In a period of difficult economic recovery what the UK needs most is sustainable growth. However if this is to be truly sustainable, we need to both rebalance and decarbonise our economy. The problem is that policies in these two areas are often pulling in different directions:
This may be a natural reaction to our lack of progress, but it needn't be like this. Our belief is that rebalancing our economy goes hand-in-hand with decarbonising it.
We therefore welcome the government's announcement this week of a package of measures to help protect the competitiveness of UK energy intensive industries.
The government have recognised that these industries will play an integral role at the heart of the UK's plans to decarbonise the economy. From the steel in wind turbines, to the chemicals used in energy-saving lighting and solutions in high speed rail, they will provide the building blocks for an energy-efficient and low-carbon economy.
The Chancellor has acknowledged that the current approach to UK climate change policy is increasingly putting their future at risk. Policies that push UK electricity prices above 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 far from the most competitive and additional pressure from unilateral climate policies risk investment in UK. Analysis carried out by EEF shows that in 2010 large electricity-intensive UK manufacturers paid approximately 10% more for their power than their German competitors and that in both countries, policy was a significant factor, accounting for 16% of the price. By 2013, based on existing and planned climate policies, the competitiveness gap is likely to widen to around 15% with the introduction of the UK's unilateral ‘carbon price floor'. The result of this will be that by 2013 the impact of climate policies could account for about 25% of the price paid by the most electricity-intensive industries in the UK.
This package will help level the playing field for a number of sectors, but also highlights that the UK needs to face up to this issue. Tackling climate change by relentlessly pushing up energy prices for the industries we are reliant on to build a low carbon economy, will be counterproductive. Not only will it weaken our industrial base and put jobs at risk, it will deliver little or no environmental benefit. Global emissions will be unaffected. Rising demand for energy-intensive products will simply be met from elsewhere as investment switches to more competitive locations. But it doesn't have to be this way.
Alongside the energy intensive package the government must also step back and consider a fundamental overhaul of its approach to Green and Growth. The government must address the divide presented in the survey published by EEF, showing that despite the vast majority of manufacturers seeing opportunities in the green economy, only one in eight felt that the UK policy framework supported investment in the UK.
It is clear that in order to meet our ambitious 2050 GHG emissions reduction target of 80%, the UK will need to dramatically decarbonise the energy supply. This should be a major priority for the government. However decarbonisation must be achieved in the most cost effective manner. The government must also support manufacturers to improve energy use and learn lessons from successful schemes designed to incentivise energy efficiency such as Climate Change Agreements (CCA) and simplify the policy landscape.
The UK and EU effort to lead the charge in adopting the toughest targets has gone largely unheeded. The time has therefore come for the government to consider an alternative approach. The government should be encouraging manufacturers to expand production in the UK if it is more carbon efficient for them to do so.
Finally, with many other countries cherishing similar ambitions, we need to develop an industrial strategy fit for the 21st century which sets out a long term vision for the priorities which will drive investment in manufacturing in the UK. Climate change policies need to be placed in the broader context of issues like innovation policy, tax reform and access to finance. Similarly, these growth policies need to consider the environmental consequences of reform.
Because we have yet to resolve these tensions, we're left facing a green-growth divide. Reconciling these two priorities will require government to significantly shift its strategy on climate change if we are to meet both objectives of growing our economy in a green and sustainable manner.