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Carbon Price Floor Threatens To Make UK Industries Uneconomical

Warnings to government are mounting across the process industries about its taxation policies, particularly its carbon price floor policy and tax hikes on the oil and gas sector. Ineos, for example, has informed the government that its chlorine plant in Runcorn could become uneconomical under the sudden introduction of the proposed carbon floor price.

The warning is just one of a series emerging from energy-intensive sectors of the process industries. Another to speak out has been Tata Steel, which is facing similar problems and is planning closures and a large number of redundancies.

The Carbon Budget obliges the UK to cut emissions by more than almost any other country in the world, putting prime minister David Cameron and his energy secretary Chris Huhne firmly in the spotlight. Legally binding targets for a 50% cut in greenhouse gas emissions (c/f 1990) by 2025 and an 80% reduction by 2050, will, they claim, put the UK at the forefront of the global low-carbon industry.

Meeting these targets will require huge investment in wind, solar and wave power, which are the most costly and, in the case of wind, unsightly of renewable energy options. It will also mean the UK removing fossil fuels from its energy mix more quickly than any other industrialised economy.

The problem with the Carbon Budget is that it fails to properly address the impact of these measures on energy costs and, most worryingly, the competitiveness of UK industry against counterparts in not-quite-so-low-carbon countries, such as India and China.

Concern is clearly greatest among energy-intensive industries, particularly chemicals, steel and paper. The Chemical Industries Association (CIA), for instance, estimates that the Carbon Budget could raise energy-related costs already the highest in Europe from 10% to more than 100% of profits for many companies.

Echoing the views of many across the process industries, Steve Elliott, CIA chief executive, believes that without effective transitional support measures, many industrial businesses will be wiped out.

“If the measures are half-hearted, manufacturing jobs and companies who are delivering low-carbon solutions will be ripped out of the industrial heartlands of the UK, with very little prospect of new businesses being attracted to invest,” Elliott warned.

The CBI, too, has voiced concern that UK energy and tax policies are putting too much cost pressure on energy-intensive sectors and undermining investor confidence in these industries.

Speaking to business leaders, politicians and energy suppliers at the CBI energy conference, director-general John Cridland noted that over the last 12 months the government has hit industry with the Carbon Reduction Commitment (CRC), Carbon Floor Price and the recent hike in oil and gas tax.

“At a time when rebalancing of the economy needs UK manufacturing to be playing a bigger role, energy-intensive industrial users need more help. But the Budget unilaterally increased their cost base,” said Cridland.

Meanwhile, as the CRC has seemingly changed from encouraging energy efficiency to becoming just a cost and a complex scheme the business group leader said: “The government should axe the CRC as it stands. If it wants a green tax, it should do the job properly.”

With regard to the carbon floor price, the CBI is concerned that even if the price of carbon in the EU ETS (Emissions Trading Scheme) rises, as is the case now, the carbon floor price will not necessarily fall correspondingly, and risks tipping energy-intensive industries over the edge.

“The CBI supports the carbon floor price in principle, but we have to see exemptions for those industries most at risk those very industries that are a critical part of our low-carbon economy,” said Cridland. “Therefore, we propose a rebate-based exemption linked to the energy-intensive industries’ work on energy efficiency.”

According to Cridland, heavy energy users want to do their bit and reduce their emissions, and many are already doing so. What they need, however, is help to use renewable heat, energy from waste and more of the innovations already out there.

Equally important, said the CBI leader, is the need to give the energy industry and investment community greater certainty. Action is needed to encourage investment and unblock the planning system, but Cridland remains to be convinced that this summer’s Energy White Paper will deliver.

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