Budget 2011 and Environmental Taxes

Written evidence submitted by the Chemical Industries Association

Executive Summary

1. Our key comments relate to the Budget 2011 decisions on Carbon Price Support (CPS). It is clear that establishing a carbon price floor will help to deliver a key objective by incentivising increased investments in low carbon sources of power. We support the need to renew our aging electricity generators and so move towards a secure, low carbon mix in the UK’s base-load generating capacity, but believe that feed-in tariffs (FiTs) could have been a more focussed and cost effective way to achieve this.

2. While Budget 2011 included many measures which meet with business support, the introduction of CPS on a UK only basis without adequate mitigation poses a risk to UK competitiveness and British jobs in energy intensive and internationally exposed sectors like chemicals. This is because CPS is contributing to the already high outlook for the cumulative impacts of the UK’s climate change and energy policies on our energy related costs. Based on the policies which are in place and announced, the latest update of an independent report suggests these so far unmitigated costs could double by 2020.

3. It is important that proposals for the mitigation of undesirable impacts such as these are addressed at the same time as the taxation measure. However, we understand that the Government’s strategy for energy intensive industries, which will consider the cumulative policy impacts on our energy related costs, is not expected until this summer. Delays such as this only contribute to prolonged uncertainty and can be detrimental to long term business decisions about the UK.

4. It is vital that the UK ensures a sustainable business environment for energy intensive sectors like chemicals which have a contribution to make to both rebalancing and greening the economy (as the chemical industry is an enabler of climate change solutions). Surely the optimal way to achieve a green economy is through the retention of the whole supply chain for green products including the contribution from energy intensive sectors ?

The Chemical Industries Association

5. The Chemical Industries Association (CIA) is the organisation that represents chemical businesses throughout the UK. The chemical sector is both energy intensive and exposed to international competition in terms of both trade in our products and attracting investment. At the same time, t he UK chemical sector has a n excellent track record for reducing our own emissions, and we are also enablers of climate change solutions : globally, the greenhouse gas emis s ions saved by our products and technologies are twice the level of our own production emissions. For further information, see the annex to this submission.

Detailed comments on inquiry themes

Whether Budget 2011 furthers the Government’s green objectives, including the impact of the cut in fuel duty on greenhouse gas emissions and air pollution

6. Our key comments relate to the Budget 2011 decisions on Carbon Price Support (CPS) which is designed to deliver a carbon price floor target for the electricity generators. Whereas the cut in fuel duty is designed to reduce the impact of market developments and international events on the strength of fuel prices, the objective of CPS is to contribute to an increase in electricity prices by addressing the perceived weakness of carbon prices in the EU Emissions Trading Scheme. We have no comment on whether the temporary reduction in fuel duty impacts on the government’s green objectives, but it is clear that establishing a carbon price floor will help to deliver a key objective by incentivising increased investments in low carbon sources of power.

7. We support the need to renew our aging electricity generators and so move towards a secure, low carbon mix in the UK’s base-load generating capacity but believe that feed-in tariffs (FiTs) could have been a more focussed and cost effective way to achieve this. Furthermore, while the Government’s carbon price support (CPS) proposals are designed to bring long term certainty to investors in low carbon generating capacity, we are concerned that our members in the chemical sector should enjoy a similar level of certainty to support their long term business decisions on UK investments up to 2020. While Budget 2011 included many measures which meet with business support, the introduction of CPS on a UK only basis without adequate mitigation poses a net risk to UK competitiveness and British jobs in energy intensive and internationally exposed sectors like chemicals. This runs counter to the objectives of rebalancing the economy towards manufacturing and also to greening the economy (as the chemical industry is an enabler of climate change solutions).

8. The offsets for CPS impacts on business provided by the Government in Budget 2011 (as further explained in its response to CPS consultation submissions) offer no direct mitigation for CPS because they are based on avoiding further increases to the levies which impact our energy bills rather than mitigating the effect of policies already in place or announced . In particular: Government will not introduce a levy to fund the carbon capture and sequestration (CCS) incentive , and there will be an increase in relief from Climate Change Levy (CCL) on electricity for Climate Change Agreement (CCA) participants to 80% in 2013 (from the current level of 65%) .

9. T he increase in CCL relief on electricity only reinstates the rate of relief that applied prior to 1 April 2011 and represents a small proportion of CPS costs . T he table below shows that CCL savings are expected to be worth less than a third of the cost of the CPS pass-through to electricity prices in 2013 (based on 100% pass-though) and around a tenth of the cost of CPS by 2020 as it escalates to support the target rate of £30/tCO2 for the carbon price floor (based on DECC carbon price projections).

