The Carbon Briefing: Do the UK’s green taxes make its industry uncompetitive?
- 24 Jul 2012, 14:00
- Ros Donald
The
Spectator and
Sunday Telegraph have both run pieces claiming that the UK's
environmental taxes are harming our industries' chances of
competing internationally. They're quoting a
report the Department of Business Industry and Skills
(BIS) released last week suggesting that UK energy intensive
industries will pay more for electricity than their counterparts in
other countries, mostly due to the government's green policies. The
study has added weight to energy intensives' complaints that they
are being pushed abroad by punitive green costs in the UK - but is
this the whole story?
The report, carried out for the government by consultancy ICF International compared the
steel, cement, chemicals and aluminium industries in 11 countries -
of which most have renewables policies. And it found that UK-based
energy intensives will pay up to double what European counterparts
pay for electricity by 2020.
Energy intensive industries in the UK have been lobbying for
relief from environmental taxes. Head of Tata Steel's European
division, Karl-Ulrich Kohler recently said the UK's "over the top"
climate change policies
put at risk its planned £1.2bn investment, and the company
blamed green policies for its decision to cut 1,500 jobs in the UK
last year.
Why do other countries pay less?
The results look pretty startling, although it's worth pointing
out the study looks at the top end of predictions. But why is the
gap so big?
It's certainly not because the UK is the only one pursuing
environmental policies. As the study notes, all European countries
must buy carbon credits under the European Trading Scheme (ETS),
and other European countries have plenty of green policies in
place. Outside Europe, the governments in China and India, for
example, are steadily increasing energy taxes. If you fancy reading
more, the
OECD has compared countries' environmental policies.
The main reason that competing countries have lower electricity
costs, especially in the EU, is that they offer substantial relief
to energy intensive industry in the form of tax breaks and
reimbursement, the report says.
For example, in Germany, industrial producers of materials
including glass, ceramics, cement and fertilisers may all currently
claim full reimbursement for Germany's eco tax, which amounts to 15
euros per kilowatt hour.
What could be the impact of proposed relief for UK
industries?
The chancellor, George Osborne, proposed that UK industries should
receive similar support in his 2011
autumn statement. Beginning in 2013, the government plans to
create a £250 million compensation package for industry affected by
the EU Emissions Trading Scheme (ETS) and the carbon price floor to
ensure it "remains competitive". BIS has just
closed a consultation on the measure.
It's hard to know what this will cover, although preliminary
reports suggest £100 million of the money will be given to soften
the impact of the proposed
carbon price floor - which is designed to ensure a steady
charge on carbon emissions even if carbon trading prices fall. It's
unpopular with pretty much everyone, from politicians to
green and
consumer groups. The price floor only applies in the UK, and
home-grown industry will have to pay for it on top of the ETS
payments, so relief in this area could tackle a significant extra
cost.
There is one area where UK industries may not receive extra help,
and that's with charges designed to support renewable generation
such as
feed-in tariffs - where BIS says UK industry has to pay
"relatively high incremental policy costs". In Germany and Japan,
however, feed-in tariffs are much lower for energy
intensives.
The
Confederation of British Industry said the report shows the
government's proposed relief for energy intensives "won't go far
enough". It's difficult to know whether they're right, though,
given that there hasn't been much more detail about the relief
since it was announced.
It's not all about tax breaks, though
There are two other important exceptions to the report's
calculations that would lead to a different outcome if they were
included. The analysis doesn't include industrial plants with their
own electricity source (although if such a plant were to generate
its own electricity from coal, it is likely to find its prices are
even higher, as
Rio Tinto did last year - which it says led to the closure of
its Lynemouth aluminium plant). And the report also points out that
industrial players are able to negotiate their electricity price -
as DECC points out
here. It hasn't factored this into its modelling,
however.
Finally, the report shows that the UK's low carbon policies are
steadily pushing electricity prices down, as you can see on the
graph. According to the modelling, increased renewable generation
will reduce wholesale electricity prices paid by industry by around
£4 in the UK by 2020. BIS factored this effect into its calculation
of electricity prices but didn't model it in other countries. It
would be interesting to compare the UK's price reduction with that
in other countries with greater renewables capacity.
The picture's still unclear
The CBI argues that the UK's heavy industry will need to be
involved in decarbonising the UK economy, by making the products -
like wind turbines - that can help us to get there. If you agree
with that statement, it's important to find ways - as other
countries have - of ensuring big energy users don't find themselves
at a disadvantage in comparison to their overseas
competitors.
The BIS study has prompted a wave of press and business comment
warning that the UK's heavy industry could be driven away by
punitive energy costs. Yet while these fears appear founded in some
cases, declaring the
end of British manufacturing seems a bit premature. It's clear
other countries have been quicker off the mark in protecting their
industries. But with similar measures not yet in place in the UK,
and some uncertainty over how they will work, it's not yet possible
to use the BIS report to compare like with like.