(Adds carbon floor specifics from second paragraph.)
By Mathew Carr and Catherine Airlie
May 12 (Bloomberg) -- The U.K. coalition government led by David Cameron proposed a floor price for carbon and fewer giveaways of European Union emissions permits, according to an agreement between the Conservatives and Liberal Democrats.
The Conservatives’ initial plan would set a “carbon floor” by changing the climate-change levy, which now taxes all forms of power generation. The coalition would refocus the tax on sources that generate the most carbon and use the proceeds to help finance nuclear and wind-power development.
The new U.K. government followed U.S. lawmakers today in proposing a floor to keep carbon prices from falling to levels that provide no incentive to phase out fossil fuels. The plans by U.S. senators John Kerry and Joseph Lieberman would set the minimum at $12 a ton.
“The case for a carbon-price floor is compelling,” said Dieter Helm, professor of energy policy at Oxford University.
EU permits for December delivery rose 0.25 percent to 15.73 euros a metric ton as of 5:15 p.m. on London’s European Climate Exchange. The contract has risen 25 percent so far this year as the economy improved and utilities hedged future power sales.
Green Exchange International LLC, a unit of CME Group Inc’s New York Mercantile Exchange, said it sees “significant flaws” in the U.S. plan. Carbon floors may hamper trading profits and curb market participation, Chief Executive Officer Tom Lewis said today in an interview in London.
While traders resist market interference, Oxford’s Helm said Europe’s cap-and-trade program is too volatile to provide long-term guidance for investors and is vulnerable to industry lobbying, he said. While the coalition proposal is a step in the right direction, “it may not be ambitious enough,” said Helm, who advocates a carbon tax on consumers rather than producers.
Nuclear Incentives
The U.K’s committee on climate change said earlier this year that a fee of 50 euros per metric ton of CO2 is needed to spur low-carbon investment. The U.K. is the only county to set a legally binding target to cut CO2 emissions to 80 percent below 1990 levels by 2050.
Centrica Plc and Electricite de France SA, partners on four new reactors in the U.K., voiced support for the carbon floor. It would have to be “much higher” than the current EU permit price to be effective, Andrew Turpin, Centrica spokesman, said by e-mail.
‘Polluter Pays’
Centrica, the U.K.’s biggest energy supplier, praised the new government for “proposing a mechanism to underpin nuclear development through a higher carbon price that ensures the polluter pays and tilts investment away from fossil fuel generation,” Nick Luff, Centrica’s finance director said.
The U.K.’s carbon floor would effectively tax all forms of generation and be refunded should the EU’s emissions trading system price rise above the floor, said Andris Bankovskis, a London-based associate director at consultant SQW.
“Below the floor price, the refund would decrease in proportion to carbon emissions,” he said. “The guiding principal should be that the floor price is capable of incentivizing investment in U.K. nuclear power and other forms of low-carbon generation.”
U.K. power stations and factories have had limits on CO2 emissions since 2005 under the EU’s emissions trading system. They got most of their CO2 permits for free and can buy or sell excess permits into the market. They will get fewer permits for free in the eight-year phase from 2013 to 2020. The new government will push the EU to further curb the number of permits handed out for free, it said.
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