Carbon Price Support CPS

The Carbon Price Support (CPS) mechanism was introduced to encourage transitioning to a low-carbon economy by making high-emission power generation (specifically coal) less economically viable, thus shifting costs from the public to producers.

It is a tax rate that is applied to fossil fuels (coal, gas, LPG) used by power generators, forming part of the Climate Change Levy (CCL). Introduced in 2013 on fossil fuels used to generate electricity in Great Britain, (but not Northern Ireland, which has a different market mechanism) it is designed to create a minimum price for carbon emissions. The scheme aimed to make coal-fired generation more expensive than cleaner alternatives, and helped to successfully accelerated the phase-out of coal in the UK.

Since 2016, the rate has been frozen at £18 per tonne of carbon dioxide equivalent (tCO2e) and it acts as a top-up to the UK Emissions Trading Scheme (UK ETS), often resulting in higher wholesale electricity prices whilst trying to limit the impact on consumer energy bills. The UKs share of coal in electricity generation went from 40% in 2012 to under 1% by 2024, in many respects due to the CPS as well as other policies. CPS is in some ways more complex because it can raise electricity prices also for industry, including Energy Intensive Industries, thus the government provides compensation for those deemed at risk of carbon leakage. This means industries that might relocate to pay lesser carbon tax and import into the UK, ie the carbon produced abroad would be a form of carbon leakage.

So the aim is to reduce polluting industries by increasing prices, but in effect giving certain industries a discount to prevent them moving abroad and continuing to pollute and effectively shift the emission elsewhere. The scheme that deals with these issues for energy intensive industries such as aluminium, cement, fertiliser, hydrogen, iron and steel is called the Carbon Border Adjustment Mechanism CBAM.

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