Carbon Price Floor: No Floor Without A Ceiling

Carl Jackson outlines how a Green Tax could disadvantage the UK economy.

Soaring bills, mis-selling scandals and a seemingly interminable winter have made energy policy a hot topic these days. Power companies have joined banks on the list of industries we love to hate. The Government, though, deserves praise for getting plenty of tough decisions right.

It has cut ludicrously high renewables subsidies and pressed ahead with the next generation of nuclear power stations.  On fracking, it has ignored the “earthquake” hysteria, listened to the evidence and lifted the ban.  For consumers, simpler tariffs are on the way.

I hope the Government’s new carbon price floor will be added to the list of success stories, but right now the jury is out.  In force since 1 April, it aims to boost investment in low carbon technology.  However, because it applies only in Britain, the carbon price floor could drive jobs into the hands of our European competitors.  To stop this happening, we should exempt vitally important energy-intensive industries from the impact of this Green tax.

So, what is the carbon price floor and how will it work?

Under the EU’s Emissions Trading Scheme, businesses which produce high carbon emissions must purchase ‘European Union Allowances’ – essentially permits to emit carbon.  The more a business emits, the more permits it must buy.  Around 11,000 businesses across Europe are affected.

Britain’s carbon price floor works by charging businesses a top-up tax if the EU carbon price falls below a minimum level – £16/tonne this year. So if the carbon price is higher than £16, UK businesses pay no extra tax.  However, if prices fall to, say, £10 then they will pay £10/tonne for the permit plus an extra £6/tonne in tax to make up the difference. The lower the price of carbon, the more tax British carbon emitters must pay in comparison to their European competitors.

The Government says the carbon price floor will provide certainty for investors in low carbon technology.  That is a worthy aim, and should bring economic benefits.  What is open to question, however, is whether those benefits will outweigh the cost to some of our biggest employers and the wider economy.

Between them UK energy intensive industries – like steel, cement and ceramics – employ 600,000 workers and contribute £50 billion a year to the economy.  For them, energy is always a major expense and sometimes a majority of their costs.  Yet government figures predict they could see electricity costs rise by 52% by 2020 as a result of Green taxes like the carbon price floor.

This would be serious in any event, but what makes the price floor a gamble is that Britain is going it alone. On a whole raft of energy policies, Britain is bound by EU rules that apply to all 27 Member States.  The carbon price floor, though, ID-100136038goes above and beyond the call of duty.  If carbon prices stay below £16/tonne (which they seem certain to do for the foreseeable future) then the carbon price floor will be a tax that British businesses pay and their European rivals avoid.

From now on, being based in Britain could cost energy-intensive industries hundreds of millions of pounds a year more than if they upped sticks and moved across the Channel.  There are signs this is already happening.  Britain’s aluminium industry has been all but eliminated by plant closures in Anglesey and Northumberland – both a response to high energy prices.

To add insult to injury, the floor price is unlikely to reduce carbon emissions. These are capped at the EU-wide level, so if British businesses use fewer carbon permits, their rivals in other EU countries will be free to snap them up at rock bottom prices.  Every tonne of carbon priced out of Britain will be emitted more cheaply elsewhere. The emissions will not be reduced; just outsourced.

To its credit, the Government recognises that the price floor will have a disproportionate impact on energy-intensive industries.  Last year it promised a £250 million support package to ease the pain, but will this be enough?  Germany – often hailed by environmentalists as an example for Britain to follow – gives its energy-intensive industry a £9 billion exemption from the Green taxes paid by most other businesses. We should follow this example.

The Government expects to raise over £4 billion from the carbon price floor in the next three years.  It should use this revenue to help our vitally important heavy industry, or risk losing it altogether. As the Chancellor rightly told the 2011 Conservative Party conference, “We are not going to save the planet by putting our country out of business.”

Carl Jackson is a qualified solicitor and policy adviser to a Conservative MP. His main political interests are economics, Europe, energy policy and civil liberties. He tweets as @HenryVIIswallet

1 COMMENT

  1. I oppose all green subsidies as I think renewable tech should compete on a level playing field and government should stay out, but to be fair you are right the government is doing some good things. What you don’t mention is that the minimum carbon price is only £16 per tonne this year it will be £30 a tonne by 2020.

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