Gareth Stace of the EEF argues the "green levy" review offers the perfect opportunity to axe a tax that is distorting markets and failing to deliver on environmental goals
By Gareth Stace, EEF
31 Oct 2013
Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics
Government policy remains deeply divorced from the rhetoric. Readers of BusinessGreen will have already formed a view of the current administration's progress in delivering its ambition to be the "greenest government ever". The pledge that we wouldn't go further than our European competitors is equally laughable. Indeed, Chris Huhne was right to level a charge of hypocrisy against George Osborne for singling out green taxes for inflating energy bills - Osborne has introduced the most perverse "green" tax of them all: the Carbon Price Floor.
The unilateral Carbon Price Floor is a very real threat to the competitiveness of UK manufacturers and will do little to further the government's aim of decarbonising our electricity supplies. Furthermore, it risks undermining the ability of manufacturers to invest and grow. In short we are disadvantaging ourselves without any net environmental benefits. Indeed, we risk weakening incentives across Europe by further depressing prices under the EU ETS.
It was introduced by government with the intention to provide investors in low carbon energy with an additional degree of certain. But EEF has consistently argued that the measure is an unnecessary addition to the support that will be provided by Contracts for Difference.
Treasury Ministers have stated that the Carbon Price Floor will help the UK innovate and invest in the low carbon sector. But the uncertainty over its future price makes it an ineffective way to incentivise low-carbon generation.
Furthermore, if government want us to move to a low carbon economy, with innovation at the heart of the transformation, then why is the R&D spend on energy and environment, as a proportion of total government R&D expenditure, way below the OECD average?
The justification that the Carbon Price Floor is required to provide certainty over the carbon price for investors in new nuclear is particularly flimsy. With no new nuclear likely to be built this decade, the price floor is simply generating windfall gains for existing operators - and the Treasury.
Given the pledge by Osborne that we would not go further than our competitors, the unilateral nature of the Carbon Price Floor smarts. The policy adds costs that aren't borne by other manufacturing operators with which we compete. As a result, we are deeply concerned that this will result in a less competitive UK manufacturing sector.
Embarrassingly, Energy Minister Michael Fallon agrees. In a recent piece in the Daily Telegraph, Fallon is quoted saying: "We shouldn't put British industry at a disadvantage against Europe and the US: for our manufacturers this would be assisted suicide." The piece cites a meeting with Fallon and business leaders in February where he called the Carbon Floor Price "a fairly absurd waste of your money"... before mistakenly stating that the policy had been inherited from Labour.
Let me clear. This is not an issue for energy-intensive companies which, once State Aid issues have been resolved, will benefit from the government's compensation package. This is an issue for mainstream manufacturers for whom rising electricity prices is becoming an increasing concern. Our analysis shows that the Carbon Floor Price, on its own, will increase electricity prices for medium-sized manufacturers by 10 per cent ahead of the next general election in 2015.
And the disparity between the floor price and the carbon price in Europe will remain for the rest of the decade with low EU ETS allowance prices. The current Carbon Floor Price trajectory will mean that as of 2015/16 UK electricity consumers will be paying more than six times as much per tonne of CO2 as our European competitors.
While it is true that today's manufacturing sector is highly innovative and few companies compete on price alone - being competitive on cost is still highly important for a sector which is being driven to export to the rest of the world because of stagnation in European markets.
As well as reducing a company's ability to grow, if firms' profits are being squeezed by an increase in costs that is not borne by their competitors it can make the difference between investing and not investing. Or the difference between investing in the UK or elsewhere.
The Prime Minister's announced review of green taxes presents the ideal time to plan for the Carbon Floor Price's demise.
Green taxes must to what they say on the tin. We need green taxes to be effective in driving desirable behaviours. We need the Treasury to be honest about what it is trying to achieve and set taxation to drive that objective with targeted interventions that support green growth. We need policies that send the right signals to the manufacturing sector to invest in cleaner factories within the UK for the long-term.
The focus on scrapping the Energy Company Obligation is a false flag and risks undermining one of the few policies that can target emission cuts where relatively cheap options still remain. It is the Carbon Floor Price that should be on the block.
Gareth Stace is head of climate and environment policy at manufacturers' association EEF
The unilateral Carbon Price Floor is a very real threat to the competitiveness of UK manufacturers and will do little to further the government's aim of decarbonising our electricity supplies. Furthermore, it risks undermining the ability of manufacturers to invest and grow. In short we are disadvantaging ourselves without any net environmental benefits. Indeed, we risk weakening incentives across Europe by further depressing prices under the EU ETS.
Treasury Ministers have stated that the Carbon Price Floor will help the UK innovate and invest in the low carbon sector. But the uncertainty over its future price makes it an ineffective way to incentivise low-carbon generation.
Furthermore, if government want us to move to a low carbon economy, with innovation at the heart of the transformation, then why is the R&D spend on energy and environment, as a proportion of total government R&D expenditure, way below the OECD average?
The justification that the Carbon Price Floor is required to provide certainty over the carbon price for investors in new nuclear is particularly flimsy. With no new nuclear likely to be built this decade, the price floor is simply generating windfall gains for existing operators - and the Treasury.
Given the pledge by Osborne that we would not go further than our competitors, the unilateral nature of the Carbon Price Floor smarts. The policy adds costs that aren't borne by other manufacturing operators with which we compete. As a result, we are deeply concerned that this will result in a less competitive UK manufacturing sector.
Embarrassingly, Energy Minister Michael Fallon agrees. In a recent piece in the Daily Telegraph, Fallon is quoted saying: "We shouldn't put British industry at a disadvantage against Europe and the US: for our manufacturers this would be assisted suicide." The piece cites a meeting with Fallon and business leaders in February where he called the Carbon Floor Price "a fairly absurd waste of your money"... before mistakenly stating that the policy had been inherited from Labour.
Let me clear. This is not an issue for energy-intensive companies which, once State Aid issues have been resolved, will benefit from the government's compensation package. This is an issue for mainstream manufacturers for whom rising electricity prices is becoming an increasing concern. Our analysis shows that the Carbon Floor Price, on its own, will increase electricity prices for medium-sized manufacturers by 10 per cent ahead of the next general election in 2015.
And the disparity between the floor price and the carbon price in Europe will remain for the rest of the decade with low EU ETS allowance prices. The current Carbon Floor Price trajectory will mean that as of 2015/16 UK electricity consumers will be paying more than six times as much per tonne of CO2 as our European competitors.
While it is true that today's manufacturing sector is highly innovative and few companies compete on price alone - being competitive on cost is still highly important for a sector which is being driven to export to the rest of the world because of stagnation in European markets.
As well as reducing a company's ability to grow, if firms' profits are being squeezed by an increase in costs that is not borne by their competitors it can make the difference between investing and not investing. Or the difference between investing in the UK or elsewhere.
The Prime Minister's announced review of green taxes presents the ideal time to plan for the Carbon Floor Price's demise.
Green taxes must to what they say on the tin. We need green taxes to be effective in driving desirable behaviours. We need the Treasury to be honest about what it is trying to achieve and set taxation to drive that objective with targeted interventions that support green growth. We need policies that send the right signals to the manufacturing sector to invest in cleaner factories within the UK for the long-term.
The focus on scrapping the Energy Company Obligation is a false flag and risks undermining one of the few policies that can target emission cuts where relatively cheap options still remain. It is the Carbon Floor Price that should be on the block.
Gareth Stace is head of climate and environment policy at manufacturers' association EEF
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