INSIGHT: UK carbon floor price proposals drive business mad

02 August 2011 17:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The UK chemical industry reacted angrily last week to the latest analysis of the impact of government carbon policies on energy costs.

Large energy users see their future cost competitiveness under threat, particularly in relation to their counterparts in the rest of Europe.

Chemical companies say they are burdened with some of the highest energy – gas and electricity – prices in Europe. But they can expect to see those costs rise significantly within 10 years if current government low-carbon proposals are enacted.

The Department of Energy and Climate Change (DECC) suggested on 29 July that electricity prices could rise by 52% – without taking inflation into account – by 2020. The industry, and other energy intensive users, believe the actual rise, given current government policies, could be closer to 100%, according to the UK Chemical Industries Association (CIA).

Producers of chemicals, cement, paper and steel have joined forces to protest about a series of proposals which, designed to stimulate a low-carbon economy, are likely to lead to significant energy price increases. But they reserve most of their ire for the planned carbon price floor mechanism designed to guarantee the cost of carbon dioxide.

Carbon prices have languished since the establishment of the EU’s Emissions Trading System (ETS). And as the ETS moves towards its third phase – with additional burdens on high-volume chemicals makers – it appears to be particularly ineffective.

The low price of carbon – around €12/tonne at the beginning of August, according to ICIS – is not seen as sufficient to attract investors in low-carbon technologies or to persuade carbon emitters from polluting.

EU carbon prices

Waiting for the ETS to work effectively is an option, but Britain's coalition government has proposed the establishment of a carbon price floor in the UK to attract low carbon investment and to make the (carbon) polluter pay even more.

The carbon floor price is just one of a number of policies that are designed to drive investment in new low-carbon technologies. The burden on older, traditional manufacturing, however, is likely to be severe.

The DECC analysis is based on a carbon price floor of £30/tonne (€34/tonne) in 2020 and £70/tonne in real 2009 prices.

“I remain dismayed that the government should want to proudly pursue implementation of policies that will result in an increase [in electricity prices] of such magnitude,” CIA chief executive Steve Elliott said in reaction to the DECC report.

“Comparing the impact with many competitor businesses in other countries, I can just imagine how they will be rubbing their hands in anticipation,” he added.

“It’s time we recognised the true policy cost comparisons with other countries where greater relief is on offer. Chemical businesses are ready and willing to work with government on getting this right for our country.”

The chemical industry sees itself as a great facilitator in the move towards a low-carbon economy. Its companies can provide materials for insulation, lightweight components for vehicles and battery parts.

But large parts of the industry have to rely on energy-intensive processes to make products as diverse as fertilizers and chlorine.

INEOS’s Jim Ratcliffe voiced his strong opposition to the carbon floor price proposal when it was first revealed earlier this year. He has suggested before that government environmental policies threaten the existence of the firm’s important chlor-alkali production facilities at Runcorn in northwest England.

The chemical industry says it welcomes the acknowledgement by DECC that the impact of the government’s proposals could be severe, but believes the severity has been understated.

Significant measures are needed to mitigate these impacts, it says.

The CIA is also concerned about the way the department’s analysis is presented. 

“The key concern for DECC should be the absolute level of unrelieved policy costs in competing production locations, rather than impacts relative to questionable wholesale electricity price trends,” it says. “The UK is the only EU country to impose a carbon floor price.”

For more on EU carbon and electricity prices, visit ICIS Heren

By: Nigel Davis
+44 20 8652 3214

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