Matthew Sinclair: This flawed carbon tax will hinder recovery

Tata Steel site is Stocksbridge
Tata Steel site is Stocksbridge
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There often seems to be an endless tide of bad news about the state of the economy these days. Inflation is high, growth is recovering slowly from the credit crunch and a debt crisis is enveloping eurozone economies like Greece and Italy. It’s enough to make you forget that Britain is still home to innovative, productive and successful industries.

Major multinational companies are still putting their money here and creating jobs. For example, last month the Yorkshire Post was able to report the good news that Tata Steel is planning £4.5 million in investment for four projects in Rotherham and Stocksbridge.

Unfortunately, even as the economy is stumbling towards a slow and uncertain recovery, the politicians can’t resist shooting it in the foot.

Now, the carbon floor price – a new tax that the Government announced at the Budget – threatens to make it impossible for steelworks and other energy intensive industries here in Britain to compete.

Energy intensive industries are already struggling, thanks to regulations which are designed to try and reduce greenhouse gas emissions, but increase their costs as well as your electricity and gas bill at home.

You pay 14 per cent more for electricity as a result of these regulations and could see prices rise by more than 50 per cent this decade to pay for massive investment in things like offshore wind to meet European Union targets.

The largest industrial energy consumers already pay 10 to 25 per cent more for their electricity than rivals operating in Germany, and 60 to 75 per cent more than those in France. The Engineering Employers’ Federation estimate that the new carbon floor price will add another 10 per cent to their electricity bills by 2020.

Just to make it worse, the carbon floor price will actually reduce costs in the rest of Europe at the same time as it adds to them here.

That’s because in other countries the price will still be set on the carbon market: they aren’t bringing in carbon price floors of their own.

And as we don’t alter the overall European cap on emissions, increasing the price here and reducing our emissions will reduce the price in the rest of Europe – it’s a simple case of supply and demand. That will increase their greenhouse gas emissions to the extent it cuts ours, making the whole thing a complete waste of time.

And it will drive an even greater gap between the cost of industry locating here and going somewhere else.

Of course we don’t only compete with other European economies British business also has to compete for markets and investment with rivals in countries like the United States, India and China that don’t face anything like the same kind of burden from green taxes and regulations.

If activity moves to those countries, then that will mean fewer jobs here, and it will also mean emissions are driven abroad instead of cut; a phenomenon known as “carbon leakage”.

The combination of carbon leaking out of Europe and no change in the overall cap almost certainly means that the carbon floor price increases total emissions: the climate doesn’t care in which country a tonne of carbon dioxide is emitted.

Driving energy intensive industry out of Britain will cost us dear. Karl-Ulrich Köhler – the head of Tata Steel Europe – has already warned that the carbon floor price threatens the company’s £1.2 billion programme of investment in the UK. That means less growth and lost jobs – and it will offset some of the revenue that the Government hopes the new tax will raise.

The Energy Intensive Users Group and the Trades Union Congress estimate that energy intensive sectors currently employ 225,000 workers in Britain.

It isn’t just the jobs of those directly working for the big energy intensive companies that are at risk.

Jim Ratcliffe, founder of chemicals firm INEOS, has warned that it could be impossible to keep the INEOS Chlor plant at Runcorn open if energy costs continue to mount. If that happens, it won’t just be the 1,000 people who work at the plant who lose their jobs.

An industry study suggested that 46,000 jobs could be lost directly within ten years and a further 87,000 would be threatened in the wider economy.

Tata Steel employ 20,000 people in Britain but they also contract out large amounts of work. They think that means there are three to four times as many jobs at stake should the business contract, even before considering the effects on the wider economy.

All those workers pay lots of tax. Putting them out of work, or forcing them to accept lower-paying work, may mean the carbon floor price doesn’t deliver anything like the £1.4 billion that the Treasury expects.

We can’t afford this industrial masochism. The Government should be trying to help businesses to grow and succeed in Britain, not ruining their chances. They need to at least ensure that energy intensive industry isn’t hobbled by higher energy costs.

Or, ideally, to stop families paying more on their electricity bills at home too, they should scrap this misconceived policy entirely.

Matthew Sinclair is director of the Taxpayers’ Alliance and author of Industrial masochism: The carbon floor price and energy intensive industry.