10. We welcome the reduced corporation tax rates announced in the Budget but, regrettably, this will be of little benefit to energy intensive companies when the cumulative impact of the UK’s climate change and energy policies could see our energy related costs double by 2020. This is the impact projected in latest update of an independent study by WatersWye Associates for the Energy Intensive User’s Group and TUC. In addition to the unrelieved costs of CCL and CPS, further contributors to cumulative costs include the EU Emissions Trading Scheme (EU ETS), the Renewables Obligation (RO) and Feed In Tariffs (FITs). The chart below shows the projected impact of the main announced and expected policy measures on the wholesale electricity prices faced by energy intensive industries.

11. Note that the chart reflects Budget 2011 CCL announcements and also the projected cost of measures in the Government’s Electricity Market Reform (EMR) proposals. The combined CCS / Emissions Performance Standard figure is now, in part, illustrative of the value of the Budget 2011 offset. The chart does not reflect the additional increases in energy market prices expected due to additional infrastructure costs which are particularly driven by the Renewable Energy Strategy – these are included in the full WatersWye Associates assessment.

12. The results of the WatersWye Associates study underline the need for the Government to develop a plan to mitigate the cumulative impacts on energy intensive sectors from existing and announced policies, including CPS.

Approaches to shifting the burden of taxation from ‘goods’ (e.g. labour) to ‘bads’ (e.g. emissions) and factors that need to be considered when designing and introducing green taxes

13. When shifting the burden of taxation from "goods" to "bads", it is important to properly assess the potential impacts on sectors of the economy and to plan for their mitigation where they will be severe. In the context of the cumulative impact of the UK’s climate change and energy policies on energy costs household fuel poverty is clearly undesirable and needs to be addressed. In addition, as long as these costs arise from unilateral UK and EU policies, there will also be a need to address the risk of carbon leakage from exposed energy intensive sector sectors like chemicals. Carbon leakage refers to loss of jobs and investment to less carbon efficient production locations overseas and is a term usually associated with the EU ETS but, as the WatersWye Associates study demonstrates, the risk of carbon leakage stems from a wider range of instruments than EU ETS alone. It is vital that the cumulative context is considered rather than the isolated impact from an individual instrument.

14. It is important that proposals for the mitigation of undesirable impacts are addressed at the same time as the taxation measure. Unfortunately, the regulatory impact assessment (RIA) for last December’s CPS consultation looked at general business impacts and did not evaluate the specific effects on energy intensive sectors - it was simply noted in the CPS consultation document that BIS and DECC were evaluating the cumulative impact of energy and climate change policies on energy intensive industries in the UK and would use this to advise Ministers on how to decarbonise the economy while maintaining the competitiveness of these industries. While this assurance appeared positive, delays such as this only contribute to prolonged uncertainty and can be detrimental to long term business decisions about the UK.

15. At the time of writing we understand that the Government’s strategy for energy intensive industries is expected this summer. We hope that this strategy will include fully developed proposals for mitigating cumulative impacts on energy intensive sectors at an early opportunity. We recommend that the key areas considered for mitigation solutions should include:

Fully implement existing proposals for measures to address the risk of carbon leakage – in particular:

16. Build on the welcome confirmation in Budget 2011 that a new phase of the CCAs will go ahead and extend to 2023 by ensuring that the New CCA participants qualify energy intensive sectors for the maximum CCL discount permitted under the EU Energy Tax Directive.

17. Follow through on the intention, signalled in Budget 2011, to provide Good Quality Combined Heat and Power plant (CHP) with relief from CPS by providing this technology with full exemption from direct CPS on fuel inputs for both heat and power generation. This will help to ensure that CHP is no worse off than other heat generating sources and would encourage CHP in line with the continued emphasis placed on this energy efficient technology in the rest of Europe.

18. Implement the financial compensation measure for the electricity price impact from Phase 3 of the EU Emissions Trading Scheme (EU ETS) to the full letter of DG Competition’s forthcoming state aid guidance.

Address the existing cumulative impacts for which there is no current mitigation:

19. Develop a solution to provide full alleviation of the indirect cost of CPS passed through by the generators to power prices for exposed energy intensive electricity consumers like chemicals. We propose that the New CCAs could be used to define the businesses that should be eligible for this solution.

20. Develop a solution to provide full alleviation from CPS for the chemical processes that currently qualify for CCL exemptions for wholly non-fuel uses of electricity in electrolysis.

Avoid adding further policies which increase cumulative impacts on energy related costs:

21. The EMR proposals should focus on the most cost effective policy options proposed. We still believe that if a targeted Feed in Tariff (FIT) with Contracts for Difference (CfD) was correctly implemented, this could be the most cost-effective way to incentivise low carbon investments and there would be no need for a less focussed and more expensive measure like CPS. It is important that any further measures do not unduly result in a more "managed/regulated" electricity market. We would prefer a light touch approach and fear that the number of reforms proposed under EMR would make the electricity market unnecessarily complicated and costly.

