British electricity generators might have to purchase all their European Union Emissions Trading Scheme (ETS) allowances through an auction as part of government plans to boost low-carbon generation - including nuclear.
Chancellor of the exchequer Alistair Darling announced today: "If we want to encourage investment in low carbon technology in energy renewables and in nuclear, for example, and to make industry more carbon efficient we need to go further. So in the next phase, instead of auctioning 7%, I want to see auctioning of 100% of these allowances for energy generators."
Under the ETS, electricity generators - and companies in other major industrial sectors - have to submit emissions allowances for every tonne of carbon dioxide their plants emit. Currently the majority of those allowances are allocated to generators for free by government. Allocations are based on historic emissions, with coal-fired generation plants receiving many more allowances than gas-fired generators.
Only a small proportion of the allowances have to be purchased in the emissions allowance trading market or from the 7% of allowances that are currently auctioned by government.
However, from 2012 Darling wants to stop allocating free allowances to generators, with the generators' share of the emissions allowances being sold by through an auction process. Fossil fuel generators will therefore have to pay for every single tonne of carbon dioxide their plants emit.
Generators have already been criticised for passing on the 'opportunity cost' of emissions allowances to customers. The firms have opposed calls for a 'windfall tax' on these extraordinary earnings, claiming that this would reduce investment in lower-carbon technologies.
Nuclear generators do not receive an allocation of allowances, but neither are they required to submit allowances as their plant do not emit greenhouse gases, although some nuclear power plants have to submit allowances for their back-up diesel generators.