Calls for carbon floor price exemption

5th August 2011

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Energy intensive industries need government support to counter the potentially crippling costs of government's carbon reduction polices, according to the CBI and the EEF.

Both industry bodies have this week published reports calling on the government to partially exempt companies in the steel, cement and glass manufacturing industries from the proposed carbon floor price (CFP), claiming that its introduction will leave these industries unable to compete globally.

According to figures from EEF, the CFP alone will cost the manufacturing sector £1.2 billion each year by 2020, damaging its ability to remain competitive and increasing the risk of “carbon leakage” – firms moving operations to countries with little or no carbon reduction commitments.

In a paper published today (5 August 2011), the CBI suggests the government introduces a rebate-based exemption from the CFP, while the EEF made proposals for direct compensation in its report on Monday (1 August).

Both bodies agree that a package of actions is needed to ensure the UK can reduce its carbon emissions while maintaining its manufacturing operations.

“The government is in serious danger of throwing out the baby with the bathwater if it continues to pile new costs onto industries that are responsible for hundreds of thousands of jobs and bring in £15 billion to the UK economy every year,” said Katja Hall, CBI chief policy director.

“Businesses accept that they must share the cost of moving to a low-carbon economy, but we simply cannot afford to price out this vital sector. The government must ensure its autumn energy strategy looks at ways of exempting companies most at risk from the carbon floor price, while encouraging them to be as energy efficient as possible and use new technology to reduce emissions further.

EEF director of policy, Steve Radley, said: “We have now reached a tipping point where the cumulative burden of UK climate change policy will make it uncompetitive for some sectors to invest and create jobs in the UK.

“The government must show that it recognises the impact of its combined policies on manufacturing by swiftly bringing forward measures to ensure these key sectors remain in the UK and continue to invest here.”

However, IEMA warned that if the government removes one of its key emission reduction mechanisms for a particular group of businesses, either those companies have to find a different way to secure carbon reductions or other parts of the economy will have to do more.

“The risk of carbon leakage is a real one that needs to be addressed. We need to ensure that, by exempting heavy industry from the CFP, we don’t simply shift that risk to other sectors of the economy,” said Martin Baxter, IEMA director of policy.

“If there’s a policy measure in place that is designed to achieve a certain environmental outcome then anyone coming up with an alternative, has to show what the environmental consequences of that policy change would be and where else that carbon reduction is going to come from.”

The CBI touches on this problem, but only to say that government must be careful that any action to lower the impact of the CFP does not “simply shift the tipping point for carbon leakage to other sectors by increasing costs for them too.”

Other suggested government actions from the CBI include:

  • helping large conglomerates to investigate the possibility of negotiating long-term energy contracts;
  • helping develop procurement standards for low-carbon energy-intensive products;
  • developing sector-specific guidance to help industry reduce carbon emissions; and
  • supporting uptake of combined heat and power technologies, carbon capture and storage and utilisation of waste heat

Meanwhile the EEF argued the government should:

  • make use of EU Emissions Trading Scheme rules to compensate sectors that are subject to energy generators passing on the costs of the scheme directly;
  • exempt heavy industry from any new additional costs, such as the feed-in tariff consumer levy; and
  • increase rate relief from the climate change levy to 90%

DECC responded to the papers agreeing that ensuring that energy-intensive industries remain competitive was an important consideration in policy to ensure reduced carbon emissions.

"Rising electricity costs pose a key risk to those energy intensive businesses whose international competitiveness is most affected by our energy and climate change policies and are critical to our growth agenda," said a spokesperson.

"That’s why, in addition to the measures set out by the chancellor in the last Budget, we will take steps to reduce the impact of government policy on the cost of electricity for these businesses. We’re currently working with industry on this and welcome the CBI’s contribution.”


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