The encyclopedia · Finance & Accounting · Financial decision · 2013–2020
UK's carbon price floor topped up the EU ETS when permit prices crashed
A top-up tax guarantees UK generators a minimum carbon price, so low-carbon investment no longer depends on a volatile EU allowance market.
UK Government · UK electricity generators
the move
The EU Emissions Trading Scheme was meant to price carbon, but its permit price crashed to record lows in 2012-2013, removing the incentive to invest in low-carbon generation. The UK announced a Carbon Price Floor in the March 2011 Budget and introduced it on 1 April 2013.
The design combines the EU allowance price with a UK Carbon Price Support top-up tax on fossil fuel generators. The top-up is set so total carbon costs reach the government's floor target, rising over time. When the EU price falls, the UK charge rises to compensate.
Critics called the tax expensive and regressive, but the mechanism's purpose was certainty: investors in low-carbon generation could underwrite projects against a known minimum carbon price instead of betting on the EU market. The EU Commission later studied it as a market-stability measure.
why it works
- The top-up is automatic, so the floor holds even when EU allowances collapse.
- A published trajectory gave investors a multi-year price path to finance against.
- It acted as a unilateral national hedge inside a shared EU market.
- Revenue flowed to the Treasury while the price signal stayed with generators.
what transfers
If a market price is too volatile to invest against, back it with a mechanism that fills the gap automatically: the market still sets the marginal cost, but the floor sets the floor.
what came after
The floor raised almost £1bn in its first year and was criticised for pushing costs onto bills, but it contributed to the UK's coal-to-gas fuel switching and remained in force through the 2010s. After Brexit the UK replaced the EU ETS with its own Emissions Trading Scheme while keeping a similar price floor logic.
references
- Unpopular but tenacious: A guide to the UK carbon price floor
- Study on the EU ETS market stability measures (carbon price floor case)
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