So a new report from the Committee on Climate Change (CCC) published today on EMR, further sets out its latest thinking on funding of new technologies and the place in the market for gas.

The CCC has rightly highlighted that shifting to a low carbon economy has the opportunity to bring significant benefits to our manufacturing sector and the economy as a whole. We must create the market conditions so the UK becomes the number one place to invest in low carbon technology and generation.

However, the report fails to point out that this shift cannot be achieved at any cost. We maintain that we must be careful not to pile on costs to UK manufacturers, which ties their hands behind their backs, in terms of investing in the UK.

To keep costs manageable we need to focus on positive incentives for low carbon generation rather than punitive taxes on fossil fuels, such as the carbon price floor, that ramp up consumers’ bills for little or no environmental benefit.

In moving to a low carbon economy, the UK government must ensure that a wide basket of technologies are drawn from, which must also include gas and nuclear. Collectively, they offer us an opportunity to achieve our aims at least cost.

In addition, whilst the commercially recoverable shale gas resource in the UK has yet to be determined, it has the potential to make a significant contribution to security of supply and our economy.

We have recently called for a long-term uplift in government spend in energy and environment R&D to help bring down the price of low-carbon technologies so they are cost competitive, whilst in turn stimulating opportunities for UK manufacturers and their supply chains. Setting strategies to develop less mature technologies is therefore crucial to identify innovation potential to cut costs.

Quite rightly, the Committee has highlighted that finance, both short & long term, is often a barrier to low carbon investment. To that end, we support the package of measures that the Committee has identified to provide more confidence to investors.

Equally, the CCC is right to call for an extension of the Levy Control Framework out to 2030. The aim of this measure should be to keep a lid on subsidies for energy technologies.

Here at EEF, we have always supported the Energy Intensive Industries (EII) Compensation Package and therefore welcome this latest stage in its development, published yesterday. We recognise that government is keen to ensure a level playing field with our competitors both within Europe and globally.

First, let’s recall the stated aim of the Package, namely ‘[the] aid aims to avoid the risk of increased global greenhouse gas emissions due to shift of production from EU countries to those outside the EU that are not subject to emissions reduction targets’.

However, we remain concerned that the proposed details of the Package will result in failure to meet this aim for two key reasons.

·       The package will only compensate about two thirds of the additional pass-through costs within electricity prices for energy intensive industries from the EU emissions trading scheme and the carbon price floor. It therefore only partly addresses competitiveness risks.

·       The lifetime of the package is only three years. This is highly inadequate and sends the wrong signal to investors in UK manufacturing. The government must, at the forthcoming spending review, commit to a much longer time frame for this Package if it is to bolster investor confidence.

Although I am critical of these two design features of the Package, I do believe that government is working hard to ensure that the right sectors are recompensed.

An example of this is the regional emission factor, i.e. the amount of carbon dioxide emitted per unit of electricity generated. The BIS consultation from last year proposed to use a factor of 0.411tCO2/MWh, rather than the regional emission factor of 0.58tCO2/MWh proposed by the Commission. By using this lower figure, the UK would effectively be compensating its EIIs less than other Member States. We called on BIS to opt for the higher figure to ensure a more level playing field. The guidance, published yesterday, confirmed that the UK government is now proceeding with the higher figure. This is very welcome. So this is a step in the right direction, but it still doesn't mean that the unilateral cost increases, faced by UK energy intensives, are in any way fully addressed

Of course this all hangs in the balance pending State Aids approval for part of the package – namely the carbon price compensation. Unless we receive a positive outcome from the Commission very soon, the UK government risks not being able to backdated compensation for the carbon price floor to April 2013. This would mean that the UK’s EII manufacturers will be paying uncompetitive electricity costs, in relation to their overseas competitors.

So if anyone says to you that this is job done, in relation to addressing the competitiveness problems that energy intensive industries face, in relation to higher energy prices, then I would say, look again at the detail.

Yesterday’s EU ETS back loading vote sends the right signal to the rest of the world. We have a market-based system which will deliver the emission reductions it has committed to. Political intervention would have undermined what little investment certainty there is. 

Many of course have argued otherwise. Many negative comments in the press today suggest that the vote sends the wrong signal to the rest of the world. However, we would argue that the signal you would want to send to the rest of the world is that you can deliver on your low carbon goals whilst delivering on your growth ambitions. 

