It is one of those policies that can sound reasonable in theory: the EU Emissions Trading System creates a carbon market. That market produces a carbon price that is supposed to encourage business to invest in cutting emissions by doing things like building nuclear plants. But the price is too volatile, which undermines that incentive, so you set a floor that it can’t fall below.
It doesn’t work out that way in practice.
It is easiest to understand how emissions trading works by thinking about its American name: cap and trade. We haven’t changed the overall European cap. All we’ve done is put in place a higher price here. That means we will emit less carbon dioxide here, and demand a smaller share of the emissions allowed under that cap. Less demand means a lower market price. So the rest of Europe pays a lower carbon price and therefore emits more. The carbon floor price won’t cut total European emissions by a single gram.
The IPPR wrote about that problem earlier this year. But it gets worse, as we discuss in a new TPA report out today. Not all of the industries fleeing the higher British carbon price will go to Europe. Some will go to places like the United States, India or China — where they tend to be less efficient — and that means total global emissions will go up.
The Engineering Employers’ Federation estimates that the largest energy consumers — major industries like steel and chlor-alkali — already pay up to 10 to 25 per cent more here in Britain than in Germany, and 60 to 75 per cent more than in France. In those countries industry often gets extensive rebates or more substantial discounts on its energy costs. The carbon floor price alone will add another 10 per cent to their energy costs by 2020, while reducing costs for their competitors. That will make it impossible for many energy intensive industries to survive in Britain:
The closure of the aluminium smelter will cost 515 jobs in itself but threaten thousands more indirectly. Energy intensive industries are often vital links in a wide range of manufacturing supply chains. An industry study looking at the INEOS Chlor plant in Runcorn found that it wouldn’t just be the 1,000 people who work there who would lose their jobs if it closed — as the company’s founder has warned it might if energy costs continue to mount up — but 46,000 jobs could be lost directly within ten years and 87,000 would be threatened in the wider economy. Tata Steel currently employs around 20,000 people in Britain but it contracts out large parts of its work, which means there are three to four times as many jobs at stake overall.
I hardly need to explain just how unwelcome that would be with the unemployment rate running at 8.3 per cent. It isn’t just a blow to the families and communities affected directly. It will even undermine the contribution that the Chancellor hopes the new tax will make to the fiscal adjustment. Tata Steel pays around £280 million a year in PAYE and NICs. If they and other energy intensive businesses stop investing here, or close down existing capacity, then that could offset — in full or in part — the £1.4 billion the new tax is expected to bring in by 2015-16.
The Government know that the measures announced at the Budget to limit the impact of the carbon floor price on manufacturing are inadequate. The Chancellor should scrap the tax. If he can’t manage that, he at least needs to bring in the kind of extensive and systematic protection for energy intensive industry that they have in other European countries like Germany. Anything less will make it hard to take any new plan for growth seriously.
Matthew Sinclair is director of the Taxpayers' Alliance.