A British carbon tax freeze will not cut power bills -analysts

Thu Feb 13, 2014 9:32am EST

* CO2 tax likely to be frozen at 18.08 pounds/T in 2016

* Generators' carbon costs still 3 times higher than EU

By Susanna Twidale

LONDON, Feb 13 (Reuters) - The British government is expected to freeze the carbon tax on fossil fuels but at a level unlikely to alleviate high power bills for consumers and energy-intensive companies, analysts said on Thursday.

Analysts and industry sources expect Chancellor George Osborne to announce, as part of his March budget, the freezing of the carbon tax on fuel used to generate electricity.

But the price, even after a freeze, will still leave British generators paying around three times more for their emissions than their European counterparts.

"Freezing it for a few years could be a halfway house that doesn't satisfy anyone," said Peter Atherton, an analyst at Liberum Capital.

Britain's carbon price floor came into effect in April 2013 and was designed to ensure that power producers pay at least 30 pounds per tonne for emitting carbon dioxide (CO2) by 2020.

It was set at 4.94 pounds ($8.19) per tonne in April 2013, rising to 18.08 pounds per tonne in April 2015.

A treasury spokesperson said the level had been set until the 2015/16 tax year but that no decision has been made for the following four years. A freeze is, therefore, likely to keep the price at the 2016 level of 18.08 pounds.

"That means wholesale power prices would be some 13 percent higher than without the tax," Trevor Sikoski, an analyst at London based Energy Aspects, estimated.

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UK power generators must pay the British tax on top of their obligation under the EU's Emissions Trading System to surrender one carbon permit for each tonne of CO2 they emit.

EU carbon prices have plummeted by 65 percent over the past three years to around 6.50 euros a tonne.

Analysts forecast the EU carbon price will average around 11 euros a tonne in 2016, for an overall carbon cost for UK generators at around 33 euros.

The UK's big six energy companies so far have passed on higher costs to consumers. Last year, they sparked public anger and political debate by announcing price rises well above inflation, blaming wholesale price gains, infrastructure costs, and the government's environmental and social programmes.

For energy-intensive industries, Britain has introduced a compensation package to help shield them from carbon costs, but industry groups say the tax still leaves them at a competitive disadvantage to the rest of Europe.

"I believe we have strong support across government, especially in BIS (Department for Business, Innovation and Skills). Plus we have elements of support in the Treasury and DECC. (Department of Energy and Climate Change)," Terry Scuoler, chief executive of manufacturers' organisation EEF, said in an interview.

"I know the Treasury officials' biggest concern is seeing a loss of revenue if this tax is frozen, but I am hopeful that the Chancellor will be supportive given the critical importance of the issue to UK industry," he added.

HM Revenue and Customs documents show the tax is expected to raise more than 1.2 billion pounds during the 2015-16 tax year. ($1 = 0.6030 British pounds) ($1 = 0.7359 euros) ($1 = 0.7359 euros) (Additional reporting by Ben Garside, Maytaal Angel and James Williams; editing by Jane Baird)