Rebalancing the economy is a priority: The carbon floor price needs to be scrapped

 
Matthew Sinclair
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POLITICIANS of all parties are keen that the British economy’s fortunes depend less on the work of City A.M.’s readers. Chuka Umunna – Labour’s shadow business secretary – told Bloomberg this week that under the last government growth “was too concentrated in too few sectors, and in too few regions”. Similar sentiments have been expressed by frontbenchers from every political party.

They certainly match those words with action when it comes to taxing the people and businesses of the City. But driving business out of London to other financial centres won’t help the rest of the country grow. Surely the actual objective shouldn’t be to weaken the City and hurt the financial services sector, but to look at the obstacles to growth in other regions and industries?

Since the election, public spending and taxes are up. New regulations like the Agency Workers Directive are coming through more quickly than the government’s attempts to repeal others. So the regulatory burden on business, hard as that is to measure, is probably rising as well. With all the threats in the world economy as well, it is no surprise that growth is underwhelming.

The manufacturing industry also faces a more specific problem: high energy costs. Energy is about 60 per cent of costs in the chlor-alkali industry, 40 per cent for aluminium smelters, and 25 per cent for steel makers.

The Engineering Employers Federation (EEF) thinks the largest industrial energy consumers here are already paying 10 to 25 per cent higher prices than their rivals in Germany, and 60 to 75 per cent more than those in France. Now the government is introducing a new carbon floor price, announced at the last Budget, which would make that gap even wider. By 2020, the EEF thinks it will add ten per cent to the electricity price paid by those firms.

And the new tax here will actually reduce the prices their competitors pay. While we will have a carbon floor price, in other countries the price will continue to be set on the carbon market. An artificially higher price here will depress demand, thereby reducing the market price and lowering the cost of emitting in other countries.

That’s why the scheme is a complete waste of time as an attempt to forestall global warming: it doesn’t cut the overall cap on European emissions. To the extent less carbon dioxide is emitted in Britain, more will be emitted in the other countries that participate in the EU Emissions Trading System. At the same time, some of the investment that avoids the new higher carbon price here will go to countries like the United States, India and China. That will increase emissions there and mean the overall result of this green tax is higher greenhouse gas emissions.

And it won’t be sufficient to deliver the investment in low carbon generation that the government is hoping for. EDF Energy in particular will enjoy the windfall profit. But there are still enormous risks in delivering new nuclear capacity or carbon capture and storage on a significant scale. Firstly there is the construction risk with so many of those projects going over budget. Then there is the risk that this policy, which relies on the government systematically imposing higher energy bills on domestic and industrial consumers in times of economic weakness – when the market carbon price will be lowest – won’t be stuck to. Climate policy is less and less stable thanks to being so unaffordable: just look at the recent cuts to feed-in tariffs.

This industrial masochism has consequences.

Huge numbers of jobs are at stake, directly and indirectly. The INEOS Chlor plant in Runcorn for example, isn’t just important for the 1,000 people who work there. An industry study found 46,000 jobs could be lost directly within ten years if the plant closed, and a further 87,000 would be threatened in the wider economy, as the chlorine and caustic soda it produces is used in so many other industries. Jim Ratcliffe, the founder of INEOS, has warned the government that it may not be possible to keep the plant open if energy costs continue to mount.

The £1.4bn the government expects the measure to raise by 2015-16 may never materialise. Revenues from the tax will be offset by the loss of all the taxes paid by the workers losing out. Tata Steel alone pays £280m a year in income tax and national insurance contributions.

This tax should be scrapped. Or if that really isn’t possible then the government should at least bring in the kind of protection for energy intensive industry that is available in places like Germany – some action is promised in the autumn statement, but half measures won’t do. Just this Wednesday, Rio Tinto Alcan announced the closure of its aluminium plant in Lynemouth, saying that “the smelter is no longer a sustainable business because its energy costs are increasing significantly, due largely to emerging legislation.” If politicians want the rest of the country to get growing, if they want a British economy less dependent on the success of the City, they’ll need to stop hobbling British manufacturing businesses.

Matthew Sinclair is the director of the TaxPayers’ Alliance and the author of Let Them Eat Carbon, a new book on climate policy.