France to Impose a Carbon Tax on Power Plants Starting 2017

UMM update

According to the French Ministry of Energy, France will levy a carbon tax on electricity production starting 1 January 2017. By the end of this year, the ministry is expected to unveil details about the new tax.

There are still uncertainties on the level of the new carbon tax. According to preliminary statements from the authorities, a high tax is intended (30 €/t has been mentioned). Still, with nothing yet decided, we assume a level of about 20 €/t. Note that this is to be paid additionally to the existing EUA price.

The emissions from the French power sector are rather low (28 Mt CO2 from public power and heat in 2014). We expect minor changes in French thermal power and in its fuel mix. Both are insignificantly influenced by the carbon tax. Therefore, the fundamental price impact on EU ETS should be negligible.

Looking at the French forward power market, we see that most of the French public thermal power generation is gas-fired (22 TWh in 2015). Coal-fired power generation is much lower in France, as the coal plant capacity has been nearly halved the last couple of years due to the Large Combustion Directive (8 TWh in 2015).

Expecting a carbon tax of 20 €/t, entails an increase of the SRMC coal 2017 relevant for France from 25 €/t to approx. 43 €/t, and an increase of the SRMC gas 2017 relevant for France from 36 €/t to approx. 44 €/t. This will impact the power flow between France and the Benelux, although these countries may also levy carbon taxes themselves in the future. Towards the UK the flow will probably remain unchanged due to the large price differences, while we will see marginally more net exports from Germany and Switzerland to France.

It is first and foremost the winter prices we expect to see altered due to the carbon price floor, as gas-fired power generation is the price-setting source in France during winter time.