Budget 2011 and environmental taxes - Environmental Audit Committee Contents

4 The Carbon Floor Price

56.  The 2011 Budget announced that the Government would introduce a Carbon Floor Price (or 'Carbon Price Support') from 1 April 2013 to drive investment in the low-carbon power sector. The Floor Price will be put in place by reforms to the Climate Change Levy and Fuel Duty so that they are levied on all fossil fuels used to generate electricity in the UK.[155] The Floor will start at around £19 per tonne of carbon dioxide, (£16, rising to £30 in 2020, in 2009 prices). This would require an effective levy of nearly £5 per tonne in 2013-14. The Treasury expects this to raise £740 million in 2013-14, rising to £1.4 billion in 2015-16.[156]

57.  The Energy and Climate Change Committee had recently reported on the Carbon Floor Price[157] and we have not sought to duplicate that extensive work, instead examining the potential effects of the Floor Price on international competitiveness and the Government's pledge on no new subsidy for nuclear power.

The impact on competitiveness

58.  One of the environmental taxation issues we discussed in Chapter 2 was that a tax alone will often not be enough to change behaviour. There is often a role for other policy instruments alongside to achieve the desired change. Many of the written submissions provided to our inquiry criticised the potential impact of the Carbon Floor Price on the international competitiveness of UK businesses, particularly energy intensive industries. These industries will require measures to help them adjust to a low-carbon future. EEF pointed out that the 'implicit price' of carbon in the UK as a result of the combined effect of all existing climate policies is 'already significantly higher than in other major industrialised economies'.[158] The British Ceramics Confederation recommended that the Government measure the cumulative costs of all the UK's environmental taxes through impact assessments to "ensure that the UK does not just meet its emissions reductions targets by off-shoring manufacturing—the UK needs to avoid 'carbon leakage' of energy-efficient manufacturing in the UK to less-regulated economies, exporting GDP and jobs". It conducted a survey of its members and found that the Carbon Price Floor will put about half of them "out of business" as "it was not an option to increase prices to pass on this cost to customers due to the internationally competitive market in which they operate".[159] Ineos Chlor noted an absence of a plan for helping energy intensive industries to manage the transition to a low-carbon economy.[160] EEF suggested that the Green Investment Bank could form part of such a plan.[161]

59.  Andrew Leicester told us that without the EU Emissions Trading System targets being tightened, the Carbon Floor Price is unlikely to result in less emissions:

Anything that is introduced on energy that is within the wider context of the EU ETS has very little impact if it does not result in the ETS's calculations being tightened.[162]

We support the Government's commitment to push for 100% auction of EU Emissions Trading System allowances[163] and a European emissions reduction target of 30% by 2020.[164] The Office for Budget Responsibility estimates that £7.7 billion of proceeds will be raised from the auction of EU Emissions Trading System allowances between 2010-11 and 2015-16,[165] but the Treasury does not plan to ring-fence these proceeds for investment in low-carbon infrastructure.[166] The Government intend to publish a package of measures for the energy-intensive industries whose international competitiveness is most affected by energy and climate change policies by the end of 2011.[167]

60.  The Treasury is missing an opportunity to support low-carbon investment by not ring-fencing receipts from the EU Emissions Trading System or the Carbon Floor Price. The Treasury should consider investing a proportion of these proceeds, perhaps through the Green Investment Bank, to support energy-intensive industries to take steps to reduce their carbon footprint, enabling them to remain in the UK, to be greener, and to be competitive.

Nuclear power

61.  The Committee on Climate Change recently concluded that nuclear power currently appears to be the most cost-effective of the low-carbon technologies, and should form a greater part of the energy mix assuming safety concerns can be addressed (up to 40% of the energy mix in 2030). However, it pointed out that full reliance on nuclear would be inappropriate, given uncertainties over costs, site availability, long-term fuel supply and waste disposal, and public acceptability.[168] In the Coalition Agreement, the Government has said that it is committed to allowing the replacement of existing nuclear power stations, provided that they are subject to the normal planning process for major projects (under a new National Planning Statement) and provided that they receive no public subsidy.[169]

62.  Producers of low-carbon electricity, including existing and new nuclear generators, will benefit from any increased Climate Change Levy triggered by the Carbon Floor Price. The Economic Secretary told the House that the existing nuclear sector will benefit by an average of £50 million per annum to 2030, whilst the renewable energy sector is expected to benefit by an average of at least £25 million a year.[170] Others have estimated that the benefits to nuclear could be higher than this.[171] In its response to this Report the Government should provide its comprehensive assessment of the possible financial consequences of the Carbon Floor Price for existing and new nuclear power. EDF Energy told us that the Carbon Floor Price will influence investment decisions on extending the life of the UK's existing nuclear plants.[172] This raises a question over one of the principles we discussed in Chapter 2—the need for clarity about the objectives of environmental tax (and for these purposes we regard any Floor Price levy as an environmental tax[173]). In this context, the issue is whether the Floor Price arrangement is intended to support low-carbon power or to support non-nuclear low-carbon power.

