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UK urged to tighten payoffs for carbon policies

04 Jan 2013 17:18:03 | edcm

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The UK government's £250m scheme designed to alleviate energy-intensive industries' indirect costs caused by the carbon price floor and the EU emissions trading system (ETS) must be tightened to avoid over-compensating players already profiting from a surplus of free EU allowances (EUAs), parliament's environmental audit committee warned on Friday in a report.

"The government... shouldn't throw good money after bad by giving compensation to those already making windfall profits from the emissions trading system when allowances were allocated free of charge," said politician Joan Walley, chair of the committee.

The proposal, announced in 2011 (see EDCM 29 November 2011), and due to enter into force from 2013 after a public consultation, is designed to help energy-intensive sectors such as iron, steel, chemicals and cement offset increases in electricity prices because of the UK's carbon floor price initiative.

From April 2013, the carbon floor price will act as a top-up tax whereby power generators must pay at least £16/tonne CO2 equivalent (tCO2e) for emissions, rising to £30/tCO2e in 2020 (see EDCM 21 March 2012).

The committee labelled "nonsensical" the proposed compensation to companies for the impact of the carbon price floor when at the same time they are making windfall profits from surplus free EUAs.

According to government data quoted in the report, 34% more free EUAs were allocated to the UK's energy-intensive industries in the period 2008-2010 compared with their actual emissions, and this surplus would remain "significant" up to 2020.

London-based campaign group Sandbag estimated the 10 companies with the largest surplus of EUAs have about 240m of the credits available to be carried over to phase III (2013-2020). The value of this surplus is estimated at €4.1bn.

The committee said this surplus must be factored in: "The government must restrict the compensation payable for those companies who have financially benefited from the EU ETS by selling surplus European Union allowances, by reducing the compensation payable by the same amount."

The proposal

According to the UK scheme to aid energy-intensive users, passed after strong industry lobbying, eligible companies can claim a rebate for a proportion of costs because of the policies from the government. The £250m sum is earmarked to last until the spending review in April 2015.

The amount is broken down as follows:

- £35m will come from increasing the level of relief from the climate change levy (CCL) on electricity for Climate Change Agreement participants from 80% to 90% from 2013;

- up to £100m will come from direct compensation for the carbon price floor and £110m of direct compensation for the EU ETS costs.

The committee suggested the government provide a statement to parliament on the budgetary position of the scheme after the first year. "The government should be ready to reduce or increase the budget cap available... in light of actual cost data identified in compensation claims," the report said.

The European Commission allowed member states to provide state aid to compensate specific sectors for indirect costs to prevent carbon leakage - the loss of market share to other countries with less stringent climate policies. SM

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