Green measures: Carbon price goes up to fund renewables

Two long-awaited steps towards Britain becoming a low-carbon economy were announced by Mr Osborne: the creation of a Green Investment Bank (GIB) and the establishment of a "floor price" for carbon.

Neither received an unmodified welcome, but most analysts think the measures are necessary if Britain is to undergo the sort of green-energy revolution which all parties have endorsed.

The objective is to replace the power stations burning coal, gas and oil – which contribute to climate change through their carbon-dioxide emissions – with renewable energy systems such as wind, solar, wave and tidal power, and also – although Mr Osborne did not mention it, perhaps because of the ongoing Japanese crisis – nuclear.

These new projects are immensely expensive, and the returns, if any, take a long time to come in. For example, a nuclear power station can take 10 years to construct. So investors are reluctant – and a little helping hand, the Government feels, is needed here and there.

Putting a floor under the carbon price means British utilities burning fossil fuels will pay a fixed sum for permits to emit CO2 under the EU's Emissions Trading Scheme (ETS). That price cannot fall now even if the market price goes down. The point is simply to make carbon-based energy more expensive, so that low-carbon systems, from wind power to nuclear, become competitive.

The current market price in the ETS is £14 per ton of carbon; Mr Osborne announced that Britain's floor price will start at £16 a ton in 2013, rising to £30by 2020. That could increase energy prices by up to 16 per cent by 2020 if the utility companies pass the costs directly on to the consumer, according to figures released yesterday by the environmental consultancy WSP.

But no one ever said the low-carbon revolution was going to be cheap.

The vast sums needed to fund this will in part be provided by the new GIB, which Mr Osborne said yesterday will open its doors for business in 2012, when it will have £3bn to play with.

That might sound a lot, but it is peanuts compared with the sum eventually required – £450bn. Greenpeace said yesterday – reflecting a major moan of environmental campaigners – that for four years the bank will not be allowed to raise further sums by borrowing. This is because of the Treasury's reluctance to allow any more borrowing onto the Government books.

Watch out too for where the new GIB is sited – it will be a prestige project and many towns and cities would like it and the jobs it will bring. Edinburgh is one leading possibility.