Budget 2011 and environmental taxes - Environmental Audit Committee Contents


Written evidence submitted by the British Ceramic Confederation

SUMMARY

—  The budget needed to prioritise economic growth in the UK economy—and balance this with commitments to reduce emissions.

—  All parts of the economy must play their part in reducing the UK's emissions. We are disappointed that the green taxes in the budget targeted certain sectors of the economy, such as energy intensive industry through the Carbon Price Floor rather than spreading the burden fairly amongst all sectors including transport, agriculture etc.

—  The Government needs to measure the cumulative costs of all the UK's green taxes on energy intensive industries 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 of GDP and jobs.

—  We welcome the need to secure UK electricity supply—after many decades of under-investment—and to move to a lower carbon electricity mix. However, this has to be at least cost to avoid damaging industrial competitiveness, growth and investment.

—  The UK Carbon Price Floor adopted in the budget threatens the competitiveness and viability of many companies in our sector and other energy intensive sectors.

—  We welcome the extension of Climate Change Agreements to 2023 and that all participating sectors will continue to be eligible for the scheme. The reinstatement of the 2010 electricity rebate (80% rather than 65%) is welcome, but does not mitigate the extra costs of the Carbon Price Floor in 2013 at £16/te—let alone later when CPF costs escalate to £70/te in 2030.

—  We welcome the move for the government to fund Carbon Capture and Storage (CCS) demonstration plants from general taxation, rather than from a further tax on energy use.

—  We accept the principle in the "Growth plan" of a cap on green taxes—and want to be involved in developing the detail.

—  It is important that Green Investment Bank funds are available for industrial energy efficiency and emissions reduction projects as these can offer very cost-effective means of reduction in the UK's emissions, with relatively short payback times compared to other investments.

BRIEF INTRODUCTION TO THE BRITISH CERAMIC CONFEDERATION

1.  The British Ceramic Confederation (BCC) is the trade association for the UK Ceramic Manufacturing Industry, representing the common and collective interests of all sectors of the Industry. Its 100 member companies cover the full spectrum of products and materials in the supply chain and comprise over 90% of the Industry's manufacturing capacity.

2.  Membership of the Confederation includes manufacturers from the following industry sectors:

Gift and Tableware Floor and Wall Tiles Sanitaryware
BricksClay Roof Tiles Clay Pipes
RefractoriesIndustrial CeramicsMaterial Suppliers

Our sector and its suppliers employs approximately 20,000 people and generates £2 billion sales of which approximately £500 million are exports. The sector is a solution provider for the low carbon economy including durable construction materials with low lifecycle carbon footprints; industrial ceramics providing critical components for low carbon energy and electricity distribution; long-life refractory materials are essential for glass, steel and ceramic production

3.  Ceramics is an energy-intensive industry: energy bills / taxes can be up to 30-35% of total production costs. 85% of the energy used is natural gas. BCC is a member of the Energy Intensive Users Group. Although the sector uses more gas than electricity, the amount of electricity used is still significant. (About 85% of the total energy used is from gas). Much of the electricity used is for process control or essential safety and environmental equipment. It is therefore more difficult to reduce consumption for these essential functions.

FACTUAL INFORMATION

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

Approaches to shifting the burden of taxation from "goods" (eg labour) to "bads" (eg emissions) and factors that need to be considered when designing and introducing green taxes

4.  The Government recognises that the optimal way to achieve a green economy is through the retention within the UK of the whole supply chain for green products. This includes the energy intensive industries who already enable a range of low carbon solutions.

5.  Carbon Price Floor—and broader impact on Energy Intensive Industries. In our consultation response to Treasury we outlined how this measure alone was likely to increase our members' electricity bills in real terms by almost £40 million per annum by 2030. Based on a survey of our members, we think this will put about half of them out of business (ie the real terms energy cost increase in the HMT Proposal[71] exceeds current profits). In the fiercely internationally competitive market in which they operate, it is simply not an option to increase prices to pass on this cost to customers. This is a unilaterally imposed UK price increase that overseas competitors will not have to bear. The extra Climate Change Agreement rebate on electricity might only reinstate £200,000 of annual benefit to our members. Ceramics is not a particularly electro-intensive industry—so it is of concern that HMT's impact assessment did not include:

