Creating an unfair playing field
Imagine Europe as a playground and all the larger businesses operating within as children. Then imagine what might happen if you decide to offer half-price sweets to all those on one side of the playground – and the same sweets at double the price to those on the other. “It’s not fair,” is the likely response. And although this is a crudely simplistic analogy, it does mirror what many British businesses are feeling right now when it comes to the price of carbon in relation to their electricity bills.
While the rest of Europe pays the market rate as determined last week by the EU’s Emissions Trading Scheme (ETS) – which was trading less than €4 per tonne of carbon – UK electricity consumers will be paying an extra £4.94 per tonne in Carbon Price Support tax come 1 April 2013, when the government introduces its unilateral Carbon Price Floor (CPF) scheme.
As this is a tax on electricity generation, this equates to just under half a tonne – or around £2 – per megawatt hour. Not an insubstantial sum when you are a business consuming in the terawatt hour league.
The idea behind the CPF – ie to guarantee a more stable environment for investment in low-carbon technologies in the UK – is all well and good. But it just duplicates the measures already in place from the likes of the ETS and other support schemes being implemented through the Energy Bill. The money raised also goes to the Treasury rather than being recycled to benefit low-carbon innovation. And what’s more, this additional UK-only tax creates a disadvantage for British businesses trying to compete on an international stage, thereby increasing our risk of carbon leakage.
Costs that keep on doubling
Even if this year’s extra cost of £4.94 per tonne is considered manageable, the Carbon Price Support tax is set to almost double to £9.55 next year, and then is forecast to nearly double again, reaching £18 in 2015. This reflects the increase in the CPF set by the Treasury, starting at £16 for 2013 and rising in a straight line to £30 by 2020. As the ETS rate has collapsed, the Carbon Price Support calculation of CPF minus ETS has shot up much faster than was originally anticipated.
Any business which wants to maximise its success will, naturally, look at ways to adapt in a changing market – and what this equates to here is relocating to a market without the same carbon regulations elsewhere in Europe. We know, from talking to our larger-energy-consuming customers, that this is exactly what some are considering. So while their carbon emissions will still contribute to the overall European total, UK jobs are lost and the Treasury’s income drops. Sounds like a lose/lose scenario to me.
To be fair, the Government is aware of this. Hence the planned introduction of a package of compensation measures for energy-intensive industries, with £100-million ear-marked to reduce the pain of the Carbon Price Floor (see my earlier blog for more on this). This is currently awaiting European State Aid approval before details can be finalised, but it’s not going to help everyone affected – just a handful of high-consuming sectors.
In pursuit of parity
Clearly to level the playing field, it would be helpful if the carbon price was the same across the whole of Europe. While this may be some way off, for now, the European Commission is looking at ways to shore up the ETS to create more confidence in the scheme.
A huge surplus of carbon allowances, along with structural weaknesses in the system, is blamed for pushing the value so low. While it’s highly doubtful with our current economic situation that it will return to its 2006 peak of €30 in the short term, its recent low point of €3 is clearly problematic.
So Brussels is currently reviewing a number of measures to reform the ETS. In recent weeks, a plan for ‘back-loading’ received some support, which could see the sale of 900-million carbon allowances delayed, so temporarily creating a smaller market with, potentially, a higher price.
Longer-term structural reforms for the ETS beyond 2020 are also being discussed but we won’t know the outcome of these for some time.
In the meantime, all electricity customers in the UK will continue paying a higher price for carbon without seeing any benefits in terms of reductions in Europe’s carbon emissions. But, as I’m sure we’ve all been told countless times before, who said life is fair?