Chancellor saves energy-intensive industries from double carbon tax, but what about the rest of us?

On 1 April 2013 the Government will introduce a carbon floor price (“CFP”) as part of a package of measures designed to incentivise reductions in carbon emissions and help shift the UK to a low carbon economy.

Currently in the UK, energy suppliers are subject to the climate change levy, a tax on energy supplied to non-domestic consumers. This tax is passed down to business consumers through electricity bills and certain energy-intensive businesses can obtain a relief from the levy if they reach energy efficiency targets in Climate Change Agreements. As things stand, supplies of fossil fuels to electricity generators are exempt from the levy.

However, the introduction of the CFP will remove this exemption and act to supplement the carbon price under the EU Emissions Trading Scheme by imposing a requirement to pay a top up if that price falls below a pre-determined level. The cost of this top up will then be passed on to UK businesses.
The UK is the only country in Europe intending to introduce a CFP, meaning that UK businesses will pay more for their carbon emissions than their EU competitors.
The aim of the CFP is to create more incentives for investment in low-carbon electricity generation and help the UK reach its legally binding carbon reduction and renewables targets but it has been heavily criticised because it risks making UK industry uncompetitive in a global marketplace by increasing the cost of energy. The CBI, for example, recently described the CPF as the “tipping point which removes [UK energy-intensive industries’] ability to remain competitive”. It also risks “carbon leakage”, where those industries subject to the tax relocate to countries where they are free to emit carbon without having to operate within such constraints.
In response to these concerns, the Chancellor, George Osborne, announced in his Autumn Statement yesterday plans to exempt certain energy-intensive sectors from the CFP.  He specifically referred to the steel, aluminium and paper sectors.  He also referred to reducing the impact of the Government’s Electricity Market Reform proposals.  Further details of these plans have yet to be announced and there will be a consultation on the scope of the CFP exemption in the New Year.
In addition, the Chancellor announced that those energy-intensive industries that meet energy efficiency targets under Climate Change Agreements will, from April 2013 get the benefit of an increased relief from the existing climate change levy of 90%; up from 80%.
However, the Chancellor’s support for this particular section of industry, leaves us asking the question “what about other UK industries?”, particularly those which fall just short of the exemption thresholds.

Whilst Osborne may have tamed the worst excesses of the CFP by exempting industries which would have suffered most, the problem with the policy is more fundamental and is directly at odds with the Chancellor’s stated position that the UK should “move no faster on climate change legislation than our competitors”.
The unilateral introduction of the CFP also seems at odds with the position recently taken by the Government, and reiterated in the Autumn Statement given to the House of Commons, against the Tobin tax proposed by the EU, where the Government is insisting on a multilateral approach.  

The difficulty with sector-based exemptions is that inevitably some businesses will find themselves on the wrong side of the line, unable to claim an exemption.  We will have to wait until the New Year for the details, but some businesses will lose out and may consider the rules discriminatory.  It seems likely that there will be litigation on the point.

Michael Hutchinson, head of environment, Mayer Brown.