5.1  A quantification of the cost to energy intensive industries.

5.2  The cumulative cost on energy intensive industries as a result of all energy tax measures in the UK. The ceramics industry included 2 examples in the "The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries—Are Policies Effectively Focussed? A summary report for The Energy Intensive Users Group and the Trades Union Congress Prepared by Waters Wye Associates July 2010".[72] An updated WWA analysis including these proposals is available.[73]

5.3  Broader effects on the UK economy from loss of these businesses. For example: tax revenues from corporation tax / national insurance / income tax; extra costs (eg unemployment payments etc and consequences on GDP / balance of payments if these companies were no longer able to operate profitably in the UK. There is a significant GDP multiplier for the construction sector covering many of our members.[74] Moreover, much of the supply chain is integrated and interconnected. For example, materials and kiln suppliers work across many ceramic sectors and we have seen in 2008-10 that a single manufacturer in administration can cause a series of UK suppliers (and some of their UK customers) to fail right across the industry in a cascade.

6.  Investment is on hold and the UK regulatory framework is even more complicated than previously. Return on capital is being predicted at higher rates in competitor countries. Our members say that UK investments are not viewed favourably—and there is a track-record in the UK of a series of governments much less sympathetic to manufacturing industry than overseas competitors. Investment is essential for energy efficiency—and also for expansion at this stage in the economic cycle and is largely on hold—especially if parent companies can also invest in other countries. The new UK carbon price floor exacerbates the problem. An opportunity has been missed for the simplification and improvement in economic efficiency of climate policies—instead, the energy industry and its consumers are facing even greater complexity and policy overlap.

How policy proposals in "The Plan for Growth" will affect sustainable development and environmental protection (ie planning, green growth, low carbon investment, regulations etc) our comments in italics

7.  The areas affecting our members and their sustainable development in the plan are:

7.1  Corporation tax reduction—the reduction will only be of benefit if resource-efficient UK manufacturers can remain internationally competitive and profitable. Many of our members are concerned that unless the UK cumulative energy tax issue is addressed they may not have a profitable business in future.

7.2  UK Carbon Price (Price Floor)—see paragraph 5.

7.3  Green Investment Bank—see paragraph 17.

7.4  Global action to tackle environmental challenges. We support an international agreement on climate change which seeks to regulate greenhouse gas emissions from industry on an equal footing, regardless of location. We note that unfortunately the majority of world ceramics production is not covered by mandatory carbon dioxide / environmental legislation.

7.5  Taking action now to put the whole economy on a low-carbon, resource efficient path that maintains UK competitiveness—we are concerned that this is at odds with paragraph 7.7 below.

7.6  "Green growth opportunities"—and resource efficiency savings—see paragraph 17. Funding or co-funding for technology demonstrator projects is essential. Options for industrial scrappage and replacement schemes, low-carbon tax credits, low-carbon capital allowances and accelerated depreciation should all be explored. Incentives should apply to technologies, processes, buildings and other innovative ways of reducing the carbon footprint of business while still conducting activity in the UK. However, businesses should not be forced to replace assets before the end of their useful life.

7.7  Increased "transitional costs" of moving to a green economy. Use of market-based approaches to simplify this policy landscape, minimising the costs of transition and reducing burdens on business. "Some aspects of the move to a green economy will impose transitional costs. In the short-term cleaner technologies may be more expensive than the conventional ones they replace. Adopting new, low-carbon technologies in energy production and consumption is currently expected to increase the average non-domestic energy bill by around 11%". This statement is of major concern to our members as it is not compatible at all with "growth", "sustainable development" or international competitiveness—even for companies in our sector that have invested in brand new state-of-the-art energy-efficient factories. The reference[75] is for 11% by 2015 and 26% by 2020. This was for a limited number of policies in 2010 and so excludes a Carbon Price Floor. The costs for energy intensive industries are not assessed.

7.8  Capping the cost of policies funded through energy bills through a new framework—see summary.

7.9  Green Deal—we support the principle here and some of our members are developing innovative products for improved measures in building energy efficiency.

