Reforming the UK carbon price could save consumers £12.5 billion by 2030

A new report by leading think tank Policy Exchange urges the Government to provide clarity about the future of the Carbon Price Support in the forthcoming Autumn Statement.

The Carbon Price Support is a carbon tax levied on UK power generators, which has been in place since 2013. At current rates its adds around £36 per year to the average household electricity bill.

The Policy Exchange report argues that the Carbon Price Support has largely failed to meet its original objective of supporting low carbon investment. But it has been instrumental in achieving a switch from coal to gas generation, leading to a significant reduction in greenhouse gas emissions. In the period July to September 2016, coal generation fell to just 3% – below the output from solar photovoltaics for the first time.

The Policy Exchange report recommends that the Government should retain the Carbon Price Support until the early 2020s, to support the Government’s plan to phase out coal generation by 2025. Scrapping the Carbon Price Support now (as has been suggested by a number of other organisations) would damage policy credibility and undermine the Government’s decarbonisation plans.

However, once coal generation has been phased out, the rationale for retaining the Carbon Price Support becomes considerably weaker. Policy Exchange recommends that the Carbon Price Support is phased out by the mid 2020s, such that carbon prices in the UK and Europe are aligned.

The report suggests that this approach would reduce wholesale energy prices in the UK by around £4/MWh, saving consumers as much as £12.5 billion over the period 2019 to 2030. Aligning carbon prices in the UK and Europe would mean that Britain imports less power from the continent via interconnectors, and invests in new generation in the UK instead. This would reduce total greenhouse gas emissions across Europe, and also have a positive impact on the UK economy.

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