Government’s energy taxes and climate change policy hitting energy intensive industries hard

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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.


Director of UK Steel

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