Last Autumn (2012) the Parliamentary Information Office, as part of its ongoing reports on energy and climate change policy, reported that the Department for Energy and Climate Change and the Department for Business Innovation and Skills were jointly seeking views on a proposal setting out eligibility and design for a scheme to compensate key electricity-intensive business to help offset the indirect cost of the Carbon Price Floor and the EU Emissions Trading System.

In his Autumn Statement on 29 November 2011, the Chancellor announced that the government intended to implement measures to reduce the impact of policy on the costs of electricity for the most electricity-intensive industries whose international competitiveness is most affected by our energy and climate change policies, beginning in 2013 and worth around £250 million over the Spending Review period.

As part of this, the government has committed to compensate key electricity-intensive businesses to help offset the indirect cost of the Carbon Price Floor and the EU Emissions Trading System, subject to state aid guidelines.

The Environmental Audit Committee last Friday, 4th January 2012, published the report of its inquiry into the Energy Intensive Industries Compensation Scheme

The Government's £250 million compensation scheme to help energy intensive companies with the cost of carbon must be tightened up to avoid over-compensating large companies already profiting from the over allocation of EU Emissions Trading System allowances, according to MPs on the Environmental Audit Committee.

The Committee scrutinized the Government’s proposal for a compensation scheme to help offset some of the future electricity price rises that energy intensive industries will face as a result of the EU Emissions Trading System and the Government's Carbon Price Floor.

The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The first and biggest international scheme for the trading of greenhouse gas emission allowances, the EU ETS covers some 11,000 power stations and industrial plants in 30 countries.

Across Europe a large surplus of emission allowances in the EU Emissions Trading System worth 4.1 billion Euros had been accrued by large industrial companies as a result of pre-recession overly optimistic forecasts of growth and fierce lobbying by heavy industry. Sales of these allowances had already raised 1.8 billion Euros for these companies. In the UK, the Government’s proposed rules do not take the value of these excess allowances into account when calculating compensation.

Chair of the Committee, Joan Walley MP said:

"I welcome the Government helping energy intensive companies cope with additional carbon price rises to stop those moving jobs abroad. But it shouldn’t throw good money after bad by giving compensation to those already making windfall profits from the Emissions Trading System when allowances were allocated free-of-charge."

Concerns have been raised that without protection industries in the UK could be at risk from ‘carbon leakage’ due to European and UK policies being more stringent than that elsewhere. Principal among these industries are those generally described as energy intensive. These are characterized by the exceptional energy demands of their key processes. They include iron and steel, chemicals and cement industries.

In response to these concerns, the Autumn Statement 2011 allocated £250 million over the remainder of the Spending Review period to help reduce the impact of energy and emissions policies on the costs of electricity for the most electricity-intensive industries. Subsequently, in October 2012 the Government launched a consultation on the design of the compensation scheme to operate from 2013. The compensation scheme deals with indirect costs from the EU Emissions Trading System (ETS) and the Carbon Price Floor (CPF). The £250 million is earmarked until the end of the current spending review (April 2015) and eligible companies will claim a rebate for a proportion of costs from Government.

The ETS has created a Europe-wide cap-and-trade market for carbon that aims to reduce emissions at the lowest possible cost. Implicit in that scheme is a price signal—price of carbon—which aims to drive low carbon investment by internalizing the external cost that greenhouse emissions impose on society. In the UK, the Government has introduced a CPF to ‘top up’ the carbon price to a target rate, thus reducing revenue uncertainty and improving the economics for investment in low-carbon generation. The target carbon price will start at around £16 per tonne of CO2 in 2013 rising to £30 per tonne in 2020. This equates to a Carbon Price Floor support rate of £4.94 per tonne in 2012-13 and is expected to raise £740 million in 2013-14 for the Treasury.

These two schemes will mean that energy intensive industries face ‘indirect costs’ because they will pay higher electricity prices as a result of generators burning fossil fuels and passing ETS and CPF costs onto them.

The Committee also calls for an energy intensive industries strategy, as part of a wider UK manufacturing strategy, to set out a path for their maximum feasible decarbonisation and help guide and support companies to reduce their dependence on fossil fuels. Such a strategy should identify by how much these industries can feasibly decarbonise and improve their energy efficiency and how the Government will help to ensure that this is achieved, including through energy consumption reduction measures and incentives, and support for innovation, technological research, development and investment.

The Parliamentary Information Office will report further on the progress of these and other measures as we go through the months ahead.

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