Last Friday, the Government published an assessment of the impact of its climate policies on energy prices that will sound alarm bells in industry. The analysis suggests that by 2020 climate policy could be adding up to 52% to the price of electricity paid by energy-intensive manufacturers.
Yet the true impact is uncertain and could be higher still. The analysis is based on a range of unspecified assumptions around things like energy efficiency and the degree to which suppliers will pass on the cost of government policies to consumers. A previous government impact assessment put the impact at up to 70%.
However, one thing is certain. To cut carbon emissions, Britain need's energy-intensive industries. From steel in wind turbines to chemicals in energy-saving lighting, they provide building blocks for an energy-efficient and low-carbon economy.
Yet the Government's current approach to climate change policy is increasingly putting their international competitiveness at risk.
Energy-intensive manufacturing comprises a diverse range of processes and business models. As a result, different industries, and companies, face different risks and impacts from policies designed to cut carbon emissions.
The most electro-intensive are the most at risk. Policies that push UK electricity prices above and beyond those of our competitors will undermine their ability to attract mobile investment and compete in international markets.
Industrial electricity prices in the UK are already high. Over the past five years, they have been higher than both the EU and G7 average.
For the largest consumers, the gap has been significant. Since 2006, official statistics show that UK prices have typically been 20-25% higher than the EU-15 average. This gap extends to our major competitors - UK prices are 10-25% higher than those in Germany and 60-75% higher than those in France.
The situation is set to deteriorate further. Green policies already account for 20% of industrial electricity prices and a series of new unilateral measures are scheduled to be implemented over the next few years.
EEF estimates that one of these measures alone, the ‘Carbon Price Floor', could increase the price manufacturers pay for their electricity by 10% by 2020.
Tackling climate change by pushing up energy prices for the industries we need to build a low carbon economy is counterproductive. Not only will it weaken our industrial base and risk jobs, it will deliver little or no environmental benefit. Global emissions will be unaffected. Rising demand for energy-intensive products will be met from elsewhere as investment switches to more competitive parts of the world.
Government has said it will address the issue and, we only have to look across the Chanel for resolution. Many of our European neighbours are forging ahead in the development and deployment of low-carbon technologies without putting their industrial bases at risk.
Countries like Sweden combine high levels of renewable energy and strong green industrial bases. A critical factor behind this position has been shielding the most energy-intensive industries from the price impact of climate change policy.
A well-designed compensation package can safeguard the competitiveness of energy-intensive industries without undermining our efforts to cut carbon emissions or overburdening taxpayers. Compensation should be targeted at industries most at risk and focused on offsetting costs arising from the highest impact unilateral policy measures.
First, compensation should be targeted at the most electro-intensive industries. These include electric arc furnace steel production and aluminium smelting.
Second, it should be focused on offsetting the cost of those policies which will have the most detrimental impact on competiveness. These include the unilateral Carbon Price Floor, the impact of the next stage of the European Emissions Trading Scheme on electricity prices and, the consumer levy likely to be introduced to fund investment in low-carbon energy
By keeping the scope and scale of compensation tightly focused, a more level playing field for the UK's energy-intensive manufacturers can be delivered for a relatively modest amount of money.
Exempting the entire iron and steel industry from the Carbon Price Floor would cost about £14m a year when it is introduced in 2013. In the same year, this tax is expected to raise £740m in revenue.
Levelling the playing field for energy-intensive industries, like subsidies for renewable energy, is a down payment on our low carbon future that will reap significant dividends in terms of jobs, green technology and emissions reductions.
Government's ability to deliver an adequate compensation package for those energy-intensive industries under threat will dictate whether or not we end up with best or worst of both worlds.
Failure would result in uncompetitive prices and reliance on imported technology to cut our emissions.
A successful approach would see competitive energy prices for UK manufacturers and a thriving industrial low-carbon industrial base.