We should always remind ourselves, that the aim of the EU ETS is to reduce emissions at the least cost. Indeed, that is still a statement on the Commission's website.

Meddling in the EU carbon market would have sent a signal that the market was vulnerable to political interference and that makes it extremely difficult for investors. We need stability, predictability and long-term certainty to create the right conditions for investment in low carbon.

If we ask ourselves where our focus should be now, we should be taking a step back, looking to our future longer-term ambition and working back from that. The Commission and government are now considering the future of the EU ETS post 2020. We must make sure that this is designed correctly to achieve this vision.

EU ETS was designed to be expanded to other economic regions. So far this has achieved limited success, although there are signs that growing numbers of industrialised countries are interested in emissions trading. While most are at the design phase, let’s build on the experience and knowledge we have accumulated to creating an EU ETS for the future. Countries will only adopt EU ETS when it is shown to be effective and cost-effective. Furthermore, it must be a scheme which helps to transform internationally competitive industries rather than stifle them.

From the perspective process industries such as the steel sector, we should understand how we can reduce emissions from the sector, globally, rather than just here in the EU, to avoid seeing emissions pop-up elsewhere. 

Our efforts therefore should now be channelled on the future design of the EU ETS and in securing a 2015 international agreement which secures the level of global ambition required to tackle climate change.

Today’s vote in the Industry Committee of the European Parliament to reject the so called ‘backloading’ of EU ETS Allowances is a welcome development to stop tinkering round the edges. We must face up to the real question ere.

To withhold the auctioning of hundreds of millions of carbon allowances to the end of this decade, in order to artificially increase the carbon price, will not ensure the success of the EU Emissions Trading System (ETS). In fact it would only highlight that the scheme is not working.

When I say the scheme is not working, I am not referring to the price of carbon, but that we now see the experiment to create a ‘one size fits all’ EU wide scheme simply doesn’t work for all sectors at the same time. What the energy sector needs to decarbonise and what industry need, are different. This central conflict is arguably the downfall of the EU ETS. As some sectors need high carbon price to incentive investment, while other sectors, operating in a global market, will only suffer if subjected to this high price.

In the current economic climate, industry needs polices that have a core aim of strengthening competiveness and help those companies invest in sustainability. Just adding costs to these sectors achieves only the opposite.

The EU ETS is a market-based instrument and therefore has to be subjected to market principles. For the sake of predictability and investment certainty, we must not intervene in this market. We should not forget that the scheme is currently achieving it stated aim, that of meeting a predetermined cap on emissions within the EU. Whether or not that results in a reduction in global emissions is another matter.

Although, we as industry, long ago stated that an ex-post system of allocation would work better for EU ETS, government at the time believe that the certainty of the cap was paramount to the success of the system. Let’s not forget that one of the main drivers for a low carbon price is the economic recession. The last thing industry needs at this time is a high carbon price. Shouldn’t the European Parliament be voting for a policy that increases economic output within Europe. Output that will increase the need for allowances, that will increase the price. Is that not the way round it should be?

In reality the debate needs to centre on whether one scheme for largely different sectors will ever work. A sector by sector approach might prove to be the answer to low carbon innovation from all sectors and ensure that Europe is seen as a place to invest for the future.

UK Steel warns the Commission that tinkering with an established market mechanism will not solve the wider problem, that the EU ETS simply isn’t working for energy intensive industries.

UK Steel responded to today’s publication of the Commission’s Carbon Market Report, by calling for a more fundamental review of EU climate change policy than the Commission’s assessment calls for.

Commenting on the EU Report, Ian Rodgers, Director, UK Steel said:

“The answer to a perceived problem with the European carbon market is not to make short term changes with the sole aim of increasing prices. The Commission is now asking the EU ETS to do more than was designed for, which was to reduce EU emissions at least cost. They now want to raise the carbon price to fund low carbon investment beyond what is needed to meet the existing cap.

“This tinkering shows that the Commission has no faith in the market mechanism that it itself created; and it undermines investor confidence in the long term predictability of the EU’s emissions cap.