63.  The Secretary of State for Energy and Climate Change told the House that:

there will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation. New nuclear power will, for example, benefit from any general measures that are in place or may be introduced as part of wider reform of the electricity market to encourage investment in low-carbon generation.[174]

64.  We asked the Treasury (without success) to set out for the purposes of our inquiry a general definition of a subsidy.[175] Nevertheless, the International Energy Agency defines energy subsidy broadly as 'any government action that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by consumers'.[176] The effect of the Carbon Floor Price will be to reduce the cost of nuclear energy generation when compared to CO2-emitting generation sources. On that basis, the Carbon Floor Price could be considered a subsidy for nuclear power when compared with fossil fuel energy sources.[177] However, the Government considers that it will not break its promise in the Coalition Agreement on no subsidy for nuclear if any subsidy is not "specific" to the nuclear industry.[178] The Economic Secretary told us that she saw the Carbon Floor Price as "putting in place a level playing field—a floor on the carbon price that will encourage a shift away from high carbon power generation".[179]

65.  The Energy and Climate Change Committee recently recommended that the Government should address the advantages, risks and challenges of promoting new nuclear generation head-on and honestly: 'It should not distort the market merely to save political face about the precise meaning of the Coalition Agreement for Government'.[180] The Government's definition of a 'subsidy' in relation to nuclear is not robust and does not hold up to scrutiny. The Carbon Floor Price will subsidise nuclear in the same way as renewable energy sources, which have no adverse environmental impacts, and nuclear will benefit the most from the Carbon Floor Price mechanism. As the Energy and Climate Change Committee recommends, the Government should recognise the issues related to new nuclear head-on and honestly.

66.  We questioned the Minister on whether she had considered a clawback tax on existing nuclear generators (so that they pay the same tax as oil and gas generation).[181] She told us that it was not possible to make nuclear power generators pay back the hidden subsidy in the Carbon Floor Price because that would raise "issues of State aid" benefits "for one particular sector more than another". She also argued that, to maintain 'fiscal neutrality', "we can't suddenly unilaterally tax one particular area in a way that is deemed unfair to other areas; so we don't have perfect freedom to do that".[182] A more compelling case will have to be made before we can accept the Treasury's rationale barring such a clawback tax. We note, for example, that the Government increased the tax rate on domestic oil and gas production to pay for the cut in Fuel Duty. In its response to this Report, the Government should explain clearly whether, and on what legal basis, it would be possible to levy a clawback tax on existing nuclear generators so that they pay the same tax as oil and gas powered generation. If in fact legally permissible, the Government should require nuclear power generators to pay such a clawback tax to fulfil its promise to provide no nuclear subsidy.

155   HM Treasury, Reform of Air Passenger Duty: a consultation, March 2011, page 18, Box 4.A. Back

156   Budget 2011, op cit, pp 32 and 43, table 2.1; Carbon Floor Price Consultation: the Government response, op cit, page 16.  Back

157   Energy and Climate Change Committee, Fourth Report of Session 2010-12, Electricity Market Reform, HC 742. Back

158   Ev w78 Back

159   Ev w68 Back

160   Ev w14 Back

161   Ev w78 Back

162   Q 7 [Andrew Leicester] Back

163   Q 86  Back

164   HC Deb, 17 May 2011, col 177. Back

165   Budget 2011, op cit, page 92, table c.3. Back

166   Qq 87 and 88 Back

167   HC Deb, 17 May 2011, col 176. Back

168   Committee on Climate Change, The Renewable Energy Review, May 2011. Back

169   HM Government, The Coalition: our programme for government, May 2010, page 17. Back

170   HC Deb, 9 May 2011, col 1024W.  Back

171   Ev w3; Electricity Market Reform, op cit, page 43. Back

172   Ev w39 Back

173   The Office for National Statistics already counts the Climate Change Levy as a 'tax on non-domestic use of energy' in the National Accounts but was still to determine the treatment of the Carbon Floor Price (Office for National Statistics, UK Environmental Accounts, page 70). Back

174   HC Deb, 18 October 2010, col 42-6WS. Back

175   Ev 46 Back

176   UNEP and IEA, Reforming Energy Subsidies, 2002. Back

177   Ev w104 Back

178   The Secretary of State for Energy and Climate Change told the Energy and Climate Change Committee during its inquiry on Electricity Market Reform that a subsidy for nuclear generation would be "something which is specific to the industry"; Electricity Market Reform, op cit, paragraph 125. Back

179   Q 69  Back

180   Electricity Market Reform, op cit, paragraph 132. Back

181   Q 10 Back

182   Q 74 Back

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Prepared 7 July 2011