The UK carbon tax on fuel for power generation provides the most clear-cut example anywhere in the world of large scale emissions reductions from carbon pricing, writes climate change economist Adam Whitmore. These reductions have been achieved by a price that, while higher than in the EU ETS, remains moderate or low against a range of other markers, including other carbon taxes.
The carbon price for fuels used in power generation in the UK consists of two components. The first is the price of allowances (EUAs) under the EUETS. The second is the UK’s own carbon tax for the power sector, known as Carbon Price Support (CPS). The Chart below shows how the level CPS (green bars on the chart) increased over the period 2013 to 2017[i]. These increases led to a total price – CPS plus the price of EUAs under the EUETS (grey bars on the chart) – increasing, despite the price of EUAs remaining weak.
This increase in the carbon price has been accompanied by about a 90% reduction in emissions from coal generation, which fell by over 100 million tonnes over the period (black line on chart). Various factors contributed to this reduction in the use of coal in power generation, including the planned closure of some plant and the effect of regulation of other pollutants. Nevertheless the increase in the carbon price since 2014 has played a crucial role in stimulating this reduction in emissions by making coal generation more expensive than gas[ii]. According to a report by analysts Aurora, the increase in carbon price support accounted for three quarters of the total reduction in generation from coal achieved by 2016[iii].
The net fall in emissions over the period (shown as the dashed blue line on chart) was smaller, at around 70 million tonnes p.a. [iv] This is because generation from coal was largely displaced by generation from gas. The attribution of three quarters of this 70 million tonnes to carbon price support implies a little over 50 million tonnes p.a. of net emission reductions due to carbon price support. This is equivalent to a reduction of more than 10% of total UK greenhouse gas emissions. The financial value of the reduced environmental damage from avoiding these emissions was approximately £1.6 billion in 2016 and £1.8 billion in 2017[v].
The UK tax has thus proved highly effective in reducing emissions, producing a substantial environmental benefit[vi]. As such it has provided a useful illustration both of the value of a floor price and more broadly of the effectiveness of carbon pricing.
This has been achieved by a price that, while set at a more adequate level than in the EU ETS, remains moderate or low against a range of other markers, including other carbon taxes. CPS plus the EUA price was around €26/tCO2 in 2017 (US$30/tCO2). The French the carbon tax rose from €22/tCO2 to €31/tCO2 over 2016-2017. In Canada for provinces electing to adopt a fixed price the carbon price needs to reach CAN$50/tCO2 (€34/tCO2) by 2022[vii]. These levels remain below US EPA 2015 estimates of the Social Cost of Carbon of around €40/tCO2 [viii].
This type of low cost emissions reduction is exactly the sort of behaviour that a carbon price should be stimulating, but which is failing to happen as a result of the EU ETS because the EUA price is too low. More such successes are needed if temperature rises are to be limited to those set out in the Paris Agreement. This means more carbon pricing should follow the UK’s example of establishing an adequate floor price. This should include an EU wide auction reserve for the EUETS. The reserve price should be set at somewhere between €30 and €40/t, increasing over time. This would likely lead to substantial further emissions reductions across the EU.
This article first appeared on Adam Whitmore’s blog On Climate Change Policy and is republished here with permission.
[i] UK carbon price support reached at £18/tCO2 (€20/tCO2) in the fiscal year 2015/6 and was retained at this level in 2016/7. In 2013/4 and 2014/5 levels were £4.94 and £9.55 respectively. This reflected defined escalation rates and lags in incorporating changes in EUA prices.https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293849/TIIN_6002_7047_carbon_price_floor_and_other_technical_amendments.pdfand www.parliament.uk/briefing-papers/sn05927.pdf
[iv] Based on UK coal generation estimated weighted average emissions intensity of 880gCO2/kWh, and 350gCO2/kWh for gas generation.
[v] 50 million tonnes p.a. at a social cost of carbon based on US EPA estimates of $47/tonne (€40/tonne).
[vi] There is a standard objection to a floor in one country under the EUETS is that it does not change of the overall cap at an EU level so, it is said, does not decrease emissions. However this does not hold under the present conditions of the EUETS, and is unlikely to do so in any case. A review of how emissions reductions from national measures, such as the UK carbon price floor, do in fact reduce total cumulative emissions over time is provided was provided in my recent posthere.
[vii] The tax has now set at a fixed level of £18/tonne. It was previously set around two years in advance, targeting a total price comprising the tax plus the EUA price. There was no guarantee that it would set a true floor price, as EUA prices could and did change a good deal in the interim. Indeed, in 2013 support was set at £4.94/tCO2, reflecting previous expectations of higher EUA prices, leading to prices well below the original target for the year of £16/tCO2 in 2009 prices (around £17.70 in 2013 prices). See https://openknowledge.worldbank.org/handle/10986/28510?locale-attribute=en. The price is also below the levels expected to be needed to meet international goals (see section 1.2), and below the social cost of carbon as estimated by the US EPA (seehttps://onclimatechangepolicydotorg.wordpress.com/carbon-pricing/8-the-social-cost-of-carbon/and references therein).
[viii] Based on 2015 estimates.
Roger Lambert says
“The UK tax has thus proved highly effective in reducing emissions, ”
Sorry, but you have not proved anything. We see emissions down and coal down virtually everywhere and that is without carbon taxes.
The fact is, carbon taxes have been tried in six major areas – and they have all been deemed a failure, including, most recently, British Columbia, the former sole poster child of carbon tax success.
Nigel West says
The escalating carbon price, tighter limits on NOX and SOX emissions and the growth of renewables, have all played a part in coal’s decline:
Roger Lambert says
Don’t confuse correlation with effect. Carbon taxes have been a failure everywhere they have been instituted, and for a good reason – they put virtually zero impetus on the people who make RE decisions.
