The Government’s carbon price floor policy, as currently proposed, is unlikely to command investor confidence.
It needs to gain credibility if the Government wants to successfully attract new low carbon investment into the UK, says a report published today by Climate Change Capital (CCC), the investment manager and advisory group.
Investors will highly discount the value of the current policy because it will be implemented through the tax system. Investors would have to hope that every year Parliament will continue to vote for increasing carbon price support until at least 2030. This is highly unlikely say the authors. They also cite a recent study  commissioned by the Government that says a non-credible carbon price policy would actually lead to reduced investment in renewables and reduced security of power supply in the long term.
The CCC report suggests embedding the carbon price floor commitment in a contractual obligation, which would then provide investors with the long-term credibility they require to invest. This contract, or Carbon Price Support Guarantee (CPSG), would involve the Treasury underwriting the value of carbon price support so that the carbon price floor was guaranteed. It could sell these guarantees for a nominal fee to investors. Owners of the CPSG could exercise the contract if the Treasury breaks its own promise on carbon price floor levels.
Rupert Edwards, Head of Policy and Market Analysis at Climate Change Capital and one of the report’s authors, said:
“The UK Government’s carbon price floor proposals demonstrate that the UK has the ambition to take a leadership role on climate policy at a time when the EU as a whole seems to be losing its nerve.”
“The trajectory for the proposed carbon price floor is meant to be set over the next two decades to give investors certainty so they can bring forward new low carbon investment into the UK. Investors will, however, have serious doubts about the long-term credibility of the carbon price floor policy as it is currently conceived. This is because it is a tax-based mechanism subject to annual votes in Parliament.”
“A policy to reduce uncertainty must itself be certain. To ensure that certainty a contractual obligation could be created with no costs to Government if the Treasury keeps to its carbon price floor commitments. This Carbon Price Support Guarantee (CPSG) would increase certainty, reduce the incentive for investors to ‘wait and see’, and lower costs for investors and the economy. If part of an integrated approach, for example with Electricity Market Reform and the Green Investment Bank, it would be a powerful commitment to a low-carbon Britain.”
To read the research report visit http://www.climatechangecapital.com/media/198658/0375%20thinktank%20uk%20carbon%20price%20floor_2011_03_10.pdf