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Carbon Floor Tax to hit Business Energy costs

Yet more bad news for energy users, except this one we’ve known about for a while now, perhaps conveniently hoping it wouldn’t come to fruition. But that is has, and from 1st April 2015 another one of those pesky taxes on energy is taking a hike, a big hike.

With Osborne’s recent populist posturing and Hawk-Eye Davey’s monitoring promise fresh in our ears it’s going to be interesting to see how they justify this latest energy tax rise, just one month ahead of the general election.

In all probability they will pretend it hasn’t happened and that it was all the EUs / previous government’s / greedy energy companies’ fault. But it will have happened and the responsibility lays squarely on the doorstep of Number 11.

The Carbon Price Floor, for that is what it is known as, was designed to punish CO2 producers and reward low carbon and renewable technology. The floor price came into effect in 2013 and rose to £9.55 per tonne on 1st April 2014.

This year however there will be a huge increase, to £18.08 per tonne.

The tax, ostensibly a penalty on burning coal and gas, promises to drive up the cost of electricity (generated by fossil fuels).

The tax is paid by power generators on top of their obligations under the EU’s Emissions Trading System, which itself forces companies to surrender one (costly) carbon permit for every tonne of carbon dioxide (CO2) they emit.

The carbon tax has a bigger impact on coal than gas as coal emits almost double the amount of CO2 into the atmosphere when generating electricity.

But with the latest Fuel Mix disclosure showing 34.0% of electricity being used in the UK is sourced from coal and 25.6% from gas, there will be little respite from the impact of these costs rises on the cost of energy.

The good news, if there is any, is that Osborne has seen fit to freeze the tax at £18.08 and not increase it to the originally planned £30.00 by 2020. How long that will last before the decision is reversed or a new tax is formulated remains to be seen.

At the last count there were 8 direct taxes on the cost of energy to UK business customers:

  1. The Carbon Floor Price
  2. Renewables Obligation
  3. Contracts for Difference
  4. Energy Companies Obligation
  5. Feed In Tariff
  6. Higher Distribution Cost Levy
  7. Climate Change Levy
  8. VAT

In total it is estimated that these taxes make up 23% of the retail cost of gas and 30% of the retail cost of electricity.

It is no surprise therefore that the retail price has failed to keep pace with the falls in the wholesale market since Autumn 2014.

Al Gore got the phrase right: “An inconvenient truth”.