Why the Carbon Price Support was scrapped

How cutting a carbon tax on electricity could cut carbon emissions

Britain has two carbon taxes on electricity. There’s the Emissions Trading Scheme (ETS), a cap-and-trade scheme where businesses can buy and trade a fixed number of permits to pollute (emit carbon), and there’s the Carbon Price Support (CPS) – an additional £18 per tonne tax on electricity generation. Next year, Britain will only have one. Yesterday, Treasury Minister Dan Tomplinson MP announced that from April 2028, the CPS will be abolished.

The obvious effect of the cut will be to lower electricity bills a bit, estimates of the magnitude suggest a £8 to £20 saving for the average household, but it might have another surprising effect: lowering emissions. Carbon taxes are designed to make emitting carbon more expensive and encourage the switch to cleaner alternatives, so how can scrapping one be the green option? To understand, it’s worth going back to why the CPS was first brought in.

Your watch is over

In September 2024, 142 years after the first coal power station in Britain opened in 1882, Britain’s last coal power station was taken off the grid. Coal is by a long way the dirtiest way to generate power. When it was up and running, Ratcliffe on Soar, Britain’s last coal plant, was emitting 2 and half times more carbon per unit of electricity produced than nearby gas power plants.

Getting coal off the grid was just about the most impactful way Britain could cut emissions. The problem was the Emissions Trading Scheme (ETS) wasn’t working. In theory, ETS permit prices were meant to gradually rise as they were taken off the market, but instead they collapsed. The Great Recession temporarily caused emissions to collapse and meant firms were able to build big surpluses of permits (exacerbated by generous free allocations). The result was that by early 2013, permit prices fell to about £2.50. This was not a strong incentive to get off coal.

The Carbon Price Support (CPS) was brought in to top-up prices so they hit the level that policymakers intended ETS permit prices to reach so they would actually start changing behaviour. And they did.

The tax played a huge role in moving coal off our grid, generating massive reductions in UK carbon emissions. Per unit of electricity produced, Ratcliffe on Soar was therefore paying 2 and half times more Carbon Price Support than a gas power plant. The carbon price support was therefore serving a genuine policy purpose, removing coal off the grid and encouraging the uptake of carbon-free renewables and still lower carbon sources of electricity like gas.

Gas isn’t going anywhere and we don’t just pay this tax on gas

Gas is lower carbon than coal, but burning gas still emits carbon. The CPS makes gas more expensive – about £6 per megawatt hour more expensive.

In the short-term, we are stuck with gas on the grid. Renewables will need a back up for when the wind isn’t blowing. Batteries are nowhere near cheap enough to provide this backup and will not be any time soon. The government’s progress on nuclear regulation is impressive, but it will be years until it shows results. Therefore, gas is going to be part of our electricity grid for years to come. Increasing bills with taxes does not change this reality.

These taxes don’t just make gas more expensive, they make all of our electricity more expensive. 17% of our electricity comes from renewables on fixed term contracts. 30% comes from the wholesale market with a ‘Renewables Obligation’ top up. The rest comes straight from wholesale markets. Electricity producers bid to sell electricity, with the market clearing at the point where supply meets demand. All producers are paid the price of the marginal unit of electricity (aka the most expensive source), which is often gas. In wholesale markets gas almost always sets the price. Pushing up the price of gas therefore pushes up the price we pay to producers in the wholesale market that are not gas. The bulk is older renewables and our ageing nuclear fleet, as well as some sales to the grid from rooftop solar.

Therefore, driving up the price of gas means driving up the cost of nuclear and renewables that don’t emit any carbon at all.

Decarbonisation needs cheap electricity, the carbon price support got in the way

Decarbonising the whole economy involves two major steps.

1. Decarbonising our electricity supply

2. Electrifying everything that currently isn’t electrified.

On 1, we have not done badly. Removing coal from our grid, replacing it with gas, and increasing the renewables share of electricity has reduced emissions dramatically.

On 2, we are doing very badly. Only 21% of our energy comes from electricity. In transport, buildings, industry and agriculture we need households and businesses to make expensive investment decisions to convert from pure fossil fuels to electricity where 2/3rds of the energy comes from zero carbon sources. But they won’t do this if electricity is too expensive. In fact, prices are so high that despite the rollout of heat pumps and EVs, electricity use has been steadily declining.

The BBC recently documented a man in Glasgow who had bought a heat pump, but has opted to switch back to his gas boiler because it was costing him too much.

While heat pumps can be 3 or 4 times more efficient than gas boilers at converting energy into heat, electricity costs around 4 and half times more than gas. Turning off his clean heat pump and switching on his fossil fuel burning boiler made economic sense. Gas based electricity that carbon efficiently powers the heat pump has to pay the CPS. The less efficient gas boiler does not. Remember, the CPS only applies to electricity.

For those of us who don’t already have a heat pump, buying one is one and a half to twice as expensive than a gas boiler, even with generous taxpayer funded subsidies. It is going to be very difficult to get people to invest in a more expensive technology that will put their bills up. This is why Britain Remade have been campaigning to get the Government to make cheap power (not clean power) their top priority.

Returning to the decarbonisation two-step of decarbonising electricity and electrifying everything, sometimes there is a trade off between the two necessary steps.

The government’s Net Zero Power 2030 push will result in our electricity supply being less carbon intensive. However, it has resulted in buying offshore wind at £91.20 per MwH on 20 year contracts. This will likely push up bills for decades and slow the adoption of technologies like heat pumps necessary for the electrification of everything.

However, with the carbon price support there was no conflict, it was all downside. As gas is going to stay on the grid for many years to come regardless of the tax treatment (and new clean generation is funded via fixed contracts), all the CPS was doing was pushing up the price of electricity, and therefore slowing down our decarbonisation. That’s why retiring this carbon tax was a key ask for our Cheaper Energy campaign.

Ditching the CPS good news for bills and good news for reducing our carbon emissions.