Keep carbon pricing at the Helm of our energy policy
Dieter Helm’s review of electricity costs made interesting, and at times challenging, reading for the energy sector, government and regulators. I don’t disagree with Dieter Helm’s view that we need to get smarter on what green levies and taxes go on household energy bills, particularly if we are to achieve the review’s laudable ambition to have the lowest electricity prices in the EU-15.
Yet in all this we should not overlook the progress that is being made to decarbonise our electricity system and the long-term benefits that brings to meeting the UK’s climate change objectives but also industrial opportunities.
There are several policies which have been successfully driving emissions reductions, including the CfD auctions which have delivered significant investment into offshore wind. But the unsung hero in the UK’s progress has been the introduction of the Carbon Price Floor (CPF). The UK demonstrated leadership by going above and beyond the rest of Europe on carbon pricing, as recognised by such organisations as the World Bank. The CPF was a major factor for the UK emissions reduction of nearly 6% in 2016.
Momentum is building globally to put a meaningful price on carbon. Reforms to the EU emissions trading scheme have been agreed; France has its own carbon tax in place; and China is due to implement its emissions trading scheme by the end of the year. Where once there might have been nervousness about the UK going further than others, it’s now clear that others are following suit in the wake of the Paris Agreement.
In his report, Helm concludes that an economy-wide carbon price is the best means of achieving the UK carbon budgets at lowest cost. Whilst an economy-wide signal is a worthy goal, it will be highly complex to implement across all sectors.
In the short term, we must not lose sight of the importance of providing a continued carbon price signal for the energy investments being made today. Carbon pricing will accelerate the transition away from subsidies to a market which can support investment in low carbon generation. It will also continue to provide a signal for more energy efficiency and low carbon flexibility in the electricity system which are key to keeping the cost of electricity as low as possible.
So as the Budget approaches, I would urge the Government to consider the advantages of its current Carbon Price Floor mechanism to provide certainty into the 2020s, whilst it considers the longer-term options presented in the Helm review for carbon pricing and electricity generation more broadly.