New energy tax threatens to undermine growth agenda

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New energy tax threatens to undermine growth agenda

Imagine if the government were to allow teachers and nurses more time off but failed to consider the impact on the students and patients that depend on the services they provide. It wouldn't happen. Never in a million years. Yet it is with astonishment that the government appears to have designed a new tax on energy without considering how it will impact those who use energy, just those who generate it.

The carbon-floor price sounds fine in principle. We support the idea of a carbon tax and believe it would provide a clear, more consistent and stable incentive to energy users to reduce high-carbon energy and fuel use; to use high-carbon fuels more efficiently; and, to provide electricity generators with a stronger incentive to invest in lower-carbon forms of energy. If designed properly it could be a cost-effective mechanism to meet climate change objectives and ensure security of supply into the 2020s.

However, this support is conditional on countervailing measures to ensure that the overall cost burden on manufacturers does not increase. Indeed it is entirely logical that a carbon tax should lead to a consolidation of the many climate-related costs that fall upon manufacturers. And there is quite a few. As it stands 20 per cent of energy costs are as a result of climate change policy in the UK. By 2020 it is estimated that this will rise to 70 per cent. The carbon floor price will result in a cost increase on manufacturers, equivalent to a tripling of the climate change levy rates.

Make no bones about it. These unilateral UK-only costs will factor into the investment decisions made by global companies: Whether to put future investment in the UK, or in a region of the world where these costs do not exist.

The Treasury's accompanying impact assessment in fact is refreshingly honest in its assessment that the floor price will have “a significant impact on a small, but important number of energy sectors in the UK”. It helpfully lists these sectors. But it does not attempt to quantify the impact. Nor does it consider those who are operating on tight profit margins.

But this is only part of the picture. Indeed, we note with concern that this is in addition to the proposals outlined in DECC Electricity Market Reform Consultation which contain measures that aim to achieve a similar outcome that the CPF consultation aims to achieve this time through ‘Contracts for Difference (CfD). In addition to this, we are being asked to contribute to parallel consultation on the CRC energy efficiency scheme and climate change agreements. And this year the rate of climate change levy relief for manufacturers able to enter into a climate change agreement has been reduced from 80per cent down to 65per cent relief - a tax increase on manufacturers of £50 million per annum.

It is all such a mess. It has become impossible comment on individual measures as we are seriously lacking the government's wider view. At the moment, from where we are sitting, it seems chaotic. Government needs to draw breath and clearly articulate its vision on climate change policy. Seen in parallel with the growth review, the government is sending some very mixed messages.


Director of UK Steel

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