“What is actually needed is fundamental reform of the ETS Directive as soon as possible with a view to creating a fit-for-purpose system for the years after 2020. Policy makers must accept that a ‘one size fits all’ approach within EU ETS simply doesn’t work. It both slows down innovation and decreases industrial competitiveness. It is time to admit that it doesn’t work for energy and trade intensive industries; and the Commission’s report accepts that it isn’t working for the power sector.

“The proposal will inevitably result in higher electricity prices and other costs across Europe.  But the UK steel sector operates in a truly global market, so unilateral cost increases merely damage our competitiveness.

“EU climate change policy must give companies every reason to invest here in the EU, both in efficient processes and also low carbon innovation. This must be done if we are to achieve our ambition to reduce carbon emissions globally. Rather than short term fixes, the EU must look past 2020 to build international consensus on how to achieve global action to deliver significant global reductions in carbon emission.

“The UK and European steel sectors are committed to reducing emissions and is investing in researching and developing the step change technologies that will be needed to delivery significant carbon reductions from the sector.

“Today’s announcement only shows to the rest of the world that unilateral, one size fits all climate policy is not the answer.”

ENDS

UK Steel is the trade association for the UK steel industry.  It represents all the country’s steelmakers and a large number of downstream steel processers.

The publication today of the Energy Efficiency Strategy by the Government Energy Efficiency Deployment Office (EEDO) of course is welcome. However, after taking a look at it, the word ‘Strategy’ doesn’t spring to mind.

The EEDO publication reads more like, an office within DECC, in listening mode, following its call for evidence earlier in the year.

Energy efficiency is of course extremely important for many part of the economy. Indeed, we in the manufacturing sector know this all too well. An EEF member told me last week that the first energy efficiency workshop he attended was in Q2 in 1979. For manufacturing, particularly energy intensive manufacturing, energy efficiency has been on the agenda since the first fuel shock, way back then.

We must be careful here though in an assessment of the opportunities and barriers to greater efficiencies in energy usage. Firstly, let us not forget that industry, business and commercial sectors are not the same, interchangeable or comparable. All three sectors have their own challenges to face, whether that is global competition, the availability of abatement opportunities or the fierce competition for finance within the company.

If government really wants to make a difference in this area, it needs to think more broadly about the business environment in which businesses operate. Arguably, issues like access to finance and tax incentives for investment in state-of-the-art machinery are just as important as energy efficiency schemes that have had mixed success over the years. There is arguably both a big economic and environmental dividend in encouraging manufacturers to invest in the latest industrial machinery. And tax incentives are a well-established and well-understood measure compared to bespoke, complex, new energy efficiency schemes. 

Having said that there is a difference within ‘business’ sectors, this is nothing compared to the non-comparability between residential and business sectors. The former being a sector where the significant gains from energy efficiency have not yet even begun to be realised. Here, there is a massive opportunity just waiting to be seized and delivered. EEDO has a significant, exciting and rewarding task ahead to crack this age old nut.

We also must remember that energy efficiency improvements are not the same as demand side reductions in absolute terms. A company that becomes more efficient in its use of energy becomes more competitive and is therefore able to invest and grow. Therefore making more with less, but perhaps even using more total energy. This is something that we here in the UK should embrace, that if we can make something more efficient here in the UK, than elsewhere in the World, then we should.

Meeting the dual objectives of a green economy as well as a growing one continues to hit the headlines. Following our report, published six months ago, Green and Growth: Solutions for growing a green economy, CBI published its own take on the matter. It concurred with our analysis – there need not be a choice between green and growth - but having the right policy framework in place matters.

Today, we published our survey of our members examining their response to climate and environmental challenges. The results are clear: The government has yet to deliver the policy framework we need to deliver the vision of a green and growing economy.

UK manufacturers are among the most efficient in the world, at least according to recent surveys and analysis (See figure 2.3, 2.5). And they are striving to do more. Seven out of ten manufacturers have set environmental targets that are more ambitious then legislation in areas such as waste reduction, energy efficiency and water use. Manufacturers recognise that waste, be it resources and energy, represents money off the bottom line. They manage their impact because they recognise leaner, more efficient operations are also more competitive ones.

Ironically, manufacturers see legislation targeting climate and environmental impacts as holding them back. The burden of differing and competing reporting demands results in more paperwork and less innovation. And the associated cost continues to rise. Just a few weeks ago the government’s own research showed that UK manufacturers in energy intensive sectors pay more in energy taxation and for climate change policy than anywhere else examined – and the situation is set to become even worse in future.

