Cost of Energy Review – Will UK Lead the World on Carbon Tax?

Cost of Energy Review – Will UK Lead the World on Carbon Tax?

  • 25 Oct 0

Professor Dieter Helm’s independent Cost of Energy Review has been published. The review, which was commissioned by the Government, has sparked much debate from praise for its technology neutral, free market approach to dismay at his recommendation to abolish the Contacts for Difference auction scheme that is claimed have been responsible for halving offshore wind costs in a matter of years. It is of little surprise that the report finds that the cost of energy to the consumer is too high but the proposed measures to rectify this will require fundamental change in policy to achieve lower bills.

There is a broad political consensus across all major parties in the UK that climate change is a reality and that we must reduce greenhouse gas emissions. The question that is being debated is how this will be achieved. A division exists between a technology neutral, pro-market approach versus widespread low carbon subsidies. In Professor Helm’s view, the implementation of an economy-wide carbon tax coupled with technology neutral auctions to incentivise new investments will achieve the overarching goals. His detractors are adamant that the approach would not have led to the dramatic cost reductions achieved in certain renewable sectors, for example offshore wind. The question is – which view will bring the deliverables needed to achieve lower prices and encourage investment in much needed renewable technologies.

The reduction in the cost of offshore wind appears to be a great success for the UK with its long coastlines and significant winds. With many geographic factors in its favour, this is hardly surprising. That said, there is much criticism of the Government policies that have provided subsidies to renewable technologies despite the plummeting costs worldwide that has allowed significant financial gain at public expense. Another example of this is solar panels where the cost has plummeted worldwide in recent years, which would have happened without the expensive feed-in tariff policy. This is notwithstanding the recognition that the UK is one of the least suitable places in the world to deploy solar power, partly because of the lack of sun, but also because peak electricity demand is in winter.

The greatest success for energy policy in the UK has been the phasing out of coal power. This is due to the Carbon Price Support policy which tipped the economics in favour of natural gas, whilst the Emissions Performance Standard effectively banned new power plants fuelled by coal unless equipped with carbon capture and storage. Economists favour the use of carbon taxation because it is cost-efficient and covers all forms of energy use. The focus of energy policy to date has been primarily on electricity power production missing less costly gains in emissions reduction in other areas and unnecessarily raising the cost of decarbonisation which is financed by consumers and taxpayers.

There are valid criticisms of the use of carbon taxation to reduce emissions. Firstly, investors will not commit to risky capital intensive projects without confidence in the return on investment. Helm’s recommendation does not include the removal of guaranteed prices for low carbon generation but endeavours to level the playing field through use of Equivalent Firm Power auctions. The second criticism is that taxation in the UK merely offloads the emissions to countries without such a tax. Helm recommends the use of a Border Carbon Adjustment (BCA) meaning that if an overseas nation wishes to sell its products in the UK it would pay the equivalent environmental taxes a UK producer would pay ensuring no carbon tax benefit for moving operations abroad. A border carbon adjustment has not been adopted anywhere in the world and are thought of as too complicated to implement. Indeed, applying a BCA on every product entering the country would be near impossible, but applying it to the electricity that comes through interconnectors and to energy intensive goods would be quite straightforward.

The UK’s exit from the EU provides an opportunity for the development of British innovation in the carbon pricing arena. The Government has pledged its support for an emissions trading scheme that will achieve the same if not better results than the EU ETS should the UK decide to leave. Giving consideration to the Clean Growth Strategy and the findings in Helm’s report, it is entirely feasible that the UK could lead the world in implementing a carbon tax with a border carbon adjustment. It remains to be seen as to whether the Government will make such a bold move on the international stage given the impending divorce from the EU.


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