Levy ls followed Lhls could be ln Lhe form of
cuLs ln employmenL Lax such as naLlonal lnsurance. AlLernaLlvely lL could be repald ln Lhe
form of granLs Lo speed Lhe flow of lnvesLmenL ln low carbon Lechnologles sLlll furLher. lL ls
llkely LhaL energy lnLenslve lndusLrles, who wlll be hlL by rlslng energy bllls as lncreased cosLs
are handed on, wlll demand refunds Lo compensaLe for Lhese lmpacLs, parLlcularly as many
secLors currenLly en[oy exempLlons from Lhe CCL buL are noL exempL from Lhe lmpacL of Lhe
Lradlng scheme. ln addlLlon soclal welfare and consumer groups may demand LhaL Lhe mosL
vulnerable ln socleLy are also compensaLed for Lhe hlgher energy bllls Lhey wlll face as a
resulL of Lhe floor prlce pollcy.

>' #)3-$'#3+<- 5$&5&4#)
ln conslderlng Lhls pollcy ln deLall Lhe CovernmenL should also evaluaLe a varlaLlon, whlch
would see Lhe lnLroducLlon of a reserve prlce seL for Lhe aucLlon of permlLs lnLo Lhe markeL.
1hls would have a slmllar lmpacL ln Lerms of creaLlng confldence ln Lhe carbon prlce as lL
would slgnal Lhe prlce of carbon Lhe CovernmenL expecLed Lo be pald now, and more
lmporLanLly, ln Lhe fuLure when aucLlons become Lhe maln meLhod for dlsLrlbuLlng permlLs.
lL has one lmporLanL advanLage, however, ln LhaL lf Lhe markeL does noL wanL Lo pay Lhe
hlgher reserve prlce Lhen unsold permlLs can be carrled forward and evenLually removed
from Lhe markeL reduclng Lhe supply of permlLs lnLo a markeL whlch ls already currenLly
oversupplled.
Already beLween now and nexL March some 31 mllllon permlLs wlll be released lnLo Lhe
markeL ln 7 lnsLalmenLs of 4.4 mllllon.
2
1he uk should seL a mlnlmum prlce aL whlch Lhese
permlLs would be released lnLo Lhe markeL, cancelllng any permlLs whlch were noL sold aL
Lhe reserve prlce, reduclng Lhe supply of permlLs, lowerlng emlsslons and ralslng Lhe carbon
prlce overall.

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2
hLLp://www.dmo.gov.uk/lndex.aspx?page=L1S/AucLlonlnfo