The so-called free market is not the venue of choice for major RE advances – government mandate is. And nowhere, at anytime, has the concept of a carbon tax ( and there are a million different schemes) been shown to be more productive or efficient than targeted subsidies.
In the U.S., at least, we can not have both. Republicans have already made it clear that subsidies will all be eliminated if a carbon tax is instituted. We would then be trading the proven efficacy of targeted subsidies for the vague promises of proven failure.
geir vollsaeter says
Right on Roger. ETS hasn’t delivered much of anything in the EU, Carbon Taxes have been more efficient while Californias Emission Performance Standards and Low Carbon Fuel Standard have delivered near 100 % predictable reductions. While taxes and in particular ETS have lead to volatility and uncertainty for investments,. EPS and LCFS have provided certainty for industry, consumers and governments .https://www.linkedin.com/pulse/critical-need-life-cycle-impact-analysis-climate-geir-vollsaeter/
The European Tradings Scheme seems almost to be designed to fail. A Generous amount of certificates, governments can give out certificates for free, loopholes and easy fraud via the clean development mechanism, no sell-by-date on certificates,……
According to economic theory the market is a kind of algorithm to find the optimum for society, and by balancing different interests via the price. Assuming that humans are the selfish rational beings that economic theory assumes us to be the market needs the right information to find this optimum. In the case of CO2 this means that the price of CO2 certificates must reflect the cost of climate change. The ETS does not deliver this, the price of certificates is a fraction of the climate change cost estimates. In other words use a CO2 tax based on the best estimate of climate change damage.
Nigel West says
The UK’s carbon tax on fossil fuels used for power generation has helped accelerate the closure of coal fired plants. A few years ago about a third of the UK’s electricity came from coal fired gen., now it’s less than 10%. Gas fired gen. capacity having displaced coal.
Grid connected wind capacity has also grown and taken market share from coal. But this would have happened regardless of the carbon tax support mechanism.
UK Government introduced the escalating carbon price support mechanism in 2013. It was intended to help gradually close the gap between the fossil fired gen. prices and the more expensive cleaner forms of generation, both renewables and new nuclear. Hence on economic grounds fossil fuels should then decline in use and be replaced by new clean generation. UK investors in renewables and nuclear, through a CfD support mechanism, are insulated from wholesale prices, the carbon price not being material.
The escalating carbon price has hurt UK energy intensive industries like steel making and contributed to rising domestic power prices. This lead to Government placing a cap on the carbon support element in 2017 and 2018 as shown in the graph in the article.
UK Government reasoning behind forcing an escalating carbon tax on power generation included pushing coal plant into retirement, eventually gas plant too, to be replaced with clean generation. Without competition from cheaper fossil fuel generators, Government forecast that clean forms of generation would eventually dominate the market and price support mechanisms should no longer be needed for renewables and nuclear.
That carbon tax would help renewabe and nuclear is a fairy tale told to politicians. The only proponent of a carbon tax is the natural gas industry and they defend only a carbon tax that will be sufficient to reverse the merit order of coal and natural gas. Switching to nuclear, CCS and renewables is not just “buying a new powerplant”, you need to basically change all your workforce because no one in the conventional energy sector is sufficiently trained (and I include nuclear where most of the people with knowledge are retired). So even if natural gas is more expensive that renewables with a carbon tax it won’t trigger any switch to renewables because they will stick to what they know.
And of course a carbon tax has absolutely no effect on any other sector : a carbon tax won’t trigger any investment in public transit, it won’t change anything for industry who need cash to buy a more efficient machine, and so on…
Unless you are willing to go to an absurdly high amount in order to get a radical change in business model (the car industry in 2020 has basically a 500 €/tons carbon tax), the only way to get a switch to no carbon generation is a through a pro-clean generation policy (duh!), not an anti carbon policy…
Roger Lambert says
“The UK’s carbon tax on fossil fuels used for power generation has helped accelerate the closure of coal fired plants. A few years ago about a third of the UK’s electricity came from coal fired gen., now it’s less than 10%. Gas fired gen. capacity having displaced coal.”
Is natural gas not considered a fossil fuel in UK? It is not also subject to whatever you all call a carbon tax?
Last time I checked, coal was being displaced by cheaper natural gas everywhere on the planet – and *without* carbon taxes. How can you now insist on claiming that carbon taxes have been *proven* to have done anything at all?
And a better question is: what Renewable Energy infrastructure has been built solely due to any carbon tax anywhere in the world? (Answer: there is none, zero, kaput) Because every single dollar of a targeted subsidy does exactly that – it buys RE infrastructure.
And as far as I can tell – the ONLY thing we *must* do is build RE infrastructure ASAP. For without it, we can not switch off the machines that burn carbon.
Nigel West says
Roger, both coal and gas used in UK power stations is subject to a carbon tax but the carbon emissions from coal burning are about twice that from gas.
So in the electricity market place coal bears a heavier carbon tax burden. See article below on market dynamics of coal v gas and the impact of UK carbon taxes on power generation.
The UK’s grid is very tight on dispatchable capacity, gen. margins are tight relative to demand. As wind/solar provides negligible firm capacity, Grid has a needed to ensure some old coal stations are retained to be available during peak demand periods.
“And as far as I can tell – the ONLY thing we *must* do is build RE infrastructure ASAP. For without it, we can not switch off the machines that burn carbon.”
To switch off machines that produce carbon, both nuclear power and RE is needed.
Roger Lambert says
Were not the price increases merely passed along to consumers? That seems to be the case?