Floored

IT TAKES a particular kind of environmental policy to irk industrialists and greens alike. In its short life the Carbon Price Floor (CPF), a tax on pollution that was frozen by the chancellor of the exchequer on March 19th, has done precisely that. Holding down the unloved levy—for four years from 2016—will cut energy costs for businesses and householders. But it leaves Britain’s climate policy in a mess.

Carbon taxes or trading schemes, which aim to encourage investment in low-carbon generation by steadily raising the cost of alternatives, are the cheapest way to clean up smoggy economies. Unlike subsidies for renewables, they do not rely on politicians guessing which technologies to support. Since 2005 an EU cap-and-trade scheme has forced polluters across the continent to purchase permits for each tonne of carbon they emit. Britain’s carbon-price floor, a form of carbon tax announced in 2011 and enacted in 2013, aims to protect green investors from swings in the price of these permits by setting a minimum amount that polluters must pay for them.

The policy riles businesses in energy-intensive industries, such as chemicals and manufacturing, whose bills are already rising because of global fuel costs. Nor is it much loved by renewable groups, for whom straightforward cash subsidies are a more appealing means of support. Critics say the tax has pushed up electricity costs yet has failed to force the closure of cheap coal-fired power stations, which still provide 40% of Britain’s power. They regret that the Treasury has stashed away the proceeds (probably £2 billion a year by 2016) rather than invest in more green schemes.

By far the biggest problem is that since the carbon tax’s conception the European emissions-trading system has collapsed. A glut of permits means European power firms have been paying as little as €4 ($5.60) per tonne of carbon, down from about €30 in 2008 and much lower than the £18 ($30) minimum at which Britain’s price will be set. That is making the country’s manufacturers uncompetitive without reducing Europe’s carbon emissions, because permits not purchased in Britain still get snapped up by its neighbours.

Mr Osborne claims his freeze will save a medium-sized manufacturer about £50,000 a year, and the average household about £15. That is peanuts. But the damage to government policy is severe. The reform may well require taxpayers to cough up more money for renewable generators whose subsidy rates have been calculated on the assumption that carbon taxes keep bumping up the wholesale price of power. Postponing promised increases only a year after the tax was launched destroys its credibility with green investors, even if politicians return to raising it in a few years. And without a rising carbon price, Britain’s plan to produce carbon-free power by 2030 will depend ever more on subsidies, which may prove unsustainable.

The CPF’s troubles reflect particularly badly on Europe’s bureaucrats, who have failed to salvage a continental trading system that has long since lost its teeth. Leaders at a summit on March 20th and 21st are expected to forgo most climate chatter for discussions on promoting industry and defusing the crisis in Ukraine. When Britain’s tax freeze expires in 2020, things may not have moved along much.

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