The notion of the ‘carbon price floor’ (fashionable recently) makes at the first glance think of a minimum price for EUAs when traded on the market. And immediately a reservation comes to mind – how could it generally be possible to influence on prices for EUAs by such a rigorous regulatory means when inherent, pivotal component of the EU ETS is a free interaction of the demand and supply? And how could it be made only in UK when emission trading is, as a principle, pan-European? There is also a practical ambiguity, notwithstanding the legal character of the measure at issue, what will be its impact on prices on the European emissions marketplace?
After having only a cursory look at the design documents of the new measure planned to be implemented in UK as from 1 April 2013 (cf. ”Planning our electric future: a White Paper for secure, affordable and low carbon electricity” published in July 2011 and earlier “Carbon price floor consultation: the Government response” (from March 2011 - http://www.hm-treasury.gov.uk/d/carbon_price_floor_consultation_govt_response.pdf )) the situation is more clear – the legislative initiative has the character of a taxation measure applying only in UK.
As follows from the abovementioned White Paper as from 1 April 2013 supplies of fossil fuels used in most forms of electricity generation will become liable either to the Carbon Change Levy (CCL) or fuel duty. Supplies will be charged at the relevant carbon price support rate, depending on the type of the fossil fuel used. The rate is to be determined by the average carbon content of each fossil fuel.
HMRC Tax Impact and Information Note attached to the “Carbon price floor consultation: the Government response” also explains that pursuant to the Schedule 6 to the Finance Act 2000 (which contains the primary legislation for Carbon Change Levy) in most cases, gas, solid fuels (including coal) and LPG used to generate electricity are currently exempt from CCL (with the reservation of the specific rules relating to oils where duty can currently be reclaimed in full by the electricity generator).
So, the enigmatic concept of the ‘carbon price floor’ means simply removing as from 1 April 2013 the current exemption from Carbon Change Levy for solid fuels, gas and LPG used to generate electricity. These commodities will become liable to new ‘carbon price support
rates’ for CCL taking account of the commodities’ average carbon content. These
rates will be different from the main CCL rates levied on consumers’ use of gas,
coal, LPG and electricity, which will be retained.
Formula for Carbon Price Floor
The elaborated mechanisms for the determination of the carbon price support rates are described in detail in the abovementioned documents but their intention is generally to reflect the differential between the future market price of carbon and the floor price determined by the Government.
The carbon price support rates for 2013-14 announced in Budget 2011 are equivalent to £4.94/tCO2.
These rates represent the difference between the Government’s target carbon price (the floor) and the future market price for carbon in the EU ETS in 2013. Future rates will be announced at subsequent Budgets depending on the prevailing carbon price. A sustained increase in the carbon price would reduce the tax rate necessary to meet the floor. The final rates will be determined two years in advance with indicative rates published for two further years. For example, the rates for 2013-14 were announced at Budget 2011, together with indicative rates for 2014-15 and 2015-16. This is to provide greater certainty and to allow generators time to include this in hedging activities.