Putting a price on carbon is widely championed as an economically efficient way of cutting carbon emissions. Some even argue that pricing tools such as carbon taxes or cap and trade schemes should be allowed to operate on their own, and that renewable subsidies and regulation only distort the market.
However, a new report by Imperial College, On picking winners: the need for targeted support for renewable energy, funded by WWF-UK, shows that this is not the case. Carbon pricing on its own isn’t the best way to increase investment in renewables, especially those that are far from market such as wave and tidal. Here are three reasons why:
- The carbon price isn’t enough to make investors favour renewables over new fossil power stations even if it makes average costs over the lifetime of the power stations the same. Renewables are very capital intensive and developers need more certainty over the future price of electricity than can be provided by a carbon price alone (as it will only ever represent a proportion of the electricity price).
- It’s cheaper. Targeted support for different renewable technology that slowly reduces over time as the technology becomes cheaper is much more cost effective than raising the electricity price across the board through a high carbon price. Introducing a carbon price into an electricity market creates wind fall profits to existing low carbon generators who have already paid off their initial investments. Setting a high carbon price increases these profits.
- Carbon pricing doesn’t sufficiently address the risk of high carbon lock-in. Unless carbon prices are very high, carbon pricing may only have an effect on how existing assets are used eg encourage energy companies to use less of their coal fired power stations and more of their gas power stations, and will not influence which types of assets get built. Once high carbon assets are built, they create powerful lobbying pressure against further carbon price rises.
What does all this mean for UK policy? There needs to be a clear commitment from government to supporting renewables over the long-term to provide stability and attract investment. This means government needs to ring-fence support for less mature renewables beyond 2020 to ensure we develop a range of technologies and don’t just opt to only go for those that are cheapest in the short-term.
More needs to be done to prevent high carbon lock-in. We urgently need a specific carbon target for the Energy Bill, to ensure sufficient contracts for low carbon power are given out by Treasury. This will ensure low carbon generation crowds out fossil power stations and we become locked-in to a steady, cost-effective, low carbon transition.