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UK offers big industry relief from carbon floor and EU ETS

29 Nov 2011 15:41:21

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The UK government is giving £250m (€293m) to energy-intensive industries to alleviate the indirect costs caused by the carbon price floor and the EU Emissions Trading System (ETS).

Pressure from a number of business lobby groups representing heavy industry (see EDEM 5 August 2011) has seen the UK government yield some ground on its carbon price floor plan launched in March.

The policy instrument is effectively a tax aimed at encouraging utilities to invest in low-carbon power generation infrastructure. The tax is due to take effect from April 2013.

The lobbies argued the new tax, part of the government's electricity market reform package, will lead to carbon leakage - the loss of energy-intensive businesses to overseas locations where carbon costs are lower - while the economic picture continues to deteriorate.

UK Chancellor for the Exchequer George Osborne announced on Tuesday that the UK government will provide £250m to help energy intensive users with costs arising from the EU ETS, carbon price floor and increase relief from the climate change levy (CCL) to 90%.

"I am worried about the combined impact of the green policies adopted not just in Britain, but also by the European Union, on some of our heavy, energy-intensive industries," Osborne said in the Chancellor's annual statement given to the Westminster parliament on Wednesday.

The package

The £250m rebate package - which will need to clear the hurdle of state aid rules first - will be doled out over the life of the existing parliament, which should end in 2015 if the coalition survives a full term.

Details about the breakdown are thin, although documents released by the Treasury show that £100m of the £250m is earmarked for dealing with the carbon price floor's impact on energy-intensive users.

The steel and metallurgical industries are most likely to benefit.

The proposed new tax will raise power generation costs considerably. The government is legislating to put in place an implied EU Allowance (EUA) floor price of €18.70 (£16.00)/tonne of CO2 equivalent in 2013 for the power sector. The implied floor price, to be charged as a tax once prices dip below the set minimum, will target a €35.05/tCO2e price by 2020.

The benchmark EUA was assessed at €8.00/tCO2e on Monday by ICIS Heren (see EDCM 28 November 2011), which shows the extent the tax could be used.

Recent trades on the UK wholesale electricity market on the far curve have suggested that some traders are betting the UK government will scrap the planned tax, although this is considered unlikely (see EDEM 25 November 2011). FOR

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