Yes. It already has. And will likely continue doing so. A price on carbon is one of the few things upon which oil executives and climate researchers are in accord: it was agreed at the Shell Energy Summit  that it would be the most significant step forward in the battle against climate change. In the UK, that price stands at £18 with Carbon Price Support (CPS) plus whatever European emissions allowances are trading at (around £25 at present).

Paying around £40 for a whole tonne of carbon may seem like a small price to pay but it has proven enough to almost completely eliminate coal power stations in the UK. Your average coal power station pumps out around four million tonnes of carbon dioxide each year; at a cost of £160 million in taxes alone. Gas produces half the carbon dioxide and so half the cost. CPS has driven 73 per cent of the total reduction in coal generation between 2012 and 2016.

Carbon is too cheap

But £80 million is still a lot of money per power station, begging the question; why are companies not investing in renewables? The average carbon pricing gap – the difference between actual prices and a benchmark value – is 76.5 per cent on average across the nations responsible for 80 per cent of global emissions. The UK is one of a minority of nations that has substantially reduced its pricing gap, pushing up the price of carbon. Despite this increase in the cost of pollution for industry, nearly half of electricity in 2019 has been generated by fossil fuels.

Prices will increase

It turns out carbon prices will have to nearly double to cause a larger shift towards cleaner technology. But that is not such a huge ask. The price of one tonne of carbon under the European Trading Scheme (ETS) has increased by five times in the past two years. The Netherlands intends to impose a national levy that could add €100 (£90) to the ETS price by 2030. If one million citizens from seven EU nations sign a recently registered petition, the European Commission will also be obliged to respond to a call for a minimum carbon price.

Price of 1 tonne of carbon

Brexit and whatever deal, if any, that does or does not accompany it is unlikely to reverse the trend either. If the UK exits the ETS, it will be replaced by a Carbon Emissions Tax, though precise details are still yet to emerge. UK Parliament became the first to declare a climate emergency earlier this year and has also committed to net-zero emissions by 2050. On-shoring energy supply is also highly desirable in an increasingly protectionist and energy scarce international environment.

If pricing and market mechanisms are to be used against fossil fuels, it would be rather futile to resist. With this in mind, the case for renewable energy is strengthened further. Opportunities for investment support still exist but are becoming fewer, most recently with the closure of the Feed in Tariff earlier this year.

As renewables pass from being encouraged to being expected, we are beginning to see projects, historically reliant on subsidy, realised on a 'subsidy free' basis. Where support still exists it should be exploited while it still can be. Yet any renewable investment will likely pay dividends as the price of carbon, and so fossil fuels, increases. Earlier and wider adoption will see these benefits, and many others, reaped sooner.

Carbon pricing gap 2015

The carbon pricing gap is an indicator of countries’ use of carbon pricing. It compares actual effective carbon rates to a benchmark rate of £27 per tonne of carbon dioxide. If every tonne of carbon dioxide were priced at least at £27, the carbon pricing gap would be zero, and if all emissions were unpriced, it would be 100 per cent. In the UK, 42 per cent of emissions are priced below the benchmark figure.

Further information

Contact Savills Energy