UK energy policies are sabotaging industry’s global competitiveness

 
Tony Lodge
THE revelation that George Osborne wants fossil fuels to remain a key and important supplier of Britain’s electricity generation shows he can talk the talk. But the chancellor will struggle to give legs to his policy. His statement comes immediately unstuck when you consider how the Treasury is preparing to lump huge taxes on such fuels, making them, and the energy they produce, more and more expensive – and Britain even more uncompetitive in the process.

Osborne’s rhetoric is not new. Last year he called for a revival in UK manufacturing to both help rebalance the economy and maintain and develop a new skills base. Addressing the Welsh Tory Conference, he asked, “wouldn’t it be great if Britain made things again?” While Osborne made all the right noises on cutting red tape, these words have not been matched with action. Manufacturers and energy intensive industries have faced spiralling energy costs. And it’s about to get worse.

Anyone claiming that such costs are dictated by global or international factors, over which the UK has little influence, doesn’t know that a series of unilateral policies are now passing through parliament which will directly and indirectly cause costs for manufacturers and heavy industry to soar. This will cause jobs to be lost and industry will relocate overseas where costs are lower.

Earlier this month, Vince Cable’s Department for Business, Innovation and Skills released a detailed report which concluded that so-called green policies will make British industry uncompetitive compared with our main competitors as early as 2020. It found that UK steelmakers already pay more for energy than international rivals, and they can expect to pay over 280 per cent more than their American and Russian competitors by 2020. Cement, aluminium, fertiliser, industrial gas, as well as steel producers, will face huge costs as a result of new policies, such as the carbon price floor, introduced by the coalition.

Ironically, it was Osborne, at last year’s Tory conference, who accused environmental regulations of “piling costs on the energy bills of households and companies”, and who argued that the government should not adopt green targets that damage the business sector. To applause, he pledged that “we’re not going to save the planet by putting our country out of business. So let’s, at the very least, resolve that we’re going to cut our carbon emissions no slower, but also no faster, than our fellow countries in Europe.”

However, from 1 April 2013 (potentially a very bad joke) carbon emissions in the UK from electricity generators and energy intensive industry will be taxed at £16 per tonne of carbon dioxide emitted, rising to £30 per tonne in 2020. The UK is currently paying around £7 a tonne through the EU Emission Trading Scheme, along with all other EU states.

An early casualty of our energy policy was the March closure of Rio Tinto’s aluminium smelter at Lynemouth, in the north east, with the loss of 515 jobs. The company said the smelter was no longer sustainable due to rising costs and looming legislation. The company will shift aluminium production and investment overseas where costs are lower. This is just the beginning.

By imposing new high unilateral taxes on fuels that are cheap and abundant, like coal and gas, the government cannot claim to have its hands tied by international factors. And ironically, a carbon price floor will do nothing to help deliver low carbon electricity. New nuclear plants will get a guaranteed price for their electricity through a contract for difference, in any case.

Britain risks becoming a world leader in energy taxation. Cheap, reliable and abundant energy is essential for the future competitiveness of British industry. It is incoherent to impose green taxes on manufacturers and then – as happened in the budget – give money back in the form of subsidies. The coalition claims to want to see a manufacturing-led economic recovery, but this will only be forthcoming if energy prices are internationally competitive. Unilateral energy taxes will only increase electricity costs and drive vital industries overseas.

Tony Lodge is a research fellow at the Centre for Policy Studies. His latest pamphlet, The Atomic Clock – How the Coalition is gambling with Britain’s energy policy was published earlier this year.