Policy without perception

Posted on 9 Jul 2010 by The Manufacturer

Steve Radley: It’s hardly groundbreaking. Research conducted by EEF has revealed that many of the UK’s manufacturers think climate change policy is a burden on their business.

You’d be forgiven for thinking manufacturers are whinging about extra costs and being forced to do something they’d rather not.

Yet a serious review of the current climate change policy landscape shows that they have a point. The effectiveness of policy must be judged against four tests. It must create clear, reliable and transparent incentives. It must ensure regulation targets the right places. Regulation must be simple and not administratively burdensome.

And it must take clear account of the impact on the competitiveness of those businesses subject to regulation. Climate change policy currently fails on all these points.

Manufacturers are subject to a confusing mix of regulatory sticks and incentives which are failing to address the unique challenges they face. They already have to pay the Climate Change Levy.

Some will be regulated by the EU Emissions Trading Scheme (EU ET S) and/or have a Climate Change Agreement (CCA). Many now also fall under the Carbon Reduction Commitment Energy Efficiency Scheme (CRC).

The sum of all this policy? Confusion and mixed, muddied incentives. Policy overlaps are frequent and reporting requirements are not harmonised, creating immense complexity and administrative burden. This complexity serves only to confuse the very signals to change behaviour that policies were brought in to stimulate. In addition, policy is generally extremely blunt. It fails to take into account the work already achieved, the technological boundaries of manufacturing processes and the host of other barriers manufacturers face when trying to improve the energy efficiency of their operations. Perhaps most worryingly, government has yet to really grasp the cumulative impact of all this policy on the competitiveness and profitability of UK manufacturers.

In short, our analysis shows that the current direction of travel risks undermining a healthy and vibrant manufacturing base at a time when there is a growing recognition of the need for a rebalanced economy. Government needs to rethink how it regulates manufacturers in this area.

To start with, we believe that it should reform the Climate Change Levy (CCL) into a carbon-based tax.

A variable tax, set according to the carbon content of fuels, would begin to provide the right price signals to energy suppliers and energy consumers. It would provide a stronger incentive to energy users to reduce high-carbon energy and fuel use, use high-carbon fuels more efficiently and for electricity generators to invest in lower-carbon forms of energy.

As a first step users of energy, currently subject to the CCL, should be taxed according to the carbon content of the fuels they use. But the long-term goal should be to extend the carbon tax throughout the entire economy so that all society plays its role in tackling climate change. Government must set in train preparations for this as soon as possible.

Any reform of energy taxation must be accompanied by voluntary negotiated agreements which provide tax relief for industry, like the current Climate Change Agreements (CCA). While CCAs are supported by manufacturers and have proved to deliver significant reductions in carbon emissions, these agreements are ripe for further reform.

Government must recognise that each manufacturing sector operates differently and that individual, tailored solutions may be required. We want to see an approach which uses the carrot of tax relief to encourage improvements in energy efficiency – but in the context of what individual manufacturers are rationally able to achieve. We also believe government can go further to use these agreements to streamline other, existing regulation.

Competitiveness concerns must be taken more seriously. In particular, government must routinely consider the cumulative impacts of its policy on manufacturers’ ability to compete and remain profitable.

And, finally, we’d like to see a shake-up of the Carbon Trust to ensure that its advice and support focuses on the common barriers faced by individual manufacturing sectors. The Carbon Trust’s Industrial Energy Efficiency Accelerator is a welcome move in the right direction. Only by getting to the heart of manufacturing processes can the substantial cuts in carbon dioxide that government is seeking be made.

These are the messages EEF will be taking to government. It’s time for government question seriously whether they understand the impact that their legislation is having on a vital aspect of the national economy.

Steve Radley, director of policy, EEF the manufacturers’ organisation