Our survey shows that this cost and the perception of red tape risks impacting on investment decisions. While the Red Tape Challenge is starting to make an impact in areas such as employment law, the Coalition Government has overlooked entirely the complex, costly and incoherent climate and environment landscape. We call on the government to carry out a comprehensive review ahead of the next Spending Review.

Just to be clear we absolutely agree with the objectives of this policy landscape but we think these objectives can be met in a better way which works with the grain of manufacturing. Our members agree. The survey shows this area is suffering from an image crisis and needs drastic overhaul and streamlining to create the right incentive to meet the challenge in the most efficient way possible. While we clearly need to meet the challenge of decarbonisation we need to also ensure that the UK is an attractive option for investment and internationally competitive. A more strategic approach is required.

To help we think that there absolutely needs to be a focus on affordable decarbonisation. We propose a new green and growth “stress test” – where all new and reviewed legislation is routinely assessed against these two objectives. If both objectives aren’t met the legislation should not be passed. We think things should be made a little easier for environment managers – let’s review the reporting schedule in its entirety and plan it better so that companies aren’t overloaded at certain times of the year and work isn’t duplicated.

Finally, while the direction of government policy and permitting requirements continues to push for more investment our survey shows that unsurprisingly access to finance continues to hamper the ability of manufacturers to implement new schemes and roll out new technology to improve their efficiency and cut waste, carbon and water use. We think there is a failure by government’s energy and climate change department, as well as the environment department, to grasp the challenge this will pose for companies, particularly SMEs. While a Green Deal for SMEs is welcomed, we need a broader debate on innovative financing models to deliver long-term green objectives.

We’ve suspected it for a long time: Many UK manufacturers are paying more in energy taxation and for climate change policy than our competitors. In fact green policies are costing Britain’s steelmakers and other energy intensive manufacturing sectors at least double what some of their main European rivals pay. The picture quickly becomes worse when looking at competitors in Asia, Russia and the US.

The source of this new evidence is a report commission by the government. It looks at the impact of government policy on energy prices on energy-intensive industries – steel, cement and some chemical industry processes. It compared the UK experience to that in China, India, Japan, Russia, Turkey and the US. In the EU, a comparison was made with Germany, France, Italy and Denmark.

The report supports the case we’ve been putting to government for a long time – that the country’s high energy taxes along with the costs of climate change policy is eroding the competitiveness of UK manufacturing in some key sectors. Worryingly, it indicates that it is likely to get a lot worse by 2020 with costs likely to be double for high energy industries compared to 2011.

The gulf between the UK and many other countries stems from the absence of a global deal on climate change different countries are pursuing carbon reduction policies at different rates and costs. In the UK, our renewnable energy deployment strategy accounts for a lot of the additional costs faced by EIIs. Other unilateral costs include the Carbon Price Floor – a new UK tax which imposes a minimum price for emission allowances under the EU’s emissions trading scheme.

Ironically it is these self-same manufacturers who provide the building blocks for thousands of products that will help us cut carbon - from energy efficient building materials to solar panel and electronics. These are manufacturers who are stepping up to be part of the transition to a low carbon economy – but they can’t do it with one hand tied behind their backs.

EEF has warned that, unabated, this could lead to “carbon leakage” in sectors that struggle to pass on their costs because they are operating in global, fiercely competitive markets. Carbon leakage refers to an incremental erosion of incumbent manufacturing because production and investment is shifted to regions without carbon controls and where manufacturing costs, and therefore products and materials, are therefore cheaper.

European governments appear to be taking this issue extremely seriously. The report shows that even in Europe where we are subject to similar regulation and targets UK EIIs are still paying more than most because other member states are reimbursing vulnerable industries.  Reimbursements to EIIs appear most significant for Germany, Denmark and Italy, and are also relatively high for France. However, this is an area where further investigations by government is needed.  

To be fair, the government has begun to make the right noises. Last year, the Chancellor announced a package of measures that will run until 2015 to help offset some of these costs for EIIs. But it is still unclear who qualifies and whether there the allocated funds will be adequate. There is also no firm commitment to address the high costs borne by consumers as a result of the renewables investment.