7.10  Green Economy Council. At present our sector has no representation that adequately articulates its concerns.

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

8.  See summary.

RECOMMENDATIONS

The impact of the taxation system in general on sustainable development

9.  We need a UK regime fair on companies that strive to be energy-efficient, and provides transparency, predictability, simplicity and allows them to compete internationally. This is not the case at present.

10.  The Climate Change Act needs to be amended to include imported carbon, so that UK policy is focussed on reducing emissions on UK consumption—rather than just production. The current UK policies allow products made in less stringent environmental conditions overseas to have a competitive advantage at the expense of UK jobs and increased net global emissions.

11.  Thorough impact assessments on energy intensive industries (covering all the areas in paragraphs 5.1-5.3) need to be performed for the Carbon Price Floor and all future "green taxes" that affect these industries. New policies to reduce emissions should only be adopted that minimise the costs on the UK economy as a whole and do not increase global emissions or carbon leakage.

12.  That the Government acknowledges the impact of the carbon price floor and other carbon taxes on the bottom line of energy intensive industries and takes appropriate steps in the context of the ongoing Electricity Market Reforms to mitigate the cumulative burden of this and other climate policies and ensures that industrial users are actively involved in this process.

13.  Low carbon electricity investors require the certainty now that when new generation capacity comes on stream, electricity will then receive financial support. A Carbon Price Floor—a policy designed primarily to support nuclear electricity—should therefore remain at zero until at least 2020 (estimated timescale for new nuclear capacity) and should remain at a low level, say £20/tonne from 2020 until 2030.

14.  The Environmental Audit Select Committee as a matter of urgency should examine the cumulative costs of UK regulation on Energy Intensive Industries.

15.  Future Climate Change Agreements for Energy Intensive industries must continue to use sector-specific challenging yet achievable targets. Rebates should mitigate the maximum possible amount of the Climate Change Levy.

The scope for the taxation system to protect and increase stocks of natural capital and the possible role of proposed "natural accounts"

16.  Waste infrastructure needs to operate at scale in new ways, recognising that what was waste should now be seen as a strategic resource around which value chains can be created. An example relevant to ceramics and several other energy-intensive sectors is waste the need for biogas generation, yet current tax instead incentivises electricity from waste.

The announcement in Budget 2011 on the Green Investment Bank

17.  As in our earlier response to the EASC inquiry,[76] it is important that Green Investment Bank funds are available for industrial energy efficiency and emissions reduction projects as these can offer very cost-effective means of reduction in the UK's emissions, with relatively short payback times compared to other investments. We welcome the government's commitment to provide a further £2 billion to the Green Investment Bank on top of the existing £1 billion, but are disappointed in the phased-in approach.[77]

21 April 2011


71   Chart 5.E: Time weighted baseload electricity prices (£/MWh, real 2009 prices) in http://www.hm-treasury.gov.uk/d/consult_carbon_price_support_condoc.pdf Back

72   http://www.eiug.org.uk/publics/WWA%20Impact%20of%20Climate%20Change%20Policies%20EIUG%20TUC%202010723.pdf Back

73   http://www.eiug.org.uk/publics/r1403w1.pdf Back

74   LEK Report for CBI / UKCG "Construction in the UK Economy-The Benefits of Investment" October 2009.
Slide 10: £1 spent on construction output generates a total of £2.84 in total economic activity (ie GDP increase)
http://www.cbi.org.uk/ndbs/press.nsf/38e2a44440c22db6802567300067301b/1b0460221653edd28025765c005a5db8/$FILE/UKCG%20L.E.K%20report%2028.10.09.pdf 
Back

75   Paragraph 23 in http://www.decc.gov.uk/assets/decc/What%20we%20do/UK%20energy%20supply/236-impacts-energy-climate-change-policies.pdf Back

76   http://www.publications.parliament.uk/pa/cm201011/cmselect/cmenvaud/memo/greeninvest/wrev27.htm

Written evidence submitted by British Ceramic Confederation (GIB 27) Green Investment Bank-Environmental Audit Select Committee Session 2010-11 Back

77   While the GIB will start a year earlier than planned, in 2012, initially its capital is staggered over the first few years, and it will not be able to raise its own finance on the capital markets until 2015 on the condition of the fiscal debt target being met Back


 
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