GB carbon pricing: the next few years

Ruth Galligan -
You could be forgiven for not being sure how the UK’s carbon pricing mechanisms are going to change over the next few years. There remains in place a raft of these mechanisms – attaching a variety of prices to carbon emissions and energy consumption both upstream and down. This article looks at the timeline for carbon pricing changes between now and 2020. In a subsequent blog we focus on the CRC in more detail.

We think of the different mechanisms in terms of where they impact energy users – whether the mechanism is directed downstream at individual energy end users, carbon emitters or upstream across the economy at large. We also look at whether the mechanism is a direct tax or an alternative market-based instrument (such as emissions trading).

What are the costs and how will they rise?

•    Downstream taxing on energy use – the Climate Change Levy (CCL): from 2016 to 2019 will rise in line with the Retail Price Index (RPI); from April 2019 the CCL will rise at a higher rate than RPI.

•    Downstream tax rebate on energy use – Climate Change Agreements (CCAs): eligibility criteria will remain in place until 2023. In 2019 energy end users with CCAs will see their CCL discount increase to adjust for the increase in the CCL (as the CRC carbon price is transferred across) — but will still pay the increase in line with RPI. 

•    Downstream tax on GHG emissions – the CRC Energy Efficiency Scheme (CRC): until it is scrapped in April 2019 the price of carbon (£/tCO2) will increase in line with RPI.

•    Upstream tax on GHG emissions – Carbon Price Support (CPS) through the Carbon Price Floor (CPF): its long-term future will be announced in the 2016 Autumn Statement. The CPS will remain frozen at £18/t until April 2020 and then increase in April 2020 in line with RPI. 

•    Market-based – European Emissions Trading System (EU ETS): the Market Stability Reserve (MSR) – is due to come in to force in 2019. It’s designed to restrict the number of allowances available for emitters to buy and push up the carbon allowance price from that point onwards. Lobbying at the EU level by Member States could change the date on MSR implementation and carbon prices will continue to flux with their linkage to coal and oil prices. 

What does this all mean?

From the dates above we can see there is some short-term certainty but beyond 2019/20 the UK economy still doesn’t know how the Government will decide to tax GHG pollution and dirty energy consumption. It has been a long term aim of Government, much lobbied for by industry, to streamline the business energy landscape. This is being done through abolition of the CRC and the move to the one tax – the CCL. This means there remain upstream and downstream carbon pricing mechanisms in operation, as well as the beleaguered EU ETS. We believe carbon pricing across all tools will continue to rise beyond 2020. The extent to which will in part depend on the effectiveness of Directives such as the Industrial Emissions Directive (IED) and on EU negotiations around the 2030 emissions targets, and the influence of power and gas prices on motivating organisations to reduce energy consumption and carbon emissions.