Osborne expected to freeze controversial carbon tax in Budget

The Chancellor will reignite the row over green taxes on energy bills this week when he is expected to curb to his controversial carbon tax – easing consumer bills but infuriating green groups.

Critics of the “carbon price floor”, which increases the costs of burning fossil fuels, say it is a pointless “stealth” tax that will increase the risk of blackouts by forcing coal plants to switch off before new power plants are ready to replace them.

The tax will push up UK electricity prices, leading to job losses for struggling British industries and further increasing costs for hard-pressed bill-payers.

George Osborne is believed to be preparing to bow to pressure from consumer groups and industry by announcing a freeze to the levy in his Budget this week.

An anticipated freeze at 2015-16 levels could save households from having to pay as much as £20 a year extra on their household bills by 2020.

But according to green groups, such a freeze would lead to fewer wind turbines and solar farms being built.

In a conundrum for the Chancellor, operators of nuclear and many gas-fired power plants are also opposed to a freeze and say it would also worsen the risk of blackouts.

They argue that a dramatic u-turn over the tax – which was announced in the 2011 Budget and came into effect just last year – would scare away investors in all power plants and would also lead to the closure of more gas plants.

The carbon price floor sets a minimum price for every tonne of carbon dioxide emitted. It is supposed to rise steeply over the next two decades to encourage construction of new low-carbon power plants like nuclear and wind farms while making it too expensive to run coal-fired power plants.

The tax has the effect of pushing up the power price and, according to official Department of Energy and Climate Change estimates, added £5 to a typical household energy bill last year.

By 2015-16 that will already have risen to between £23 and £26, according to industry estimates. However, if the Chancellor were to freeze the tax at that level for the rest of the decade it could avert rises of a further £20 by 2020, according to analysis by Roland Vetter, head of research at CF Partners.

DECC declined to provide an estimate for the cost to consumers mid-decade but its own analysis shows the impact on bills would be between £30 and £50 by 2020.

Richard Hall, director of strategic infrastructure at Consumer Futures, said: “The carbon floor price should be scrapped – because it hikes energy bills for little benefit, displacing carbon emissions within the EU rather than reducing them.

“If the Government is determined to keep it, it should freeze it at its current level and use its proceeds to fund an ambitious national energy efficiency programme that will help consumers keep warm and cut their bills.”

Energy supplier E.On has called the levy a “stealth poll tax”, while another supply giant, ScottishPower, has warned the levy will force more closures of coal plants and so “threatens to make us even more vulnerable to the risk of blackouts”.

Manufacturers group the EEF has warned the carbon tax and other rising green energy costs are putting jobs at risk and making the UK uncompetitive.

The tax has arguably not achieved its aim, because wind and nuclear developers have had to be offered additional subsidy schemes. Critics say it serves only to hand a windfall to existing wind and nuclear plants, and increase receipts to the Treasury. Even Michael Fallon, the energy minister, called the tax “absurd”.

However, renewable and nuclear energy and gas-fired power plant owners, who all stand to benefit from a rising tax, are lobbying against a change.

Maria McCaffery, chief executive of wind industry lobby group RenewableUK, said: “The Treasury said it wanted to stimulate investment in low-carbon energy, yet the carbon price floor has only been in place for less than a year before the knives have come out. We’re deeply concerned because any scaling back on commitments spooks the market, which will only increase the cost of development by adding risk at a critical time”.

A freeze would cut expected returns for wind and solar farms built since the tax was announced, as subsidy levels were set to reflect the forecast rise in the tax.

RenewableUK and fellow green energy lobby group the Renewable Energy Association both warn that a freeze in the tax will see fewer wind farms and other green energy projects built, because a lower power price will require higher additional "top-up" subsidies to make the projects profitable. Ministers have already allocated a fixed pot of consumers’ cash to pay for these green energy subsidies, meaning it would be used up funding fewer projects

Nina Skorupska, chief executive of the REA, said: “This is the Chancellor seeking a short term headline, that will do very real damage to renewable energy deployment in the second half of the decade. It will mean the same amount of bill payers’ money being spent, but much less to show for it. It further undermines investor confidence in the UK as a stable place to do business, as well as blowing a hole in the Government’s wider energy and climate objectives.”

Energy supplier EDF, which recently signed a landmark deal to build Britain’s first new nuclear plant in a generation, is also lobbying against the change, while independent gas-fired power plant owners have said a freeze would make them more likely to mothball their plants. Gas plants are currently barely profitable, but the rising carbon tax would helped them at the expense of coal. A reprieve for coal plants could leave the gas plants unprofitable and see them mothballed.