Level playing field for energy-intensive industries is down payment
To cut carbon emissions, we need energy-intensive industries. From the steel in wind turbines to the chemicals used in energy-saving lighting, they provide the building blocks for an energy-efficient and low-carbon economy. Yet the current approach to 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. Over the past five years, they have been consistently higher than both the EU and G7 average. Official statistics show that UK prices have typically been 20-25% higher than the EU-15 average for the largest consumers. This competiveness gap extends to our major competitors - UK prices were 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 approximately 20% of industrial electricity prices and a series of significantnew 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 another 10% by 2020.
We need 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.
The Government has said it will address the issue and the dilemma can be resolved. We only have to look across the Chanel for inspiration. 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 and Germany, for example, combine high levels of renewable energy and strong green industrial bases. A critical factor behind this enviable position has been shielding the most energy-intensive industries from the price impact of climate change policy.
We should learn from their example. A well-designed compensation package can safeguard the competitiveness of our energy-intensive industries without undermining efforts to cut carbon emissions or overburdening taxpayers. Compensation should be targeted at those 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, aluminium smelting and chlor-alkali production.
Second, it should be focused on offsetting the cost of the policies which will have the most detrimental impact on competiveness. These include the unilateral Carbon Price Floor, the impact of the European Emissions Trading Scheme on electricity prices and the consumer levy likely to be introduced to fund investment in low-carbon energy as part of the recently announced electricity market reforms.
By keeping the scope and scale of compensation tightly focused, the competitiveness of the UK's energy-intensive manufacturers can be safeguarded for a relatively modest amount of money. For example, 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.
The Government's ability to deliver an adequate compensation for energy-intensive industries under threat will dictate whether 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. Success, on the other hand, would see competitive energy prices for UK manufacturers and a thriving industrial low-carbon industrial base.