Lobbying against the carbon floor price is lobbying for more coal power

James S Murray
@James_BG
05 March 2014

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The CBI and EEF support the low carbon economy, but they need a better approach to tackling competitiveness issues than simply attacking carbon taxes

British industry really hates the carbon floor price. I mean really hates it. Martin Temple, chair of the EEF, spoke for many manufacturers last night when he eviscerated the government's energy policy, calling for urgent action to tackle "the raft of green levies and charges that push bills up above almost any other nation in Europe". His chief executive, Terry Scuoler, went further still suggesting the organisation's lobbying over energy costs was its most vigorous political intervention in decades.

Both the EEF and the CBI have now mobilised their biggest lobbying guns in calling for a freeze in the carbon floor price, an extension to the compensation fund for heavy industry, and, perhaps most ominously for the government's green energy policy framework, a full review of the impact of other green policies, such as the Renewable Obligation. Anyone hoping that the flood-induced renewal of the political commitment to tackling climate change might translate into some climate policy consensus has very quickly been left disappointed.

Of course, neither the EEF nor the CBI are against action to tackle climate change, quite the opposite. Both organisations stress that they remain fully committed to decarbonisation and the building of a low carbon economy, at the same time as opposing many of the flagship policies designed to deliver exactly that. This is not necessarily the contradiction it sounds. There are plenty of legitimate criticisms that can be made about the government's low carbon policy framework and there are valid concerns about the way in which high UK energy prices could result in "carbon leakage" as companies move overseas in pursuit of lower energy costs.

Many environmentalists, myself included, have huge respect for the transformation that has taken place at the CBI and the EEF with regards to environmental issues over the past decade. Both organisations understand the need to build a low carbon economy and have undertaken numerous important initiatives to help support its development. The UK is lucky to have progressive mainstream business groups that are a million miles away from the corporate dinosaurs of the Sir Digby Jones era - anyone doubting that should look at the unreconstructed lobbying against any and all environmental regulations undertaken by many of the CBI's US and European cousins.

But the simple fact is that the proposed freeze in the carbon floor price that the CBI and EEF advocate would result in the UK burning more coal, increasing emissions, and weakening the investment case for clean energy and energy efficiency. How can a government that is committed to cutting emissions and driving green investment countenance such a move?

Like so many critics of environmental policies, the CBI and the EEF are much better at diagnosing policy problems than they are at prescribing serious solutions. That is not to say that there aren't problems with the current approach, the most obvious of which being the impact of energy costs on competitiveness. But the question has to be how can that problem be addressed while we continue to cut emissions and drive green investment? Not which green levy can we get scrapped in this budget?

The CBI and EEF have said they want the carbon price floor frozen and more cash found to help industry cope with the impact of the frozen levy. But such a move would require answers to numerous questions if it is to go ahead. How do you stop emissions increasing as coal becomes more attractive? What, as Policy Exchange's Guy Newey has pointed out, do you do about the impact on clean energy investment - introduce yet more technology-specific subsidies? How do you ensure that yet another change to carbon prices doesn't torpedo long term investor confidence at a time when we need to mobilise £110bn of investment in clean energy? What, having frozen the carbon floor price, do you do about the fact that European energy prices are still structurally higher than they are in the US and China - cut yet more taxes? Politically, how do you convince the Lib Dems to sign off on a policy that will tarnish their green credentials just over a year from an election? And where, given that it has repeatedly cut corporation tax, does the business community think the cash-strapped Treasury should raise the revenue that it would have got from the increasing carbon floor price? Income tax? VAT? Capital gains? Thought not.

To my mind the CBI and EEF are yet to provide credible answers to any of these questions. However, that begs another question. What does an environmentally responsible industrial strategy actually look like? How do you address the real problems presented by competitiveness issues - and anyone doubting that they exist should have heard Temple's tale earlier this week of a steel plant with a £75m energy bill that is set to rise year-on-year and which increases by £1m every time it miscalculates the so-called Triad mechanism and keeps operating during peak periods - without compromising emission reduction efforts?

The obvious answer put forward by the CBI, the EEF, and others is to sort out the EU emissions trading scheme (ETS) and deliver an international treaty that ensures all nations are doing their fair share to cut emissions. The government should be doing all it can to deliver on both of these fronts, but even in the best possible best case scenario a reformed EU ETS and global climate change deal is not going to come into effect until 2020. In the meantime the government should be looking to ramp up green ambition domestically, not water it down.

So what can be done? The first step should be to continue to increase the carbon price floor as planned, in order to encourage a shift away from coal generation and drive investment in clean energy and energy efficiency. But that commitment should be accompanied by an explicit pledge, potentially legally backed, to retire the tax as soon as the EU ETS is adequately reformed.

Such a move would help drive continued investment in the low carbon transition, but it would also result in worsening competitiveness issues. As such the government needs to get a better sense of what these issues are and draw up a plan to deal with them. I know the British political class is often accused of a having a nasty case of inquiry-itis - the tendency to hide behind a public inquiry whenever a tough political decision has to be made. But the debate over the extent to which green policies impact industrial competitiveness is characterised by so much smoke and mirrors that a full independent inquiry would prove extremely useful. There are too many anecdotes about unnamed companies being hit by high energy costs or considering leaving the UK, and not enough hard and fully independent evidence about the true impact of these policies and the relative energy costs in other countries. Such a review could also look at whether it makes sense to consolidate the numerous different carbon taxes imposed on companies and assess how the Triad mechanism can be improved using smart grid technologies to better manage peaks in energy demand.

Where there is evidence of real and compelling competitiveness pressures relating to energy costs (and remember energy is not the sole issue that determines competitiveness) the government should extend and increase the compensation funding available for affected companies. The fact is Germany's industrial sector benefits from much more government largesse to help it cope with high energy costs and the British government should not be penalising UK firms attempting to compete with Europe's manufacturing powerhouse.

You could argue that it is inefficient to increase a tax on carbon only to increase the compensation to help companies cope with the increased tax. But it is better to address competitiveness issues where they arise, rather than offer blanket benefits to coal power plants and industrial facilities that have no intention of relocating and can cope with the higher carbon price by investing in new technology.

Moreover, a government that is truly committed to building a low carbon economy could earmark some of the compensation fund to support the kind of tax breaks, incentives, and research and development spending that is needed to develop the next generation green industrial technologies that are required to deliver real decarbonisation. The EEF is already doing some fascinating work in this area to identify the new technologies that will be needed to cut emissions from key industrial processes, while Interface's New Industrial Model highlights how manufacturers can cut emissions and embrace clean technologies in a cost effective manner, but initiatives like this undoubtedly needs more financial support.

Unfortunately, this approach begs one final question - how to fund it? That, ultimately, is the question that makes life in the Treasury so challenging. But if the UK is committed to both decarbonisation and not hampering its industry with uncompetitive energy costs then the cash has to be found from somewhere. Recycling some of the increased revenues from the carbon floor price is an option, as is throttling back on the generous tax breaks handed to the oil and gas industry or actually delivering an increase in fuel duty at a time when our cars are more efficient than ever? Giving the perennially promised tax avoidance crackdown some real teeth could also deliver real results.

Either way, the Chancellor will need to find the money from somewhere, because in doing so he could go a considerable way to winning over both the green economy and the energy intensive industries that are currently so angry with his carbon floor price.