Budget special: CRC faces axe as carbon price rises

A failure to secure further savings for businesses in administrating the Carbon Reduction Commitment Energy Efficiency (CRC) scheme will see it replaced by an alternative environmental tax, the chancellor announced in his third Budget

Describing the CRC as cumbersome, bureaucratic and an unnecessary cost on business, George Osborne said he would bring forward proposals in the autumn for a new tax should significant administrative savings fail to materialise following another review (see below).

Although industry bodies welcomed the decision to attempt to further simplify the CRC, most want the scheme scrapped. Gareth Stace, head of climate and environment at the EEF, said: “We believe the CRC should be abolished. It is costly and no amount of tinkering with it will ever make it work.”

LexisPSL’s Malcolm Dowden said that the decision to persist with simplification efforts rather than immediately scrapping the CRC was largely driven by the time and costs already incurred by business in gearing up for compliance, and a reluctance to forgo the immediate revenue from the sale of allowances for 2012/13, which the chancellor confirmed at £12 per tonne of carbon dioxide.

Steve Elliot, chief executive at the Chemical Industries Association, is concerned that a new environmental tax will impose further costs on business. “It will be important to ensure that any replacement does not increase costs for energy-intensive industries that already face increased energy costs.”

But Martin Baxter, policy director at IEMA, fears that any change could derail action to cut emissions. “The government must ensure that the CRC or any replacement continues to deliver significant carbon reductions,” he commented.

Meanwhile, the cost of complying with the carbon price floor (CPF), which begins in April 2013, will now be more expensive. Energy firms will pay £9.55 per tonne of CO₂ in April 2014, a significant increase from the previously announced 2014/15 rate of £7.28. The change is largely due to the plummeting price of EU emissions trading scheme (ETS) allowances.

Last year, the chancellor set the carbon price floor at £16 per tonne, rising to £30 by 2020. Power companies pay the difference between the cost of ETS allowances and the CPF, so the lower the price of EU permits the more they will have to spend. Generators will pay £4.94 per tonne of CO₂ from next April and £9.55 the year after.

The higher rate will push industrial electricity prices up a further 6%–7% and increase Treasury revenue from the CPF by £1.4 billion.

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