April Fools Day for electricity prices

The EU’s Emissions Trading Scheme (‘ETS’) requires the union’s 11,000 power stations and major industrial installations to buy permits for each tonne of carbon they emit.  The quantity of permits issued will be gradually reduced year by year, progressively increasing both scarcity and price.  The intention is to “squeeze” the cost of conventional high-carbon fuels and drive investment towards low-carbon alternatives.  Unused permits can be retained for future use or sold.  They have real cash value – in 2011 hackers stole € 30 million worth of emissions allowances from government repositories.

ETS has now entered Phase 3 which runs from Jan 2013 to Dec 2020.  The quantity of permits issued in 2020 will be 21% fewer than when the scheme began in 2005, however the recession has reduced demand even faster.  Permit prices fell steeply from £25.50 in 2008 to £2.39 in Jan 2013 – hardly a strong disincentive.  Best estimates suggest that ETS permit prices would have to return to £25 to have any real effect.  The only recourse would seem to be to drive prices upwards by temporarily restricting supply.  On Jan 24th 2013, MEPs in the EU’s Industry, Research, and Energy (ITRE) committee voted against temporarily restricting issuance to support the price.

The decline in ETS permit prices carries a sting in the tail for the UK.  George Obsorne’s 2011 budget contained a commitment to maintain a carbon “floor” price of approximately £16 per tonne of CO2 from April 1st 2013, increasing to £30 by 2020.  ETS permits contribute towards this requirement.  When this strategy was formulated in 2010 ETS permit prices were expected to rise steadily, so any “top-up” would be modest (the Carbon Floor level actually set for April 1st is £15.70 per tonne).  But as explained above, ETS permit prices are minimal, and considered by some to be heading for zero.  The top-up required between an ETS permit price of £ 2.39 and a Carbon Floor commitment price of £15.70 could add 20% to UK electricity prices1 in 2013, and almost double them by 2030.

1 Daily Telegraph “George Osborne’s CO2 tax will double UK electricity bills” 29th September 2012

April Fools Day for electricity prices