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France to Impose Carbon Tax Only on Coal Plants

March 25, 2016

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The core French Cal 17 baseload contract dropped more than Eur2 day on day Monday after a much-awaited report by a French government-commissioned task force pressed for the introduction of a new carbon tax as of January 1, 2017, only for coal-fired power stations, as opposed to both gas and coal units, due to security of supply concerns.


Cal 17 baseload was last seen trading on Monday at Eur31.30/MWh, down Eur2.25 from the previous close on the publication of the carbon price report by former development minister Pascal Canfin, economist Alain Grandjean and Engie CEO Gerard Mestrallet.

Cal 18 base was seen trading down Eur1.65 from the previous assessment at Eur31.50/MWh.

"The drop was instant ... [due to it being] a tax on coal-fired generation instead of a carbon floor for all thermal generation," a French trader said.

"Coal units would have to factor in the Eur30/t CO2 tax (or whatever else the price will be), while gas units would remain emitting at EUAs prices or the indicative Eur11/t suggested in the report," he said.

The possibility of the tax increasing over time provided support to the Cal 18, which has not yet erased all the gains it made on previous political statements regarding the introduction of the French carbon price floor.

While the scope changed compared with market expectations, the timeline remained the same, French energy minister Segolene Royal said in a statement Monday.

"As announced by the President of the Republic at the environmental conference [March 25], a carbon floor price will be set up on 1 January 2017 on the French electricity sector: the mission proposes that the floor price is focused on coal plants, so that the environmental gain is significant while preserving the security of the power system," Royal said.

REPORT AGAINST TAX FOR BOTH GAS AND COAL

Royal asked the three authors in March to make proposals for a national measure to accelerate the phasing out of coal in France, through the introduction of a carbon price floor on the electricity market to promote gas over coal-fired generation.

"One of the main objectives sought by the introduction of a floor price on the power sector nationally is to reduce emissions of greenhouse gases by substituting coal with gas in power generation," the report said.

Royal was subsequently quoted in the press saying the carbon price floor would apply to the power sector, and would be set at Eur30/mt of CO2.

However, the Canfin-Grandjean-Mestrallet mission examined in depth the previously anticipated possibility of introducing a uniform top-up tax for the power sector and concluded it was not the strategy for France going forward due to the risk it poses to security of power supply.

It also said existing gas plants need to be kept operating for at least several more years in the context of growing renewables and a diminishing share of nuclear in the power mix.

The authors suggested instead two other solutions for "fast implementation" without expanding on the technicalities.

Royal, however, said she commissioned the ministry of finance to finalize the technical details of these measures by the end of July.

"Their initial findings are expected by end of July in order to include them in the next draft budget law," Royal said.

CARBON TAX FOR COAL GENERATION ONLY

The mission said France should either define a technical standard -- based on the CO2 emissions of power plants -- or impose a tax on coal plants.

The latter option could be done by increasing the existing tax on coal.

France currently has a customs tax for internal consumption of coal, lignite and coke (TICC). This tax applies to coal suppliers on deliveries they make to final consumers in France, or to the final consumer when it has itself produced or imported the coal it uses.

However, instead of increasing the existing coal tax, the report said, France could introduce a differentiated tax, the level of which would be determined by the thermal efficiency of the power plants.

The mechanics of the carbon tax floor applied to coal generation would be based on the UK model -- which initially envisaged the amount of tax being revised every two years, thus indicating the French carbon price for coal generation could also change over the years.

"Indeed, the French proposal is based on the system put in place in Britain: the Climate Change Levy-CCL," the report read.

SECURITY OF POWER SUPPLY CONCERNS

Meanwhile, the option that was dropped in the conclusions of the report -- the uniform tax -- would have applied to French power plants in addition to the price of quotas on the European carbon market, resulting in a total CO2 price for the power sector of Eur30/mt.

This would have resulted in a rise in wholesale power prices in France of 5-10% from the average in 2015, equivalent to Eur1.7-Eur3.2/MWh.

The uniform tax on both gas and coal generation would have lead to the closure of coal plants amid a lack of complementary measures, but would have also significantly weakened gas generation, reducing the operating hours of gas-fired plants to below 500 hours/year, according to calculations by the Canfin-Grandjean-Mestrallet mission.

A carbon cost of Eur30/t would result in a 70-90% decrease in the current operating hours of thermal plants and would mean some plants would be closed and others mothballed, the report said.

This measure, the three argued, would also increase the risk of power blackouts in France by 70%.

"This would put at risk the security of power supply of our country, because these [gas] plants are the most appropriate management tool for consumption peaks because of their flexibility," the report concluded.

"This flexibility is also an asset to integrate more renewable energy in the electricity mix. In addition, the gradual reduction of the share of nuclear in electricity production may require the maintenance of existing gas plants to a horizon of several years," the Canfin-Grandjean-Mestrallet report added.

The authors said they expected the national measure to have a "ripple effect" at European level, but the report added: "In the case of Germany, it appears that the probability of the development of a measure similar to that of France or Britain is low, at least in the short term, particularly because of the elections of 2017."

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