22. We welcome the commitment outlined in the Budget to cap the impact of DECC’s levy funded spending on energy bills but have yet to see a full definition of this commitment. In general we propose that mitigation of the impact of existing policies or additional measures should be funded from central government revenues. We note that central government funds will benefit from significant revenues from auctioning EU Allowances under Phase 3 of the EU ETS as well as monies from CPS. From a wider perspective, it’s important that exposed sectors like chemicals carry a realistic and equitable share of the cost of making the transition to a low carbon economy. While it’s absolutely right that fuel poverty should be addressed this should not be accomplished by protecting the whole of the domestic sector.

How policy proposals in ‘The Plan for Growth’ will affect sustainable development and environmental protection (i.e. planning, green growth, low carbon investment, regulations etc)

23. It’s vital that the UK ensures a sustainable business environment for energy intensive sectors like chemicals which have a contribution to make to both rebalancing and greening the economy. We therefore hope that that the Government’s anticipated strategy for energy intensive industries will include fully developed proposals for mitigating the cumulative impact of its climate change and energy policies on our energy related costs. Until that time exposed sectors like chemicals will face an uncertain business environment in the UK.

24. The chemical sector has a contribution to make to the greening of the UK economy because we are enablers of climate change solutions : globally, the greenhouse gas emissions saved by our products and technologies are twice the level of our own emissions. Examples of solutions include: building insulation, PVC and soda ash for double glazing, fertilisers and crop protection (to reduce land use), lightweight components for cars and planes, low temperature detergents, biofuels and materials for wind turbines .

25. We welcome the contribution the Plan for Growth makes to stimulating demand for the green products we enable (eg: through the Green Deal) and wish to contribute to the greening of the economy. We believe that the optimal way to achieve a green economy is through the retention of the whole supply chain for green products including the contribution from energy intensive sectors . If these customer-supplier relationships fall within national boundaries, it is more likely that the related research and innovation will take place within the UK and that the development of green products will make a larger contribution to UK GDP.

The announcement in Budget 2011 on the Green Investment Bank

26. We welcome the funding the Government is providing to gear-up Green Investment bank resources. We note that a key focus will rightly be infrastructure for low carbon energy but lack clarity on the type of projects other it may finance. The UK chemical industry a lready has a excellent track record for reducing our own emissions, having improved our energy efficiency by 35% since 1990 , and will continue to target making improvements. However , it is increasingly the case that further significant abatement will only be possible through the replacement of high cost long term production assets or the development and innovation of step change technologies. We believe that this could make the chemical sector a potential candidate for Green Investment Bank funding should appropriate projects be identified.

Additional comments on themes covered by the inquiry

The scope for the tax system to create a ‘modal shift’ from high carbon transportation to low carbon alternatives, including Fuel Duty, Vehicle Excise Duty, and Air Passenger Duty and issues the Government should consider when developing strategies for sustainable aviation and motoring

27. We generally agree with the principle that there is a need promote modal shift from high carbon transportation to low carbon alternatives, but the introduction of environmental taxes alone does not provide an adequate means of achieving this.

28. More specifically, haulage companies based outside the UK already benefit from cheaper fuel before arriving into the UK and once their vehicles are in the UK there are no charges imposed for the use of UK roads. This is in contrast to a UK haulier who not only pays Vehicle Excise Duty (VED) and an increase price for fuel, but is also required to pay road usage charges in other countries. Introducing environmental taxes will only increase the number of haulage businesses forced out the UK.

29. Instead, the UK’s strategy for sustainable transport should focus on promoting modal shift to businesses by providing opportunities and incentives with specific consideration to the level of service provision to industry from the UK rail infrastructure.

Annex

More about the chemical industry

30. With an annual turnover of £60 billion, chemical businesses in the UK are a key contributor to the economy. Every working day, our sector adds £30 million to our country’s balance of trade. The jobs of 600,000 workers in the UK depend on chemical businesses. Workers in chemical businesses earn on average 40% more than other parts of manufacturing.

31. The UK chemical industry is exposed to the risk of carbon leakage. We are highly energy intensive , accounting for 22% of total UK industrial consumption . We are also h ighly exposed to international competition in terms of both trade in our products and attracting investment. This is because our businesses compete in global markets and pricing of basic chemicals is very similar across Asia, North America and Europe. In addition, about 70% of sites are h eadquartered outside the UK ( 2 / 3 rds of these outside the EU) .

32. The UK chemical industry a lready has a excellent track record for reducing our own emissions, having improved our energy efficiency by 35% since 1990 , and will continue to make improvements. But we are also enablers of climate change solutions in a wide range of applications across sectors of the economy including: households, transport, energy and agriculture. Examples of solutions include: building insulation, PVC and soda ash for double glazing, fertilisers and crop protection (to reduce land use), lightweight components for cars and planes, low temperature detergents, biofuels and materials for wind turbines. An independent study has confirmed that the global chemical sector currently delivers 2 tonnes of greenhouse gas savings for every tonne we emit in our production processes and that, with the right policy framework, this could rise to more than 4 tonnes by 2030. These results are summarised in CIA’s low carbon brochure which also includes case studies to demonstrate that many of these solutions are already produced in the UK.

3 May 2011