Budget 2011 and Environmental Taxes

Written evidence submitted by INEOS Manufacturing Scotland and INEOS Infrastructure (Grangemouth) Limited

Background to INEOS in Grangemouth

1. INEOS functions as three operating companies in Grangemouth: INEOS Manufacturing Scotland Limited, INEOS Chemicals Grangemouth Limited and INEOS Infrastructure (Grangemouth) Limited. Together, these companies employ directly ~ 1,350 people.

2. INEOS Manufacturing Scotland Limited operates a 210,000 barrel per day capacity fuels refinery, which produces over 9 million litres of clean fuels every day. This is the only fuels refinery in Scotland and supplies over 70% of the Scottish market.

3. INEOS Chemicals Grangemouth Limited operates two ethylene crackers and derivative plants that produce polymers, synthetic ethanol and other chemical commodities. It is significantly integrated with other site operations, including the Refinery and the Forties Pipeline System (operated by BP Exploration Company Limited, transporting oil and natural gas liquids from the North Sea).

4. INEOS Infrastructure (Grangemouth) Limited operates facilities for raising steam and power which are integrated with a 3rd party’s operations to form a "good quality" CHP plant, registered with the CHPQA programme. It provides steam and power to the INEOS businesses and the Forties Pipeline system, along with other utilities. It also operates the infrastructure to export products from the site.

Carbon Price Support and Carbon Leakage

5. If the UK is to contribute fully and properly to reducing anthropogenic CO2 emissions, Government policy must achieve two goals:

· the UK must become a low carbon economy, in particular with respect to energy (electricity) production; and

· the UK must manufacture the energy intensive goods it requires within this low carbon economy.

6. From the consultations during the first quarter of this year, we can see clear evidence of an intention to achieve the first of these aspirations.

7. Unfortunately, there is however no evidence that due regard has been given to the latter. There appears to be no considered plan for helping energy intensive industries transition from a fossil fuel economy to a low carbon one. Indeed, elements of the proposals contained in the consultations on the former have (unintended) consequences on the energy intensive industries to such an extent that without urgent action from the UK Government there will be a progressive abandonment of the UK as a manufacturing centre.

8. The UK should be seeking to export energy intensive goods into higher carbon economies, creating jobs and economic growth within the UK, whilst simultaneously delivering real and significant decreases in global emissions. For this to happen, the same political will that has been applied to decarbonisation of electricity needs to be applied to a manufacturing strategy that will allow a transition to a low carbon economy.

9. Energy intensive manufacturing industry does not need subsidy, but it does require recognition that the costs of carbon, either through EU ETS or proposals for Carbon Price Support (and other energy tax measures, such as CRC Energy Efficiency), create a far from level playing field.

10. All of the INEOS businesses at Grangemouth process feed-stocks and produce products that are globally traded commodities; there is no option to pass on carbon taxation costs to the end consumer, instead these costs are taken from our margins. This directly affects the profitability of UK operations as compared to non-UK, and will ultimately impact upon investment decisions.

11. Taking the Carbon Tax elements announced in the 2011 budget as a whole, the costs of UK only carbon and energy taxation will be to add costs to our Grangemouth operations equivalent to up to 50% of our estimated EU ETS compliance costs.

12. There are multiple levels of carbon and energy taxation either in place or in consultation / development, many with uncertainties in their detail:

· EU ETS Phase III – Allocations not finalised, for scheme starting 2013

· CRC Energy Efficiency – scheme commenced April 2011, but rules being re-visited for "simplification" which may have significant impacts on application.

· Climate Change Agreements – to consult on extensions.

· Carbon Price Floor - level of CHP exemption not determined

As noted by the Commons Treasury Committee, the UK carbon and energy taxation measures "lack overall coherence" as a package; when coupled with these uncertainties it further undermines confidence in the fiscal environment when making investment decisions in UK manufacturing.

20 April 2011