The UK energy market is increasingly concerned about potential changes to the government's Carbon Price Support mechanism, expected in the Chancellor's Autumn Statement next week.
The government introduced the CPS in 2013 to support a weak European carbon price, penalize coal-fired production and give less carbon-intensive generation a competitive edge.
The tax is currently capped at GBP18/mt ($22.40) of carbon dioxide from 2016-17 to 2019-20, after a step by step increase from GBP4.94/mt in 2013 to GBP9.55/mt in 2014 and GBP18.08/mt in 2015.
The national mechanism has boosted UK wholesale power prices, while prices have fallen on the Continent, provoking calls from some UK manufacturers for the tax to be scrapped or cut.
The electricity industry and environmentalists, meanwhile, are largely united in backing the tax.
"I've heard different opinions. Utilities have urged the government to keep the carbon price floor. Of course, they have invested a lot in renewables and would like to see their investment returning," one senior market analyst said.
Also, "pressure to scrap the CPS reflects the worst of short-termism," said Micheal Grubb, Professor of International Energy and Climate Change Policy at the UCL Institute for Sustainable Resources.
"The government could not afford the loss of revenues and damage to its credibility, and investment would be deterred by yet another sign of instability," Grubb said. "Scrapping it now risks undermining crucial energy investment."
Traders have even considered an immediate cut in the rates starting from April 2017, which following the government's commitment to shift away from coal by 2025 could hurt market sentiment and spur further uncertainty.
The UK Treasury department, however, remained tight-lipped about the carbon floor price, declining to comment on the contents of the Autumn Statement scheduled for November 23.
Coal-to-biomass generator Drax, in a report on Monday, highlighted the "crucial role that policy levers like the carbon price floor play" -- a key reason for the sharp drop in coal-fired power generation.
Earlier this month, UK-based not-for-profit climate group Sandbag in a letter to the new Chancellor of the Exchequer Philip Hammond called for a freeze in the carbon price support post-2020 to same levels as now.
"It is clear that if the Chancellor ditches the carbon price support, then coal generation will rise back up again, undoing the good work done so far," Sandbag said in a report.
