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.

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