Carbon Floor Price

By The Trend is Blue | Wed 9th May 2012 05:13

Equitable Clarity from Chaos.
In the 2011 budget, the UK government announced plans to introduce a Carbon Floor Price from the 1st April 2013 for the Carbon Market. According to the budget, “The carbon price floor will start at around £16 per tonne of carbon dioxide and follow a linear path to £30 per tonne in 2020 to drive investment in the low-carbon power sector.”

The Carbon Floor Price would result in organisations paying a minimum price for GHG emissions. This would be in contrast to the European Union’s Emission Trading Scheme where there is no minimum set on the price of Carbon. The main goal of setting a floor price is to reduce revenue uncertainty and increase investment in low carbon technologies and measures.

At present Carbon prices are languishing around the 6 Euro mark (Compliance credits) which is very low to influence business decisions. The UK government hopes that a floor price would increase the price to the 25-40 Euro figure and lead to adoption of GHG abatement measures across industries. Furthermore, according to the budget, it will raise £740 million for the Treasury in 2013-14, rising to just over £1 billion in its second year and £1.4 billion in its third year. Even while there have been protests against introduction of a floor price, more countries such and Denmark, Germany, Sweden, Portugal, Spain and Greece have also called for such a measure.

If at all a Carbon Floor price is established in the UK, it will only increase the price of compliance carbon offsets such as the UN issued CERs (Certified Emission Reductions) to the 16 Euro mark in the first year. It will have no direct impact on the prices of voluntary offsets in the carbon market. Rumors that Voluntary carbon prices too will increase 3-4 times are false and no such increase in price is expected.

While it is true that a Floor Price in the compliance market will stimulate the entire Carbon market, no direct effect is expected on the prices of voluntary carbon offsets. Buyers of voluntary offsets are not bound to offset their emissions but do so under their Corporate Social Responsibility (CSR), brand building and enhancing the brand value. This is particularly true for European countries where awareness among its citizenry and industry regarding climate change issues is amongst the highest and people’s perception is favorable towards green companies. A recent study by University of California also found that the value of a company rises as it discloses green growth information.

As elaborated above the prices of voluntary carbon offsets are based on pure market principles of supply and demand and a UK carbon floor price will not have any direct effect on voluntary offset prices. The increase in prices for voluntary offsets is as a result of the high demand for voluntary offsets and relatively low supply. The high demand in offsets is because of pressure on companies to disclose their sustainability measures as a result of initiatives such as the CDP (Carbon Disclosure Project) and to become carbon neutral. This, along with reduced supply of voluntary carbon offsets from developing countries as a result of fewer GHG abatement projects is the reason for the increase in prices of voluntary carbon offsets.