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UK carbon price floor to remain in place until 2021

23 Nov 2016 15:18 GMT
UK carbon price floor to remain in place until 2021

London, 23 November (Argus) — The UK's carbon price floor will remain frozen at its present £18/t CO2 (€21/t CO2) until the end of this decade, before rising with inflation in 2020-21, finance minister Philip Hammond has said.

But the government has not indicated what will happen to the policy beyond this point, leaving participants in next month's capacity market auction with minimal emissions price visibility for the 2020s.

Industry had been concerned that Hammond would announce significant changes to the price floor in the autumn statement, delivered today. The policies are unchanged from those that his predecessor, George Osborne, unveiled earlier this year.

But the scheme's future remains uncertain. The appropriate mechanism for carbon pricing in the 2020s is still under consideration, the government said.

Plans to increase emissions caps on coal-fired power plants to force their closure by 2025 at the latest are being reviewed. This could mean that the floor may no longer be required.

The UK's T-4 auction, scheduled for 6 December, will procure capacity for delivery from winter 2020-21. The government hopes that the sale will encourage the development of more gas-fired complexes than previous tenders, following recent reforms.

But the doubt over which carbon pricing instrument will be in operation next decade represents a significant risk for potential investors in new generation capacity.

Domestic think-tank Policy Exchange had called for Hammond to provide investors with certainty over carbon pricing.

Environmental lobby group Greenpeace welcomed the continuation of the carbon price floor policy, but urged longer-term assurances. The scheme should not be removed until it has achieved its original aims, it said.

"This is a policy that needs to stay in place until the coal phase-out is locked in and renewables are lined up to bridge the gap," Greenpeace UK chief scientist Doug Parr said.

Hammond did not give an update on the availability of financing under the UK's levy control framework — the budget allocated to fund energy subsidy programmes. The government is expected to outline its future in the 2017 budget.