It’s not easy being green

Posted on 6 Nov 2014 by Victoria Fitzgerald

Victoria Fitzgerald summons the energy to investigate the UK industrial sector's position concerning the impending EU climate policy regulation changes.

According to a report published in August by Eurosceptic lobby group, Business for Britain (BfB), green policies imposed by Brussels are endangering 1.5m UK jobs by burdening manufacturers with high energy costs.

The BfB says that EU policies are responsible for up to 9% of spending on energy bills for industrial companies, and warns this could increase to 16% by 2030.

The group fears that manufacturers will consider relocating operations to countries where energy is cheaper, and with more than 1.5m individuals employed in energy-intensive industries like metals, ceramics and glass, the BfB is labelling the possible shift as “devastating”.

The research also reports that the cost of the EU’s Emissions Trading Scheme, and the Renewables Obligation (RO), a UK subsidy scheme for wind farms and other green technologies designed to hit EU renewables targets for 2020, together account for 9% of energy bills for manufacturers.

Government has stepped in and done quite a lot, we are not 100% there yet, but we have been promised some compensation packages for energy in terms of industry. 

The BfB however, which board members include chairman of JML and Labour part donor, John Mills and is backed by City grandees including Lord Wolfson, chief executive of Next, and Lord Rose, former chairman of Marks & Spencer, also accepts “there is good chance that the UK would have introduced similar policies” and that the UK has “in some areas gone considerably further than the EU in introducing expensive policies,” which removes some of the substance from its argument somewhat.

Assessing the gravity of BfB’s concerns, EEF’s senior energy and policy advisor, Richard Warren, admits that EU policy “does impact on energy prices”. However he is quick to point out  EEF’s call for reform across the entire policy framework.

“It is quite alarmist to say that 1.5m jobs are at risk because of EU policy,” Warren says. “If you got rid of the EU, where would the UK be now? Britain has its own climate change targets, it has the Climate Change Act, with stringent, if not even more stringent targets than the EU is asking.

“Even if you scrapped everything in terms of renewables, you’ve still got a lot of contracts already committed to, you wouldn’t just be able to slash everything from energy bills that come from various renewables targets.”

Warren told TM that if anyone was to agree with any of the scepticism, it should be that, “the executive summary states we should have just one emissions target for the whole of Europe and the UK government is already pushing for that.

“Government has stepped in and done quite a lot, we are not 100% there yet, but we have been promised some compensation packages for energy in terms of industry. Even without the EU, we would be in a fairly similar position, it’s not as simple as to say the EU has forced this upon us. When renewables targets were pushed through, the labour government was very much in favour.”

Though ‘alarmist’ in its disposition, energy targets are placing pressure on manufacturers, particularly as energy costs continue to rise, and with European Union leaders meeting at the end of October to agree on targets to reduce greenhouse gas emissions, increase renewable energy and improve energy efficiency, industry will be poised to learn the new 2030 Targets.

Taking aim

The EU’s proposed 2030 climate and energy framework includes a legally-binding 40% reduction of greenhouse gas emissions, a 30% improvement in energy efficiency by 2030 and increasing the share of renewables to 27% of the EU’s energy mix.

A meeting between member state representatives decided whether the efficiency and renewable targets would be binding. Conclusions were reached on October 23- 24 and the EU’s position was communicated at the United Nations Climate Change Conference in Paris, however, the outcomes have yet to be released.

One priority was to set the target number to ‘at least’ avoid placing a ceiling on the objective, this could produce a 43-51% reduction in 2030 compared to 1990 according to EU policy and debate website,

Before decisions were finalised the site released figures showing member states’ position on EU 2030 climate targets, with the UK standing against setting binding efficiency targets.

Carbon leakage

This refers to describing the situation, particularly in energy intensive sector like steel, glass and ceramics, when cost-related climate policies push businesses to relocate production to other countries that have more relaxed constraints on greenhouse emissions. This then increases over-all emissions in that area. Sectors exposed to significant risk of carbon leakage that receive a higher share of free allowances are compiled on a list aimed at protecting those cited from competition from non-EU subject to comparable greenhouse gas emissions regulations.

The draft proposal for the new list, which lasts for five years once agreed, was published on May 5, 2014. Its most recent version faced opposition from several member states, including some UK representatives, questioning whether some industries should remain on the list. The object was denied earlier in October.

In January, the European Commission introduced the Market Stability Reserve, to help reduce the amount of pollution allowances available to emitters in cases of exceptional decline in emission levels. The Commission plans for the MSR is to come into force in 2021, however the UK released a statement in October calling for the scheme to be brought forward to 2017.

This is a wake-up call that the tension between the pursuit of low carbon policies and Britain’s ambitions for a better-balanced economy must be resolved

Additionally, it urged for 900m carbon allowances from previous backloading programmes to be abolished or consolidated into the forthcoming MSR. Energy and Climate Change Secretary, Edward Davey said in a statement on October 20: “The MSR will address this issue by creating an allowance reserve that will increase or reduce the supply of allowances in the system in response to levels of demand, allowing the market to operate effectively as external circumstances change.

“This would offer a long term solution to the surplus beyond ‘backloading’, under which allowances are being removed but are due to return from 2019.”

