Munir Hassan, Partner and Head of Clean Energy at law firm CMS, said:

“The Government’s original decision to implement a carbon price floor above the EU’s ’emissions trading scheme’ price may have been bold, but it has been beset by criticisms from a number of quarters from the outset. If the EU does not allow Government to compensate energy intensive industries to provide relief from the full effects of the tax, it is not clear whether the carbon price floor could survive in its current form.”

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“A key problem for the Government is to have a robust basis for calculating the compensation to energy intensive industries for the effects on them of the carbon price floor that is in line with the Commission guidelines. The Government has produced guidance for compensating such industries for similar indirect costs from the EU emissions trading scheme overall and conceptually one might have expected both to be based on similar formulations. However, it appears that both the Government and the European Commission may now consider the two to require different approaches. The scheme for calculating compensation under the carbon price floor might therefore be more complex and end up throwing out even more issues for industry over the coming months.”

“The impact of additional costs to industry from the emissions trading scheme is an EU-wide issue whereas the carbon price floor is a UK specific issue. Resolving the impacts from that has complicated the position in getting state aid clearance for the UK’s proposed compensation scheme.”

“For the approval of the UK compensation scheme for the carbon price floor, the EU would need to look at whether the compensation scheme distorts competition in the internal market and whether the UK Government has shown that there is a real risk of carbon leakage.”

“Earlier this summer, the EU approved a German scheme compensating energy-intensive users for CO2 costs in their electricity prices while simultaneously rejecting a separate German scheme supporting non-ferrous metal producers. The EU investigation into the rejected scheme found that it may have given a competitive advantage to German producers and Germany had not satisfactorily demonstrated that there existed a risk of carbon leakage. UK industry has pointed out the risks of carbon leakage due to the carbon price floor. It is now for the EU to decide whether it agrees that this is a real risk.”

Source: http://www.cms-cmck.com