The UK's carbon tax for the period from 2016 until the end of the decade will be frozen at the 2015/16 level of GBP18.08/mt ($30.06/mt) of CO2 instead of escalating to GBP21.20/mt CO2 and GBP24.62/mt CO2 over 2016 and 2017 as originally planned.
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The UK's finance minster George Osborne presented his budget for the 2014 financial year Wednesday afternoon, confirming the expected carbon tax freeze which was widely reported in recent months.
The carbon tax was introduced last April at a support level of GBP4.94/mt CO2 to be paid in addition to carbon allowances through the EU's ETS, and is scheduled to rise to GBP9.55/mt CO2 on April 1 and GBP18.08/mt CO2 on April 1, 2015.
"The government remains committed to the CPF as a means to stimulate investment in low carbon infrastructure, but is capping the carbon price support rate at GBP18.00 from 2016-17 to 2019-20 to limit any competitive disadvantage British companies face in the global race," Osborne said.
"This could save British businesses up to GBP4 billion by 2018-19, over GBP1.5 billion in 2018-19 alone, and GBP15 off a typical household energy bill in the same year," he said.
Osborne also added that further measures would be taken to protect energy intensive industries (EIIs) and combined heat and power (CHP) plants from the carbon tax.
He said energy-intensive manufacturers would be protected from the rising costs of the Renewables Obligation and Feed-in Tariffs, "otherwise green levies and taxes will make up a third of their energy bills by the end of the decade," he said.
In addition, the compensation for energy intensive industries for the cost of the carbon tax and EU emissions trading system will be extended to 2019-20.
"The combined cost of these compensation measures is expected to be around GBP500 million a year from 2016-17. Together with previous announcements, this package means that EIIs will be compensated for all government policy designed to support low carbon and renewable investment up until 2019-20, saving the average EII up to GBP19 million by 2018-19," the budget documents show.
Finally, Osborne is to exempt from the carbon price floor "electricity from the combined heat and power plants which hundreds of manufacturers use," he said.
"Taken together, these measures will ensure that the UK businesses at greatest risk from high energy prices remain competitive and have long-term certainty on energy prices by reducing energy costs for the economy by up to GBP7 billion by 2018-19," the budget documents said. "Our steelmakers, paper mills, chemical plants and other heavy industry make up 35% of our manufacturing exports and employ half a million people," Osborne said. "This scheme helps those industries most at risk of leaving to remain in the UK."
The government's original plan to enforce a rising trajectory for the total cost of carbon emissions is intended to incentivize decarbonization amid depressed pricing levels on the ETS carbon market.
Budget documents indicate that once the direction of reform of the EU Emissions Trading System is clearer the government will review the carbon tax trajectory for the 2020s, including whether a continued cap on the carbon price support rate is necessary.
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