We need to see government make its intentions clear as soon as possible and outline post-2015 plans to give affected sectors certainty and a more level playing field. Until these measures are put in place the competitiveness of our energy intensive industries risks being slowly eroded and companies in these sectors will look to invest elsewhere.

Greening our energy supply can and should be compatible with growth, if it is done correctly and affordably. Energy Intensive Industries (EII) have a vested interest that we achieve realistic goals at least cost and most benefit to the UK and EU economy. What would upset EII would be an assessment that the objectives of greening our economy, whilst promoting economic growth, are not compatible and that government just pushed ahead with its green agenda at their expense.
To understand the contribution and importance of EII’s we need to clear up two misconceptions. Firstly, the term ‘Low Carbon Economy’ is often misunderstood and implies new sectors whereas, in contrast, these sectors are our established sectors, not new. For example, a low carbon supply chain looks very similar to a traditional supply chain with high carbon components in low carbon products (high speed rail, nuclear and wind). Therefore EII are vital to the growth of a ‘low carbon sector’ here in the UK.
Secondly, EIIs are committed to the green agenda and are taking action. For example, over the last 20 years Industry has reduced emissions by almost 40% whilst producing the same output whereas, in contrast, the residential sector has increased emissions.
The current policy landscape aims to increase costs through a carbon price aimed at de-risking investment in renewable technologies whilst making emitting carbon more expensive. What does this do to globally competitive sectors, such as steel, aluminium and cement where the price of their product is set globally and where the abatement opportunity using current technology is extremely limited? The effect is to make those sectors become uncompetitive in that global market and, if they are uncompetitive then production moves to less regulated regions. The result of this is higher global emissions and a disrupted low carbon supply chain here UK.
However, we should not forget our Climate Change Act targets or excuse globally exposed sectors from making their contribution to further reducing emissions and improving energy efficiency. But, we need to accept that different sectors require different solutions to achieve our common goal of reducing emissions globally.
In terms of the energy supply and the economy as a whole, the UK must change policy and set itself on a road to ‘affordable decarbonisation’. No successful business has a long term plan that isn’t affordable and sustainable, so government policy should be no different. But, in contrast, currently we have a crowded, confusing and costly policy landscape, one that can’t decide if its purpose is to decarbonise or just increase government income.
Creating a market for low carbon investment is easy by increasing the carbon price, regulating and setting standards. The difficult part is ensuring that the home market, be it UK or EU, can feed into and benefit from that market.
The answer for most globally exposed sectors is sector agreements that put all players on a level playing field and, create an environment where unlocking barriers to major technology changes are addressed. This process has started but it needs government support to become a reality. We are obsessed with top down targets, without a credible, strategic and cost effective route to achieving them.

I must say, it should be an interesting first Cabinet meeting, when Osborne and Huhne face each other, following on from setting out their positions on climate change policy from very different angles.

The Chancellor’s intervention into reality is welcome relief to a manufacturing sector that can deliver on low carbon innovation, but, as he says, “a decade of environmental laws and regulations are piling costs on the energy bills of households and companies”. George Osborne has hit the nail on the head by stating clearly, “We’re not going to save the planet by putting our country out of business”.

Globally we have a major problem, we need to reduce the concentration of carbon in the atmosphere and we need to make this happen sooner than we all realise. To achieve this aim, we need to accept that manufacturers will provide much of the low carbon solution.

Even Chris Huhne knows this to be true, as he envies the Chinese, installing wind turbines across the South China Sea, building 28 nuclear power stations in the time it will take us to build one and building 10,000 miles of high speed rail. All three of these projects have Energy Intensive Industries (EII) at the very heart of them.

Raising costs to EII in the EU by increasing our 2020 target will not “represent a real incentive for innovation and action in the international context” as Huhne said in 2010. We believe that what makes good business sense is, providing the right incentives and business environment so that investment in low carbon technologies takes place here in the UK and not in regions of the world that are not subjected to the same levels of policy costs that our EII are experiencing today.

An example close to home is that climate change and environment taxes for EII in the UK are four times that of Germany. How does this encourage multinational companies to choose the UK as the place to invest.

The Chancellor’s view that we should not be going faster than the rest of the EU in setting targets, is the right one. We need to lead by example, yes, with that example showing that we lead on innovation, support and success, not on who can set the highest costs to meet our much needed targets.