Tony Lodge: Ease energy burden on manufacturers who can help to end economic malaise

What George Osborne wants with one hand he risks taking away with the other. The Chancellor has made clear his desire for Britain to rebuild its manufacturing sector, which declined significantly in the Blair-Brown period, and for manufacturing to help lead Britain out of economic stagnation. There is broad political support for this measure, as MPs collectively call on the Government to do more to balance an economy which has become over-dependent on the service and financial sector.

The rhetoric and political spin of these welcome words do not stack up when one examines the new energy and environmental burdens the Government plans to slap on the UK’s existing manufacturing and energy intensive sectors.

The combined impact of the Government’s new energy and climate change policies are imposing significant new costs on the UK’s energy intensive industries, and without urgent review could see some companies leaving the UK for good.

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Steel-making, ceramics, paper, cement and lime manufacture, aluminium, basic inorganic chemicals, brewing and other industries currently employ some 225,000 workers, producing products essential to the UK’s future low carbon economy, from steel and lightweight composites for wind turbines and electric cars, to glass, ceramics and advanced insulating materials for low-energy housing. Many of these jobs are Yorkshire-based.

The respected Energy-Intensive Users Group (EIUG) and the TUC union say that the forecast increase in total energy bills, taking electricity, gas and emissions reduction schemes together, could be as high as 141 per cent by 2020.

The Government needs to ensure a better balance of policy on emissions reductions between the industrial, commercial, transport and domestic sectors. As green tax structures stand today, energy intensive industries are already carrying a heavy burden of policies to tackle climate change and reduce energy use. Yet these companies make a significant contribution to UK GDP and exports, keeping thousands of skilled workers in jobs.

The danger for manufacturing is that many of the existing environmental taxes in place will be exacerbated in just under two years, with the imposition of a unilateral UK carbon price floor. This is a money-raising tool which will tax energy intensive business £16 for every tonne of C02 emitted from 2013 but rises quickly to £70 a tonne by 2030.

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It will only apply to the UK and will reduce the competitiveness of manufacturing operations; European competitors could be paying as little as £13 per tonne in 2013. In reality, UK energy intensive industry will suffer a double hit as they will also face higher bills as a result of rising energy prices as fossil fuel power stations will also be hit by the carbon tax.

The fertiliser industry has been identified by the EU’s own study to be the sector most exposed to the risk of “carbon leakage”, where emitters merely move to another country to escape our carbon taxes. Despite the fertiliser sector’s own substantial recent investment to reduce greenhouse gas emissions by more than 40 per cent, the combined effect of these climate change policies will almost certainly make this a reality in the UK. Famous Yorkshire brewers and energy intensive users such as Timothy Taylor at Keighley are keen to avoid more Government taxes, especially after their recent £2.7m investment in new on-site facilities.

By pursuing unilateral policies, separate from our European competitors and outside the traditional EU framework, the UK risks forcing manufacturers to relocate elsewhere in Europe.

Many companies have indicated they wish to invest more in the UK, but are competing for funds from parent companies and with other plants in Europe and around the world. The UK’s climate change policies risk becoming seriously out of line with other countries’ more pragmatic approaches.

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Tata Steel, which has vast interests in Scunthorpe and Rotherham and employs thousands in northern England has already warned the Government on this issue. “The introduction of the carbon price floor represents a potentially severe blow to the sustainability of UK steelmaking,” the Tata CEO told the Government in March.

The Department for Energy and Climate Change admit that the cumulative impact of climate policies on electricity prices to large intensive users could be as much as 52 per cent by 2020 and 58 per cent by 2030, though their central scenario suggests a lower impact of 31 per cent by 2020 which, somewhat suspiciously, is around half the level indicated by earlier government analysis.

If realised this could lead to significant erosion of the UK manufacturing sector, unless clear concessions are swiftly made to manufacturing. DECC admits that average electricity prices faced by large industrial users rose by 45 per cent in just two years – between 2007 and 2009.

The imposition of a carbon price floor in the UK, potentially way above the price for carbon in continental Europe, is an important challenge for the Government to overcome, as the forces of opposition have yet to mobilise. Many in the UK Coalition Government, particularly nervous Conservative politicians, look at Australia where Julia Gillard’s Labor/Green Coalition have announced plans for a an initial carbon price floor of £15 per tonne of CO2 from July 2012.

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Gillard’s poll standing has collapsed and the Conservative opposition under leader Tony Abbott has assumed a commanding poll lead, largely based around carbon floor price unpopularity and opposition from industry. Abbott now looks set to win the next the Australian general election.

It is imperative that the Government quickly moves to mitigate the impact of these policies on our key manufacturers. UK climate change policies must have accompanying impact assessments that look at the combined effect of all related policies on intensive energy users.

The Government must now undertake a full cost-benefit analysis of energy-intensive sectors to understand the direct impact on the companies and the GDP benefit to the UK and its regions.

If manufacturing is to help pull Britain out of its economic malaise then the Government must stop putting barriers in its way and do everything to provide a level playing field with our key competitors in Europe and the rest of the world.

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