U.K.’s CO2 Floor Uses ‘Trick’ to Circumvent EU Law, RWE Says

The U.K. is using a regulatory “trick” to introduce its carbon tax on fossil-fueled power generation, which would not have been allowed under European Union emissions trading law, said the U.K. unit of RWE AG.

Britain is using an exemption under the EU Energy Products Directive to proceed with its tax, which it named a carbon floor, John McElroy, director of policy at RWE Npower, said in an interview at the Platts emissions conference in Brussels.

“That’s the trick that they have used,” he said Oct. 6. “It’s not permitted under the EU emissions trading system.”

Chancellor George Osborne in March fixed a carbon tax of 4.94 pounds ($7.71) a metric ton from 2013 to raise revenue and prompt investment into power generation such as wind farms and nuclear. Wind turbines are subsidized and the coalition government has said no subsidy will be given to new nuclear power stations. The government indicated the tax, part of the Conservative-Liberal Democrat coalition agreement when they took office in May 2010, may rise to 9.86 pounds in 2015.

No exemptions from EU law were necessary to introduce the floor, a Treasury official, who asked not to be identified in line with department policy, said by e-mail. EU laws allow the nation to tax fossil fuels for environmental reasons and the policy will provide more certainty on carbon prices than previous rules, the official said.

Talks With EU

The U.K. Department of Energy and Climate Change last month declined to provide Bloomberg News with e-mails and letters between Britain and the European Commission over its planned changes to energy-market regulations and the carbon floor.

“Its disclosure would provoke a negative reaction by the European Commission and could undermine the commission’s willingness to enter into further discussions and negotiations with the U.K.,” Tim Warham, an energy markets and networks official in DECC in London, said in a Sept. 23 letter to Bloomberg News.

“The U.K.’s ability to protect and promote its interests in the context of electricity market reform would be adversely affected if the requested information was disclosed,” he said.

Britain will scrutinize Electricite de France SA’s profit from its nuclear power plants under the tax, according to Tim Yeo, chairman of parliament’s energy and climate change committee. The nation should introduce a windfall tax on existing atomic plants to claw back additional profit, the Liberal Democrats, the junior partner in the coalition, agreed at a party conference last month.

‘Revenue Raising Exercise’

The floor will undermine the EU emissions market and increase costs unnecessarily, McElroy said. “It’s a revenue raising exercise by Treasury,” he said. RWE, Europe’s biggest emitter, has coal and natural-gas power stations in the U.K.

Nuclear generation, which emits almost no carbon, may benefit from higher electricity rates after the tax on fossil- fueled power generation is introduced in 2013, Citigroup Inc. said in March. EDF, owner of eight of the 10 atomic power stations in Britain, may earn as much as 154 million pounds, the bank said. Estimates of any profit EDF may earn as a result of the tax is “speculation,” Kaa Holmes, a company spokesman in London, said at the time.

The EU’s carbon cap-and-trade program already requires Britain’s power stations to buy permits to cover a portion of emissions and they’ll have to purchase all allowances from 2013. EU permits for December rose 1.8 percent to 10.65 euros a metric ton at 10:26 a.m. in London. They have fallen 25 percent this year.

‘Poor Example’

The U.K. carbon floor is cutting the need for emission reductions in other EU nations because it encourages a faster pace of abatement in Britain, said David Hone, climate adviser at Royal Dutch Shell Plc (RDSA) and chairman of the International Emissions Trading Association.

The policy effectively subsidizes power generation in other EU nations and increases the total cost of complying with climate-protection measures, Hone said last week at the Platts emissions conference in Brussels. “We are probably setting a poor example for the rest of the world.”

EU lawmakers need to object more stridently when member states propose energy policies and subsidies that work against single power and natural gas markets in the bloc, Johannes Teyssen, chairman and chief executive officer of EON AG, said Sept. 29.

In March, the EU commission said the U.K. tax will “weaken” the bloc’s carbon price signal.

Future British governments may abandon the tax, McElroy said. “The unilateral approach undermines the EU emissions trading system as the principle instrument for delivering low- carbon investment across Europe.”

To contact the reporters on this story: Mathew Carr in London at m.carr@bloomberg.net; Catherine Airlie in London at cairlie@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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