CBI: Carbon floor price could "push industry over the edge"

London – UK energy and tax policies are putting too much cost pressure on energy-intensive sectors, such as chemical and steel, and undermining investor confidence in these industries, CBI director-general John Cridland has warned.

Over the last 12 months the Government need to raise revenues has seen industry hit by the Carbon Reduction Commitment, Carbon Floor Price and the recent hike in oil and gas tax. Cridland told business leaders, politicians and energy suppliers at the CBI energy conference.

“At a time when rebalancing of the economy needs UK manufacturing to be playing a bigger role, energy-intensive industrial users need more help. But the Budget unilaterally increased their cost base,” said the CBI boss.

“Yes, we must see the deficit reduced and market confidence maintained. But when the Government proposes tax measures that are counter-productive, and that hold back investment and growth.”

Cridland noted recent warnings from companies like Ineos that its chlorine plant in Runcorn could become uneconomical under the sudden introduction of the proposed carbon floor price, and Tata Steel, which is facing similar problems. One major construction company, he added, is now finding it will soon cost less to import its cement from Spain than to produce it at its UK plant.

“Yet Tata makes the steel that goes into the turbines. Ineos makes the lubrication that helps the blades turn. And we need up to 150 tonnes of cement to generate every megawatt of offshore wind,” Cridland commented.

Meanwhile, as the CRC has changed from encouraging energy efficiency to become just a cost, and a complex scheme, the business group leader said “the Government should axe the CRC as it stands. If it wants a green tax, it should do the job properly.”

With the recent £2bn North Sea oil and gas levy, the Government has undermined the sector’s confidence, prompting Centrica, for example, to leave its Morecambe South gas production field because it’s paying up to 81% tax there.

“We’ll see weakened North Sea investment, increased reliance on imported gas and higher prices for business and domestic consumers. We can address this by introducing a higher ’trigger price’ for natural gas and expanding field allowances.

With regard to the carbon floor price, the CBI is concerned that even if the price of carbon in the EU ETS rises, as is the case now, the carbon floor price will not necessarily fall correspondingly. It risks tipping energy-intensive industries over the edge.

“The CBI supports the carbon floor price in principle, but we have to see exemptions for those industries most at risk - those very industries that a critical part of our low-carbon economy. Therefore, we propose a rebate-based exemption linked to the energy intensive industries’ work on energy efficiency.”

According to Cridland, heavy energy users need and want to do their bit and reduce their emissions, and many are already doing so. My Cridland said what these firms need is help to use renewable heat, use energy from waste and use more of the innovations already out there.

He said: “To achieve this will require a working, flexible and future-proof exemption model, it may also require a different level of rebate for different sectors. That’s why a clear definition of energy intensives is so important: businesses need to receive rebates when they qualify as a risk, so that everything’s transparent and everything’s understood.”

Equally important is the need to give the energy industry and investment community greater certainty in the Energy White Paper. Action is needed to encourage investment and unblock the planning system, but Mr Cridland remains to be convinced that this summer’s White Paper will deliver what’s required.

He said: “We need new kinds of investment - particularly from institutional investors. The Government has some ideas, and a well-run Green Investment Bank should attract large-scale capital from pension funds,” he said. “But while the bank will help with the scale and pace of investment required to meet this challenge - some £200bn by 2020 - it isn’t a silver bullet.

Calling for an end to all the planning delays and all the changes in the rules that make investors want to look elsewhere, the CBI boss turned the spotlight onto this summer’s energy White Paper.

“We don’t want a white paper heavy on promises of round-table meetings and departmental listening exercises and light on the boldness and certainty that’s required,” he commented.

Cridland went on to set out the areas where the CBI is seeking clear decisions from the Government. These include:
· A clear direction of travel for the electricity market reform (EMR) package: whether the low-carbon feed-in tariff will be a “contract for difference”, which has the advantage of following the market price itself, or a “premium feed-in tariff” model, which will be easier to implement for the Treasury
· On the institutional architecture: who will manage the contracts for these new feed-in tariffs? How will the tariffs be set?
· On capacity: is it seasonal peak demands that the Government is trying to solve, or the overall capacity for supply for the intermittency of renewables as part of our energy mix?

“Investors are telling me they need answers. They see the EMR package as a suite of measures, which have to make commercial sense taken together<” Cridland added.

“All this means that we’re taking unilateral action in the UK to embed the price of carbon, putting our actions far out in front of our EU counterparts and any international economies.

“For this reason, we need to press for an ambitious international agenda, and to see Durban achieve what Copenhagen failed to. We need an international framework that’ll ensure all our major competitors buy into this agenda and, over time, to put a comparable price of carbon on their activities.

“We need to get the EU Emissions Trading Scheme working even more effectively in the future.”