In the upcoming November Autumn Budget, the Treasury will decide the future of carbon pricing in GB. Following last year’s “non-announcement” confirming the existing freeze of Carbon Price Support until 2020/21, and the Spring Budget’s teaser revealing plans to scrap CPS and replace it with a total carbon price target, Chancellor Philip Hammond’s third statement on the matter is expected to finally lay out a concrete trajectory for CO2 prices beyond 2021.
The mixed track record of CPS to date shows just how consequential the decision can be. On one hand, the policy is rightly credited with coal’s demise and the resulting drop in emissions in the face of weak EU ETS – 13 GW of coal capacity exited the market since its introduction in 2013. On the other hand, despite the original intention, CPS failed to incentivise low-carbon investment, owing to insufficient level and lack of long-term certainty.
The impact of November announcement will be equally significant, and goes to the heart of the policy trilemma. Setting out a steep, long-term carbon price trajectory could boost decarbonisation by precipitating deployment of unsubsidised renewables, but would also have significant impact on consumer pockets and could potentially threaten security of supply, if intermittent wind and solar proliferate excessively. Conversely, a sudden drop in carbon pricing could reverse coal-to-gas switching and hit ROC-based renewables, and – if existing nuclear were to retire early – also cause security of supply problems. On the plus side, it would bring GB wholesale prices closer to the European levels.
To complicate things further, the Treasury’s decision does not take place in isolation. First, Brexit could see the UK crashing out of EU-ETS in 2019, leading to a temporary increase in coal production as total carbon price drops. Second, if European allowances’ price fails to recover despite reforms, maintaining the current differential may prove increasingly politically difficult, and – with interconnection set to boom – lead to great disadvantage of domestic generators. Finally, interactions with other policies have to be considered – once coal plants close by mandate in 2025, the rationale for high carbon price may weaken drastically.
In this study, we explore potential carbon price scenarios and their consequences for market participants and policy goals; and address the following questions:
- Which CPS trajectories seem likely and what are key considerations around them?
- What are the consequences for policy makers and the energy policy trilemma?
- What are implications for different technologies and market participants?