Davey also voiced concern over “increasing costs for businesses, uncertainty for investment and ultimately higher costs for consumers” as being unacceptable. He continued: “An insufficiently ambitious cap, combined with the economic recession and other factors, has resulted in a surplus in the EU ETS of around 2bn allowances, undermining the functioning of the market. The result is that the system is not sending the right signals to low carbon investors, increasing the overall costs of meeting our future carbon reduction obligations.

“However, along with Germany and others, the government believes that the Commission’s MSR proposals need to be strengthened to adequately correct the problem of oversupply and protect against future imbalances.”

The EU emissions trading system and energy intensive industry

January 1, 2021 will mark the start of a new EU Emissions Trading System (EU-ETS) and subsequently a new framework target to guide the EU through to 2030. The aim is to ensure that EU-wide emissions remain beneath a predetermined cap and contribute to the overall EU decarbonisation target. Although this may seem like a lifetime away, the debates that will shape the future of EU-ETS are taking place right now.

In the meantime, policy makers need to account for the challenges faced by Energy Intensive (EII) sectors in decarbonising, as well as understanding how the EU ETS threatens the survival of EIIs in Europe.

In its August 2014 report The Future of the EU Emissions Trading System, EU-ETS exemplified the steel sector in its energy saving potential. The UK steel industry has decreased its emissions in the past 60 years dramatically and is now nearing its limit of reduction, resulting in a stagnation of improvement.

The report states: “Regardless off the policy measures introduced by governments, the contribution of the steel sector, using current available technologies, is governed by this scientific limit.” The problem now resides in the fact that any further reductions in emissions from the UK steel industry can only be achieved by lowering production.

To plug this gap, further research and development is required for a “step-change in technologies” like Carbon Capture and Storage (CCS), the process of capturing waste carbon dioxide from large point sources and transporting it to a storage site to place it where it can’t enter the atmosphere. In fact earlier this year, UK project White Rose Carbon Capture and Storage, secured €300m EU funding to obtain CO2 and submerge it under the North Sea. Although the steel sector expects to meet the 2020 targets, there are major concerns for cutting emissions beyond this point.

Although, the UK produces a glut of specialised steel goods, they are of the same standard available from competing non-EU countries, so increasing prices for EU customers could very easily drive them into the arms of other suppliers like China, India and South Korea. The manufacture of steel in developing countries can be produced very competitively, which ups the pressure for developed markets like the UK and other EU countries.

Increasing the burden

With EEF’s report of a projected 50% hike in electricity prices by 2020 threatening to damage British manufacturing by hitting investment, margins and competitiveness, this is a stark warning that escalating energy costs could see manufacturers investing in facilities outside the UK, among other things.

According to EEF “energy already accounts for 6% or more of turnover for 27% of firms (surveyed)”.

Gareth Stace, head of climate & environment policy at EEF, said in a statement regarding the recent report: “This is a wake-up call that the tension between the pursuit of low carbon policies and Britain’s ambitions for a better-balanced economy must be resolved. Failure to do so could hit investment, margins and competitiveness, putting the brakes on growth and leaving our economy stuck in the slow lane.

“It’s time for a fresh approach. Low carbon is rapidly becoming synonymous with anti-competitive, which is why we are urging all parties vying for government to commit to review and reform current policies and mechanisms.

“Above all, we are seeking a firm commitment to implement the Energy Intensive Industries package announced in the 2014 Budget as soon as possible. High energy costs are crippling for manufacturers of all sizes, but rapid implementation of this scheme would at least reduce the burden on those who are most exposed.”

The future

It is clear that more alignment between industry, UK policy and EU policy is required to create a transparent, integrated and strategic approach to emissions targets, not to mention enforcing a reliable energy supply that is aligned with the UK’s competitors in cost. Additionally, the British government needs to be more tactical in its investment of green innovations and its protection of energy intensive manufacturers from carbon leakage, to compete fairly in the global market place. TM asked EEF’s senior climate and environment policy advisor, Roz Bulleid, about her concerns for discussions on the 2030 targets. Bulleid said: “There has been a lengthy debate over the status of the energy efficiency and renewables targets. It now seems likely both will apply at EU level, with only the renewables target binding.

“This is not the position the UK government (and EEF) argued for. Having three separate sets of national targets has not been a cost-effective approach so far and it’s hard to see how the new EU-wide targets will be deliverable without some kind of responsibility being delegated out to individual countries.”

Bulleid feels that, although not ideal, this course of action will likely be the case, and it can be argued that it will mean the same thing as an emissions-only target for industry that places increased gravity on the EU emissions trading system (ETS), which Bulleid refers to as “a bit of a basket case”.

An ideal scenario, Bulleid says, is if “energy intensive industries get the full protection and allowances they need to compete globally”.

Navigating the EU Green system is tricky and manufacturers need to keep their voices loud, so that the arrangements support the momentum in the sector. As for the Eurosceptics? Unanimous agreement on all issues is, and will remain a distance fantasy, but the reality is that our involvement in the EU brings optimism with difficulties. The EU accounts for 18% of global manufacturing output, the UK sells 50% of all its exports to the EU, not to mention that the EU invests £11bn a year on innovation programmes, of which 15% is invested in the UK and perhaps most poignantly, within the EU the UK is the leading destination for foreign investment. Manufacturers must take the rough with the smooth and implore Government to strike fair and supportive for the 2030 targets.