INSIGHT: UK carbon floor price decision nears

18 November 2011 16:06  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The energy-intensive industries in the UK, the chemical industry among them, quite rightly are deeply concerned about the shifting sands of government policy.

Energy costs are already higher for UK manufacturers than for those producing elsewhere in Europe. Climate change policy-related energy cost increases have hit them hard and are likely to dent competitiveness further.

The latest proposals – for a carbon floor price – have drawn particular attention and on Friday were attacked as “industrial masochism” by lobbying group the TaxPayers' Alliance (TPA).

"Putting in place a carbon floor price that threatens major, successful British industries with huge rises in their costs is absolute madness at a time when we need the economy growing, and business bringing investment and jobs here,” the Alliance’s director Matthew Sinclair said.

Pressure has mounted on the UK government, which in under two weeks is expected to announce a decision on its carbon floor price proposals and exemptions.

For much of this year, big energy users such as the makers of steel and chemicals have voiced their concerns that underpinning the price of carbon – which has languished since the EU’s Emissions Trading System (ETS) was established – will cost them dear.

They would be forced to pay a great deal more for electricity and when they produce carbon dioxide pollution.

The Department of Energy and Climate Change (DECC) estimated in a document released at the end of July that electricity prices could rise by 52% by 2020 (without taking inflation into account), should the carbon floor price proposals be adopted. The UK Chemical Industries Association (CIA) said the increase would be closer to 100%. The DECC analysis was based on a carbon floor price of £30/tonne in 2020 and £70/tonne in real 2009 prices.

 “We have damaged ourselves in the UK by offering huge subsidies to expensive and unreliable renewable energy schemes, paid for by the consumer," CIA CEO Steve Elliott said in a speech on Thursday.

“The carbon price support scheme is the latest example, following feed-in tariffs, the Carbon Reduction Commitment, Renewable Obligation Certificates and the climate change levy, and the EU’s Emissions Trading System,” he added.

It is not surprising, then, that surveys show energy is the number one concern for UK chemical business leaders. The rise in costs threatens billions of pounds worth of investment across all industries and even the ability to keep major plants open, the TPA says.

The proposals are particularly galling for the chemical industry, which holds so many of the keys to a more sustainable industrial future. The sector is the country’s top manufacturing exporter, generating a positive trade balance of £30m a day, compared with a manufacturing industry deficit of £300m, the CIA says.

“We provide many of the low-carbon solutions such as insulation and more efficient solar panels,” said Elliott. "We are a sector the government cannot afford to put out of business through policies that make our sector unable to compete globally."

At a time of great economic uncertainty, it would be senseless to do such damage to major industries. There is the scent of industrial renaissance in the air in the UK and an enthusiasm in the chemical industry that has not been so widely apparent for years. Much of this has to do with the negative focus on the financial sector, which accounts for such a large proportion of the UK’s GDP. But the manufacturing industry, too, has been receiving much more positive public attention amid talk of rebalancing the economy.

The UK has climate change commitments and will have to work hard to meet them, but it also needs vibrant manufacturing and processing industries. However, the chemical industry is not confident that the Chancellor of the Exchequer’s autumn statement will signal that substantive measures can be adopted to help chemical and other energy-intensive industries.

By: Nigel Davis
+44 20 8652 3214

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