EU Carbon Falls as U.K. Tax Pushes Costs Above Osborne’s ‘Floor’
European Union carbon prices fell as U.K. utilities prepared for emissions charges that will exceed the “floor” cited yesterday by the chancellor.
EU permits for December dropped 2.4 percent to 16.54 euros ($23.50) a metric ton on London’s ICE Futures Europe exchange after Chancellor of the Exchequer George Osborne included a a so-called carbon-price support in yesterday's budget.
Osborne said the floor price will be 16 pounds ($25.84) per ton of carbon dioxide in 2013. That minimum, designed to wean utilities from fossil fuels, turns out to be only one of the variables that will force U.K. utilities to pay the government a levy of 4.94 pounds per ton of emissions on top of the market price of EU allowances. That brings their total emissions costs to 21 pounds a ton, according Redpoint Energy.
“The market is digesting the premium of the U.K.’s carbon tax, which wasn’t immediately apparent in the budget yesterday,” Meg Brown, a London-based analyst at Citigroup Inc. (C) said by telephone. “It’s much higher than it first appeared.”
The Treasury set its floor at 16 pounds a ton, rising to 30 pounds by 2020, after consulting with utilities, according to a Treasury spokesman who declined to be named, citing government policy. The 16 pounds is based on 2009 prices and would now be 19.16 pounds, adjusting for inflation, he said.
Britain will raise 3.2 billion pounds over the three tax years beginning in 2013, the Treasury said in documents posted on its website. The tax will slash Britain’s emissions by 263 million tons through 2030 and accelerate private funding for five nuclear reactors in Britain, a separate document says.
The Treasury calculated the average price of EU carbon allowances for delivery in 2013 at 14.21 pounds a ton in the year started in February 2010 based on data from ICE, the spokesman said.
The U.K.’s new tax on CO2 will push utilities costs higher than the floor price cited by Osborne and will be “doubly bad news for coal-fired,” said Duncan Sinclair, a director at Redpoint Energy. His estimates for total U.K. emission costs are based on current forward CO2 prices and the levy announced yesterday.
“These measures will most likely displace U.K. coal in the order of merit, possibly accelerating the closure of some plants,” Citigroup said in an e-mailed report. “It will also support further investments in green technologies and also in energy efficiency.”
Drax Group Plc (DRX), owner of the U.K.’s largest power station, dropped for a third day in London trading on concern the government’s carbon tax will erode earnings. The stock retreated 5.2 percent to 371.9 pence as of 5 p.m.
About half of Britain’s electricity comes from coal-fed power stations, which emit twice the carbon-dioxide of natural gas plants for each megawatt hour of output. From 2013, utilities will be required to buy all their emissions allowances under the EU cap-and-trade program, rather than getting them mainly for free. The program started in 2005 and offered emitters free allowances to help with costs.
EU permits for December had jumped 10 percent in the last month, before today’s loss, on concern Europe will rely more on fossil-fuel generation, after Germany halted seven nuclear reactors after the tsunami and earthquakes caused radiation leaks at Japan’s Fukushima Dai-Ichi plant. Deutsche Bank AG (DBK) and Barclays Plc (BARC) raised price forecasts to 21 euros.
U.K. utilities may be more likely to keep burning natural gas because the new tax would limit their ability to profit from switching to coal when market prices for EU emission allowances are relatively low, said Emmanuel Fages, an analyst in Paris at Orbeo, the carbon-trading venture of Rhodia SA and Societe Generale SA.
“For the EU market, there is less allowance demand, and it is bearish,” he said yesterday by e-mail. The tax would reduce purchases of allowances by 7.2 billion pounds ($11.7 billion) through 2030, according to U.K. Treasury estimates.
Should emission permits drop to 10 euros a ton, EU power utilities outside the U.K. would probably burn more coal and buy allowances, Fages said. U.K. utilities would keep burning gas, reducing demand for allowances, he said.
U.K. natural gas prices in 2013 may rise by about 4 pence a therm, and power may increase 4.70 pounds per megawatt hour, Lakis Athanasiou, a U.K. utilities analyst at Evolution Securities in London, said in an e-mailed note. Gas for the six months through September 2013 rose 0.8 percent today to 66.5 pence a therm, according to ICE data.
“The additional CO2 price is being set three years in advance so that generators will have time to include this rise in hedging activities,” cutting risks, Athanasiou said.
Other nations may also impose measures to boost renewable spending, said Matthew Cowie, an analyst in London at Bloomberg New Energy Finance.
“The U.K. price floor also increases the chances that other EU governments take unilateral steps outside the EU emissions trading system to encourage facilities in their countries to make more substantial low-carbon investments,” Cowie said yesterday in an e-mailed research note. It referred to the U.K. plans as “a bear in sheep’s clothing.”
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