Carbon Price Floor (CPF) and the price support mechanism

The Carbon Price Floor (CPF) is a UK Government policy implemented to support the EU Emissions Trading System (EU ETS). The CPF was introduced on 1 April 2013 to underpin the price of carbon at a level that drives low carbon investment, which the EU ETS has not achieved.

What is the CPF?

The CPF taxes fossil fuels used to generate electricity via Carbon Price Support rates set under the Climate Change Levy. The price floor consists of two components which are paid for by energy generators in two different ways: (i) The EU ETS allowance price; and (ii) the Carbon Support Price (CPS), which tops up the EU ETS allowance prices, as projected by the Government, to the carbon floor price target.

The Treasury confirms the target carbon price and CPS rates three years in advance of delivery at each budget, and all revenue from the CPF is retained by the Treasury; in 2017 the Treasury recouped £1billion in CPF tax receipts.

Price freeze

When the CPF was introduced, it was due to rise every year until 2020 (to a price of £30/tCO₂). At Budget 2014 the Government announced that the CPS component of the floor price would be capped at a maximum of £18/tCO₂ from 2016 to 2020 to limit the competitive disadvantage faced by business and reduce energy bills for consumers. This price freeze was extended to 2021 in Budget 2016.

Impact of the CPF

The aim of the CPF is to encourage the transition to a low carbon economy. Since the implementation of the CPF there have been significant falls in coal electricity generation—the most carbon intensive energy source—which have partly been attributed to the CPF.

The additional costs of the CPF are ultimately borne by domestic and business consumers. Fears for the competitiveness of energy intensive industries, led the Government to introduce compensation measures aimed at alleviating the costs of the EU ETS, and the CFP.

Views on the CPF

There are mixed views on the CPF. Critics says the CPF has done little to reduce emissions, has disadvantaged UK companies and led to increased costs to bill-payers. Many power companies however support the CPF as a mechanism to encourage low-carbon investment, and some environmental groups support the aim of the policy.

Future of the CPF

There have been repeated calls for longer term clarity on carbon pricing and the CPF. In the 2017 Autumn Budget, the Government stated it was “confident” that the Total Carbon Price is set at the right level, and will continue to target a similar total carbon price until unabated coal is no longer used. The European Commission considered, but ultimately rejected, a similar system to reform the EU ETS.