Chancellor freezes carbon price until 2020

19th March 2014

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David Rushton

George Osborne has capped the price of carbon and pledged to cut manufacturers' energy costs by £7 billion in a Budget that "undermines" climate change policies, warns IEMA

In his 2014 Budget, the chancellor has announced that the carbon price floor (CPF) will remain at the 2016/17 price of £18 per tonne of CO2 until 2019/20 and that energy-intensive industries (EIIs) will be further compensated for increases in energy costs due to climate change policies. The CPF had been set to rise to £30 per tonne in 2020.

In his speech to parliament, Osborne confirmed that the government aimed to reduce energy costs for the UK’s manufacturing sector by a total of £7 billion by 2018/19.

“We’ve got to support our manufacturers if we want to see more growth in our regions. US industrial energy prices are half those in Britain. We need to cut our energy costs,” he argued.

While claiming that savings would be achieved by investment in nuclear power, renewables, shale gas and energy efficiency, the bulk of the measures the chancellor announced centered on offsetting the costs of climate change policies.

Osborne announced that electricity generated by combined heat and power plants will be exempt from the CFP. He also confirmed that the government is to extend its scheme compensating EIIs for higher energy costs caused by the introduction of contracts for difference for an additional four years until 2019/20. A second scheme, worth an estimated £1 billion to the manufacturing sector, is to be introduced from 2016/17 and will compensate firms for increases in bills caused by the Renewables Obligation and the feed-in tariff.

“Our steelmakers, chemical plants, paper mills and other heavy energy users make up 35% of our manufacturing exports and employ half a million people. This scheme helps the companies most at risk of leaving to remain in the UK,” Osborne told parliament.

He claimed without these support measures that “green levies and taxes” would account for more than one-third of company’s energy bills by 2020.

The Treasury calculates that the package of measures announced by the chancellor will, in 2018/19, save a medium-sized manufacturer £50,000, while an heavy industrial company will save around £800,000 and the average EII £6.25 million.

However, IEMA criticised the budget, arguing that it undermines the government’s approach to tackling climate change.

“Companies that have invested based on the government’s long-term price signal will be unfairly penalised,” commented Martin Baxter, IEMA’s executive director of policy. “Long-term certainty is vital for business to secure investment in measures such as low-carbon technology and energy efficiency.

“By freezing the carbon floor price, the government risks failing to achieve its climate change policy objectives, or shifting the additional effort that will be required to other sectors of the economy.”

Baxter argued that where there was a genuine concern over the impact of carbon taxes on EII’s competitiveness, government should use carbon tax receipts to support targeted low-carbon and energy efficiency investments.

However, the CBI welcomed the measures, stating that climate change policies needed to be driven at the European level.

“Our energy intensive industries are crucial to building a low-carbon economy and it's right the government is taking action to mitigate the cost for these firms,” said John Cridland, director general of the CBI. “We now need to see action from ministers to secure an ambitious EU-wide 2030 emissions reductions target to drive investment in our low-carbon future.”

Alongside supporting energy intensive sectors, the 2014 Budget included measures aimed at boosting fossil fuel extraction, with Osborne telling MPs the tax regime would be reviewed to ensure the UK can extract “every drop of oil we can” from the North Sea.

The chancellor also cancelled the planned September rise in fuel duty and confirmed that the government will reform air passenger duty to ensure cheaper long-haul flights from 2015.

On a more positive note, the Budget saw an extra £140 million set aside for the repair and maintenance of damaged flood defences, though this only puts investment back to the level the government inherited from the former administration in 2010. Also, financial support for the development of carbon capture and storage technologies will increase by £60 million, said Osborne.

The Budget confirmed that the main climate change levy rate and the landfill tax rates are to increase in line with inflation from 1 April 2015.

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