The real cost of carbon

In March the government set a floor price for tradeable carbon emissions credits in a move designed as a key part of its proposals to reform the electricity market. In essence the government hopes that providing greater economic certainty will help generate more investment in new low emission power projects, including nuclear power.

Research released by Thomson Reuters Point Carbon suggests that the UK’s proposed carbon floor price will cut carbon emissions from the UK energy industry 5.3% by 2020. The prediction says that the government’s plans, confirmed in last month’s Budget, will cut carbon emissions by 67 million tonnes between 2013 and 2020, a saving equivalent to carbon emissions from six 400MW gasfired power stations.

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 floor price is in effect an extra tax designed to come into effect if the price of carbon falls below £16 per tonne from 1 April 2013 or £30 in 2020.

However, following the carbon floor price announcement, analysts at investment bank Citigroup wrote: “On reading an accompanying policy costing document it becomes clear that the actual tax paid…will be higher, as the published prices are referenced as real prices in 2009 money. Applying inflation estimates from the office of budgetary responsibility results in an estimated nominal carbon floor of Eu21 (£18.33) in 2013 and Eur46 (£40.66) in 2020 at current exchange rates.” Thomson Reuters Point Carbon says that those estimates may even be too cautious estimating a UK carbon floor price as high as Eu54 a tonne by the end of the decade – a significant premium on the €36 a tonne price that is expected across the rest of the EU.

A potentially damaging measure
The group set to suffer the greatest impact as a result of the introduction of a floor price are the energy intensive users including the steel, aluminium, cement, paper and chemical industries.

Some manufacturing firms are already showing that the cost of a tight environmental doctrine may come in the form of British jobs.

When Tata Steel announced late last month its plans to cut production and axe up to 1,500 jobs at two sites in the north east of England due to weak demand for its products, many were crestfallen at the news but few in the steel industry were shocked.

While the company has publically blamed the slump in the UK construction market as the primary reason for the cutbacks, the added pressures imposed by the government’s new green taxes certainly exacerbated a delicate situation.

Earlier in May, The Times quoted managing director and CEO of Tata Steel Europe, Dr Dr Karl-Ulrich Köhler: “European steel makers already face the prospect of deteriorating international competitiveness because of the proposed unilateral imposition by the European Commission of very significantly higher emission costs. The carbon floor proposal will impose additional unilateral emission costs, specifically on the UK steel industry. This is an exceptionally unhelpful and potentially damaging measure.” Runcorn-based chemical company Ineos, a major energy consumer, issued similar concerns saying that the higher costs could force it to move production abroad. In a worst case scenario, the company’s energy bill could rise by as much as £30m a year by 2020, which would have a “considerable impact” on its ability to compete, the firm said.

“The Runcorn site is very important to Ineos and we have invested more than £400m in the site to date to secure its future,” Ineos chief executive Chris Tane said in a statement; “Our business has weathered the economic downturn and has real potential for long-term growth and prosperity, however this can only be realised if we remain competitive, internationally,” he said.

He said Ineos and other energy intensive manufacturers were working with the government to ensure their needs were reflected in any legislation: “The government is listening and discussions so far have been very positive. We are therefore hopeful that the legislation will provide support for energy intensive manufacturers as the UK moves towards a low carbon economy. This will be vital if we are to remain competitive versus other European and global manufacturers.” Voicing similar concerns, Lynemouth firm Rio Tinto Alcan says that the proposed floor price would cost an additional £40m per year, eliminating its profit margin. The company says the plans cast doubt over more than 600 jobs at the aluminium plant, which contributes more than £100m to the UK’s north eastern economy.

Jeremy Nicholson, director of the Energy Intensive Users Group, has warned that the UK’s energy policy is a severe risk to the economy. Speaking at an annual lunch hosted by the ERA Foundation in May, Mr Nicholson said that legislation and initiatives like the CRC Energy Efficiency Scheme and the Carbon Floor Price have increased energy costs to an uncompetitive level. “With some of these manufacturers, 20%-70% of their production costs are from energy. Even a slight rise in cost or an extra environmental tax can be very damaging,” he said.

“If we tax too much and make fossil fuel energy generation expensive, we won’t decarbonise the economy by reducing carbon from power stations, we’ll decarbonise it by shrinking the economy.”

A growing list
Although the UK floor price won’t be introduced for 18 months, the move is the latest environmental cost burden for businesses which have already been subjected to a number of green taxes and regulations.

Depending on the size of the business, a company might already be subject to the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), the Climate Change Levy (CCL) and associated climate change agreements (CCA), building regulations, and the EU emissions trading scheme (EU ETS).

The considerable regulatory list has caused unease. The CRC in particular has been labelled a ‘green stealth tax’, since money raised through the scheme is now going to government rather than to those firms who cut their bills the most as was originally promised.

Research released by electricity and gas supplier npower to mark the first anniversary of the implementation of the CRC revealed that nearly half (45%) of businesses want the scheme scrapped.

More than half of the respondents feel the CRC places unnecessary financial burden on businesses while 57% would like a simpler process for carbon footprint reporting.

Dave Lewis, head of business energy services at Npower, says that the results of the company’s latest research reflect much of the feedback the company receives on a daily basis from its customers. “It is concerning that the changes to the CRC have resulted in businesses putting less priority on reducing emissions, which was one of its key aims. We feel it is important that organisations focus on the best practice behaviour the CRC sets out to encourage, as energy efficiency and effective energy management make sound commercial sense, with or without the scheme.” Behind all the potential for economic damage lies a greater good, the sustainability of the human race.

But there are additional issues with the myriad of interrelated regulations which draw into question the proposed benefits.

One of the main problems with the structure of the current regulations is that companies buy their electricity from power providers who themselves hold permits under the EU ETS for every tonne of carbon emitted. These permits are limited but can be bought and sold depending on the need of the company. If companies under the CRC reduce their electricity demand it could simply free utilities to give their permits to someone else, perhaps another power provider or an energy intensive user, allowing them to increase their carbon emissions. A report by Carbon Retirement estimates that “between 2011 and 2020, the 90m tonnes of carbon dioxide savings the CRC participants are expected to achieve will be emitted instead by heavy industry”.

“The benefits of the CRC are limited,” says Liz Morgan, carbon solutions manager at energy consultancy firm EIC. “The cancellation of the recycling mechanism has turned the scheme into an administrative and financial burden. The legislation however, does push participants to monitor and report their carbon emissions, which in turn forces a better understanding of energy usage and carbon emissions data. The additional financial impact and legislative requirements of the scheme will also ensure that the CRC will be discussed at senior management level. In the long term, pushing energy efficiency purchasing decisions up the management chain should encourage better results.” In the end, the requirement to reduce the amount of carbon in our atmosphere is absolute and until that takes place, the regulations are here to stay.

The only mechanism for reducing the regulatory burden is to make the changes necessary to reduce carbon emissions. Until those savings are made and sustained, the government will continue to enforce restrictions to encourage change.