By Paul Homewood
Carbon pricing is pushing up energy prices, admits the Bank of England.
The Telegraph report:
Net zero policies are sharply driving up energy costs, the Bank of England has admitted, as officials battle to bring living costs back under control.
Sarah Breeden, the Bank’s deputy governor, said households and businesses were paying more for energy because of so-called carbon permits, which require power plants to pay for each tonne of carbon dioxide they emit.
These permits accounted for nearly half the cost of fuel bought by gas-fired power plants last year, Ms Breeden said, which was passed on to consumers.
Breeden’s full speech is here. In it, she says:
My final example relates to the role of climate mitigation policy in energy prices where there is now evidence that policies aimed at the climate transition were probably more important contributors to the recent rise and fall in inflation than we previously thought.
As Chart 3 shows, carbon prices rose materially in 2021 and 2022, peaking at around £100 per tonne of carbon dioxide (CO2) equivalent in the summer of 2022, a roughly 100% increase in price on the previous year. From 2021 onwards, the UK’s emissions trading scheme saw a reduction in the supply of carbon permits, a decreasing share of permits being given out for free, and an expansion of sectoral coverage (over the 2021 to 2030 period). This was around the same time as the increase in wholesale gas prices, which could also have contributed to this rise in carbon prices.
These carbon costs are non-trivial in the sectors most exposed to the scheme, like the power sector. In 2022, during the peak of energy price shock, the wholesale price of gas was the dominant driver of high electricity prices. In 2024, however, carbon costs which amounted to roughly 50% of the fuel costs for gas-fired electricity producers in the UK were a major driver of prices. Overall we might expect close to 100% of carbon costs naturally to be passed on in wholesale market prices.
Even in 2024, carbon costs amounted for half the fuel cost of a CCGT, in other words about £20/MWh.
As gas-fired power tends to set the wholesale price for electricity, the impact on consumer bills is magnified, with renewable generators making windfall profits on top of their subsidies.
Although carbon prices have fallen from their peak, it is understood that this is just a temporary adjustment.
The ESO, for instance, in their Clean Power 2030 report, states that the officially projected carbon prices in 2030 will be triple today’s.