The UK government has awarded compensation for 2016 indirect costs relating to the European Union (EU) Emissions Trading System (ETS) and the UK’s Carbon Price Support (CPS) mechanism to 56 companies in an effort to shield them from carbon leakage risks.
Under the framework of its Electricity Market Reform, the UK government previously introduced a tax, which is levied on high-carbon fuels used to produce electricity (for instance oil, gas, coal), and commonly referred to as the "carbon price floor". It is aimed at incentivising and supporting low-carbon electricity generation, thereby multiplying the price signal provided by the EU ETS carbon allowance. However, the government acknowledges that carbon pricing through the ETS and the CPS mechanisms will have a knock-on effect on the wholesale electricity price and lead to an increase in retail electricity prices in the short to medium term. Rising electricity costs can threaten the competitiveness of these companies.
As a result, the government compensates the electricity intensive industries whose competitiveness may be most at risk to help offset the indirect
cost of the ETS, in line with the European Commission’s guidelines.
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