UK Economy

Osborne freezes carbon tax at 2015 levels

LONDON (Reuters) - Britain’s carbon tax will be frozen at 2015 levels of 18.08 pounds per tonne, Chancellor George Osborne said on Wednesday, as a part of the government’s annual budget.

The first phase of a new wind farm is seen next to Drax power station in Drax, northern England, September 2, 2010. REUTERS/Nigel Roddis

The move is a downscaling of Britain’s carbon price floor, which came into effect in April 2013 aiming to ensure power producers pay at least 30 pounds per tonne for emitting carbon dioxide (CO2) by 2020, to help spur investment in low carbon technology and encourage utilities to switch from burning coal to gas.

The tax will still rise to 9.55 pounds per tonne from April 1 and to 18.08 per tonne from April 2015.

But Wednesday’s freeze means the levy will remain at 18.08 per tonne of carbon dioxide until the end of the decade, instead of the government’s previous plan to increase it on a steep trajectory until the end of the decade.

The freeze will provide a boost for energy intensive industries, such as steel and cement manufacture, for which energy can make up 40 percent of costs.

Roland Vetter, Head of Research at investment firm CF Partners said the move will shave 6.1 pounds per megawatt hour off wholesale electricity prices by 2020, compared to what they would have been if the government had stuck to the previous trajectory.

But he added that the freeze will do little to help cut domestic bills.

“In the best case scenario, an average household could save around 20 pounds per annum on the electricity bill in 2020 on the back of the potential changes,” he said.

The tax is paid by power generators on top of their obligations under the EU’s Emissions Trading System, which forces companies to surrender one carbon permit for every tonne of carbon dioxide (CO2) they emit.

The carbon levies hit coal harder than natural gas as it emits almost double the amount of CO2 into the atmosphere when generating electricity.

Drax DRX.L, Britain's largest coal-fired power producer, said its carbon costs rose by 120 million pounds in 2013 due to the start of the domestic tax and changes to rules in the EU ETS.

Shares in the company rose 1 percent after the announcement.

Analysts believe that, as power generators’ CO2 emissions are already capped under the EU ETS, the changes to the domestic price floor will have little impact on Britain’s total output of the heat-trapping gas.

Britain has a legally binding target to cut its emissions by 80 percent on 1990 levels by 2050 and has embarked on electricity market reforms aimed at spurring investment in low-carbon nuclear and renewables.

Reporting By Susanna Twidale, editing by William Hardy