A green tax that risks economic sustainability

Philip Salter
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FROM 2013, a tax on carbon producers will be unilaterally implemented by the UK upon carbon intensive industries. Costs to UK based businesses are estimated to be in the region of £9.3bn, undermining their competitiveness, damaging energy producers and users, and ultimately hitting the wallet of consumers.

Presently, about half of Europe’s emissions are covered by the EU Emissions Trading Scheme (EU ETS), in which allowances are traded on carbon produced beyond a capped limit. The carbon price floor is effectively an extra tax upon the UK’s carbon producing industries, designed to come into effect if the price of carbon falls below £16 per tonne from 1 April 2013, rising to £30 per tonne in 2020.

Luis Neira of Pan Energy Markets says that a price floor will definitely put extra pressure on prices. Point Carbon estimates that by 2020, the cost of a tonne of carbon bought in the UK, including the tax, could be as high as €54, while elsewhere within the EU ETS the price could be just €36. In consequence, Point Carbon predicts that UK businesses will be faced with additional costs of £9.3bn due to the carbon tax.

Karl-Ulrich Kohler, managing director and CEO of Tata Steel’s European operations, reacted to the decision by stating that this “represents a potentially severe blow to the sustainability of UK steelmaking.” Kohler puts this in context: “European steelmakers already face the prospect of deteriorating international competitiveness because of the proposed unilateral imposition by the European Commission of very significantly higher emission costs under Phase 3 of the EU Emissions Trading System. The CFP proposal will impose additional unilateral emission costs specifically on the UK steel industry. This is an exceptionally unhelpful and potentially damaging measure,” he concludes. If Tata continues to invest in an increasingly uncompetitive EU at all, the Netherlands – which is Tata’s other European manufacturing hub for outside the UK – will now hold a sizeable competitive advantage.

Many have claimed that the floor price is a nuclear subsidy through the back door; EDF will certainly be its biggest indirect beneficiary. But it is highly doubtful whether the price floor will be enough to get new nuclear builds. A report from KPMG from July of last year concludes: “Market participants we consulted generally felt that a carbon floor price alone would be insufficient to achieve a positive investment decision for new nuclear. It would also provide windfall gains to existing low-carbon generation and hence may not represent best value for money.”

Although the tax bomb will be dropped upon high carbon users, the fallout will hit the whole economy. Heavy industries including steel, cement and paper companies will take a serious hit. Costs will of course be passed on to consumers: “A carbon price floor rising to £30 per tonne in 2020 will place a material additional cost on our electricity generated from coal and thus the cost of electricity for the consumer,” says Dorothy Thompson, Drax’s chief executive.

The billions raised in the tax look to be heading straight for the bottomless pit of general government expenditure. It might fulfil the functions of raising revenue and politicking on the key issue of carbon reduction, but this will come at the expense of weakening UK manufacturing, limiting foreign direct investment and increasing energy prices.

Next in the series: the UK technology sector, 17 May