Britain's plan to introduce a price floor for carbon emissions permits could send carbon prices soaring, say analysts.
The government announced plans last month to introduce a floor for EU permits of £16 per tonne from April 2013, rising to £30 per tonne by 2020.
The carbon price could be pushed to £48 per tonne by 2020 due to tax rates and harm UK businesses, analysts at Thomson Reuters company Point Carbon said.
"Firstly, the price floors are inflated into future prices, making them higher," they said in a statement.
"Secondly, the expected carbon price is set two years ahead of the time of tax, meaning that intervening increases in the carbon price are not taken into account."
The price floor is intended to incentivise investment in low-carbon technology and will be levied from 2013 on UK firms operating under the EU's Emissions Trading Scheme, which caps the emissions of heavy industry.
The move could cut emissions from UK power generators by 67 million tonnes, or 5.3 per cent of total UK power and heat emissions, from 2013 to 2020, according to Point Carbon.
The way the floor is currently being represented is misleading due to the method used to calculate the tax rate, the analysts said.
The cost of a tonne of carbon bought in the UK could rise to £48 a tonne by 2020, while the rest of the EU ETS would see a price of £32.
The level of tax to be applied in any given financial year is based on the UK target carbon price floor of that year and the expected price of carbon for that year, and the difference between the two will be the tax.
UK businesses will also be faced with additional costs of £9.3bn due to the carbon tax.
"This carbon tax will indeed change the composition of the UK's power stack, making UK utilities greener," said analyst Sebastian Mankowski.
"However, this tax also represents an additional £9.3bn burden on UK business not faced by other European companies, impacting UK competitiveness as UK businesses will face higher power prices."
The floor would increase prices of both natural gas and power and could create additional incentives for energy efficiency, Barclays Capital said.
"Whether this enough to actually drive a higher uptake of energy efficiency measures is a question, as the barriers to uptake are numerous and not usually focused on variable, but capital costs," said BarCap analyst Trevor Sikorski.