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Energy tax will hit business & undermine European effort to tackle climate change

A new tax on the emissions of power companies (the Carbon Price Floor) - which came in on 1st April will raise household energy bills, hurt business and undermine European efforts to tackle climate change, according to analysis from the think tank IPPR.

The tax will raise £4.42bn for the government over three years but result in a series of negative outcomes, including:
  • The price of wholesale electricity will increase by around 17% (£8/MWh) in 2015/16 compared to today’s price, undermining the competitiveness of British industry.
  • The government expects the policy to push 30,000–60,000 households into fuel poverty in 2013.
  • Existing nuclear and renewable power generators will not have to pay the tax but will benefit from the increase in wholesale electricity prices. As a result they could reap around £1.2 billion (£916m for nuclear generators and £308m for renewable generators) in windfall profits over the next three years.
IPPR’s research shows that the Carbon Price Floor will not reduce carbon emissions at the European level and will be detrimental for EU-wide efforts to tackle climate change through the European Emissions Trading Scheme by putting downwards pressure on the price of carbon. IPPR’s report argues that the government should focus on improving the EU scheme.

Reg Platt, IPPR Senior Research Fellow said:
“Without a proactive and coherent approach to making EU climate policy stronger, the Chancellor’s Carbon Floor Price is not a green tax, it’s just a tax on business and households.

“Green industries offer huge potential for unleashing economic growth and creating jobs but there are far better ways to support them than through this tax. The key test now is whether the Treasury pursues an ambitious EU-wide strategy on climate policy.

Notes to editors
IPPR’s report – Hot Air: the carbon floor price in the UK – is available from:

The Carbon Price Floor, announced in the 2011 Budget, will levy a charge on the carbon content of fuels used for power generation. The government intends to calibrate the price of the carbon price floor to supplement the price of carbon set in the EU Emissions Trading Scheme.

When the government consulted on the Carbon Price Floor it indicated the tax would be set at £10.52/tonne of carbon in 2015/16 (inflation adjusted), which is around £4.36/MWh. In the 2013 budget the government announced the tax would be 83% higher at £18.08/tonne of carbon in 2015/16, around £8/MWh.

The predicted impact of the tax on the wholesale electricity price is based on a current spot price for electricity of £47/MWh. Windfall profits for nuclear and renewable operators are calculated assuming annual power generation from these sources is the same up to 2015/16 as it was in 2011 (i.e. 62,655 GWh from nuclear and 21,400 GWh from renewables).

IPPR’s report Hot Air shows the Carbon Price Floor will not reduce carbon emissions because any carbon not emitted in the UK as a result of the tax will be emitted elsewhere in Europe, as producers move their production. It also shows that the tax will put downwards pressure on the price of carbon at the EU level and undermine the attractiveness of low carbon investments in Europe.

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