The UK needs to boost its energy efficiency, industry compensation should be linked to clean tech investment
The lobbyists certainly earned their fees. The case for easing energy costs for UK manufacturers was made so effectively ahead of last month's budget that Chancellor George Osborne froze a tax he had introduced just two years before, seemingly forgot the tax was a replacement source of revenue to compensate for corporation tax cuts he had previously handed industry, and found yet more cash to round his energy cost compensation package up to £7bn. Add the windfall those industrial firms that have been hording EU emissions allowances will now enjoy as the carbon price continues its modest recovery and it has been a pretty fantastic few months for UK manufacturers - just so long as they are willing to turn a blind eye to the negative impact Osborne's reforms are likely to have on the decarbonisation efforts they are, for the most part, signed up to.
The reason manufacturers' lobbying proved so effective was that they had a genuinely compelling case to present. The UK may not be the only country in Europe with relatively high energy costs, but the upward trajectory of the carbon price floor would have led to escalating competitiveness issues over the course of the decade. Moreover, Germany provides a model for how compensation packages for manufacturers can address competitiveness concerns without necessarily undermining decarbonisation policies, even if it means more of the short term costs have to be shouldered by consumers.
However, the key question for Osborne should not have been 'how do I compensate manufacturers', but 'how do I tackle competitiveness concerns while continuing to accelerate decarbonisation?'
I've already argued the £7bn compensation package should have been accompanied by a comprehensive green industrial strategy backed by the kind of serious R&D spend required to deliver the next generation technologies we need to decarbonise heavy industry. But there is another step Osborne could and should still take that would actually help cut emissions, improve manufacturers' competitiveness, and drive investment. He should make the government's significant compensatory largesse dependent on manufacturers taking proactive steps to invest in energy efficiency and cut their emissions. If the government is providing a £7bn package on top of corporation tax cuts, and if there is now talk amongst manufacturers about the UK being so competitive re-shoring is a distinct possibility (which it is), then where is the quid pro quo?
There are actually some schemes, such as the Climate Change Agreements, that seek to incentivise emission reduction measures using the carrot of lower taxes, even if they are widely criticised for not demanding particularly ambitious decarbonisation measures of the companies that qualify for tax breaks. Meanwhile, Osborne actually took a modest additional step towards this approach in the Budget, making an exemption from the carbon price floor available to manufacturers operating ultra-efficient combined heat and power plants. But the fact is he could have been much more ambitious in linking compensation payments to carbon efficiency improvements.
The suggestion that financial support should be made dependent on action to enhance efficiency has been knocking around for some time, but it has been quietly opposed by much of the manufacturing lobby on two grounds - that it would be too bureaucratic to administer and it would be unnecessary on the grounds that high energy costs already provide manufacturers with every incentive they need to embrace efficiency.
However, do either of these objections really stack up?
For good or ill there is already a lot of bureaucracy (or progressive legislation, depending on your point of view) governing manufacturers' carbon emissions and energy use. It should not be beyond the wit of government minister to take the information obtained from the climate change levy, emissions reporting rules, or health and safety inspections and attach a clause to all compensation measures that allows the government to claw back some of the money at a later date if companies either fail to reduce their carbon intensity or fail to demonstrate that they have deployed energy efficiency measures.
The second objection, that manufacturers are already optimised from an energy efficiency perspective, should have more validity - and for some best in class firms it no doubt does. But is it really the case that every manufacturer benefitting from the new compensation package has LED lighting throughout their facility, electric cars on site, comprehensive insulation, and processes in place for checking compressed air systems are leak free? I'm guessing not.
If the Treasury was really committed to decarbonisation and manufacturers were really committed to optimising their long term competitiveness neither would have any problem with a sliding scale of compensation that rewards those who invest some of the money they receive in cutting their emissions.
The counter to this argument is that manufacturers can't afford it. Despite the often relatively rapid returns on investment offered by energy efficiency measures, many companies are unwilling or unable to find the capital they need to install LED lights or roll out the latest automated, optimised production line.
But this problem is just further evidence of a separate market and policy failure - namely the inability of the finance community to provide the targeted loans that would overcome the barriers to investment in energy efficiency measures. The banking sector had taken a well-deserved kicking over the last seven years, but to its litany of scandals must be added the utter failure to harness the power of responsible finance to drive mass investment in relatively low risk energy efficiency measures. Lord Adair Turner was right when he said much of banking had become "socially useless" - green finance should be the route to rediscovering the sector's social purpose.
There are a number of public and private energy efficiency financing options available for manufacturers, but a Treasury that was committed, in George Osborne's words, to becoming "a green ally, not a foe" would be looking to expand these offerings significantly, ideally by allowing the Green Investment Bank to borrow at ultra-low rates. It could then make energy cost compensation commensurate on energy efficiency improvements that would cost manufacturers nothing up front and would deliver net financial savings over time. Those who had already genuinely embraced green best practices should be allowed to pocket their compensation, and perhaps encouraged to start thinking about whether investment in renewable energy and decarbonisation R&D makes sense.
This corporate tribute to the Green Deal and pole-axed consequential improvements rule would cut manufacturers' energy costs, enhance their efficiency, and cut carbon emissions. Those manufacturers who continue to complain about energy costs should be politely but firmly told to come back when they have installed LEDs. Only those that have done precisely that should be rewarded with access to the Treasury's full compensation package.
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