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Cut in UK carbon tax 'would boost coal-fired output by 12 TWh/year'

Highlights

Cut would jeopardize UK climate goals

Coal to close by 2021/22 if CPS maintained

Cost of tax balanced by subsidy savings

London — A cut in the UK's Carbon Price Support tax risks a resurgence in coal-fired generation and higher CO2 emissions into the 2020s, Aurora Energy Research said Monday.

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Ahead of the UK Autumn Budget October 29 there is speculation within the energy industry that the government might respond to rising CO2 prices in the EU Emissions Trading System by reducing the UK's top-up tax paid by domestic generators.

"Maintaining a higher carbon price is key to decarbonizing the UK electricity sector in a timely and cost-effective manner, and achieving the government's stated intent of phasing out coal power generation," the Oxford-based research group said.

The difference between maintaining and cutting the tax could equate to 12 TWh of production a year for four years after coal plants would otherwise have closed, Aurora said.

If the government were to reduce the CPS to GBP7/tonne CO2 from the current GBP18/tonne CO2, coal plant would stay on the system until 2025, generating an average 12 TWh/year in the period 2021-25.

If the tax was maintained at GBP18/tonne CO2, this would result in coal coming off the system as early as 2021/2022, it said.

In terms of alternative generation, 12 TWh is equivalent to 2.3 Bcm/year or 6.2 million cu m/d of gas burn in a 50% (HHV, or higher heating value) efficient CCGT plant.

Cutting the CPS to GBP7/tonne CO2 would increase emissions by almost 20% (29 million tonnes CO2) during the fourth carbon budget period (2023-2027) compared to maintaining the status quo, Aurora said.

Maintaining the tax would increase electricity prices slightly, but this would be offset by lower subsidy costs, it said.

System costs would increase by GBP700 million/year on average over the period 2021-2040, or around GBP9/year on the average household electricity bill.

At the same time, a higher carbon price scenario would increase government receipts by GBP330 million/year to 2025.

In a scenario where the government sticks to its original carbon price trajectory of GBP70/tonne CO2 in 2030, meanwhile, Aurora envisages an extra 10 GW of renewables capacity coming online by 2030 (mainly onshore wind and solar PV).

The UK's Carbon Price Floor consists of two components -- the EU ETS price and the Carbon Price Support tax. The tax tops up the ETS price to meet a projected value as set by the government.

The UK's finance ministry, or Treasury, confirms the target CO2 price and CPS rates three years in advance of delivery at each budget.

In 2017 the Treasury recouped GBP1 billion in tax receipts from the mechanism.

When the Carbon Price Floor was introduced it was due to rise every year to 2020, to a price of GBP30/tonne CO2 and GBP70/tonne CO2 in 2030 (all prices real 2009).

In 2014, however, the government capped the floor price at GBP18/tonne CO2 from 2016 to 2020. The freeze was extended to 2021 in the 2016 budget.

--Henry Edwardes-Evans, henry.edwardes-evans@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com