No more market power?

Buried in today’s Budget was the Energy Markets Assessment. What is significant about the EMA is that it marks a further implicit shift in UK climate policy away from carbon trading.

The Government has consistently said that the carbon market lies at the heart of its climate policies (for example here and here). But it has also become clear that the EU ETS is failing to create price signals that are credible and long-term enough to guide investment in the power sector. This is why Ed Miliband banned conventional coal-fired new build last year. The EMA acknowledges that the carbon market won’t drive investment in low carbon technologies like nuclear and CCS, and proposes more direct interventions instead. From the liberalisation of electricity by Nigel Lawson in 1989, this would leave only new gas-fired investment as a purely market-led choice.

Where does this leave the ETS? The EMA is effectively another vote of no confidence in its long term functions. However, at the same time, if the ETS does survive, then ensuring that Britain invests in low carbon generation after 2020 will not actually ensure lower emissions from the EU overall unless the total ETS cap is adjusted downwards. The cap post-2020 hasn’t been set yet, but the Commission has indicated that the rate of decline in Phase 3 will continue into the future. Following any new power market policy decisions next year, Britain should press for a reduction in the post-2020 cap, or consider pulling out of the ETS.

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