Strategy & Operations » Governance » Budget 2014: Osborne’s carbon price freeze sparks green investment fears

CHANCELLOR George Osborne today surprised industry by accompanying his heavily trailed freeze of the carbon price floor with the unveiling of a new £7bn support package to help manufacturers cope with the rising cost of energy, prompting accusations this year’s Budget marked a return to “dirty business as usual”.

In a speech that made no mention of climate change or the green economy, Osborne’s main environmental announcements centred on moves to maximise the exploitation of North Sea oil and gas reserves and cut industrial energy costs by exempting carbon intensive firms from environmental taxes and green levies, Accountancy Age’s sister publication reports. 

In comments that will anger environmentalists, Osborne promised that the government will review the whole oil and gas tax regime to “make sure it is fit for the purpose of extracting every drop of oil we can”. But, he also acknowledged that as the North Sea was now a “mature basin”, the Office of Budget Responsibility had today revised down its forecast tax receipts by a further £3bn.

Osborne’s biggest business announcement came in the confirmation that industry groups had proven successful in their lobbying for increased support to help them cope with the impact of carbon taxes and clean energy subsidy schemes on energy bills.

“We need to cut our energy costs,” Osborne said. “We’re going to do this by investing in new sources of energy: new nuclear power, renewables, and a shale gas revolution… But above all we are going to have a £7bn package to cut energy bills for British manufacturers – with benefits for families and other businesses too.”

The package centres on the Treasury’s heavily-trailed decision to freeze its own carbon price floor at £18 per ton from 2016/17 until the end of the decade, a move that has already prompted warnings it will tilt the energy market further in favour of coal power, but which Osborne said would save a mid-sized manufacturer £50,000 a year on their energy bill, while also saving households £15 a year.

Osborne also announced an extension of the energy intensive industry compensation package, which helps firms cope with the cost of the carbon price floor, through to 2019/20, and the introduction of a £1bn worth of compensation to help companies cope with the cost of renewable energy subsidies. He said the moves were necessary, because “otherwise green levies and taxes will make up over a third of their energy bills by the end of the decade”.

Finally, he announced a new incentive would be introduced to encourage industrial companies to deploy energy efficient Combined Heat and Power plants by exempting them fully from the carbon price floor.

Osborne said the entire package would be “delivered without any reduction in the investment in renewable energy” through the government’s renewable energy subsidy schemes and levy control framework funding.

Government sources added that the compensation measures were needed to help drive industrial investment in energy efficiency and ensure that the UK continues to manufacture many of the raw materials needed to produce clean technologies. “We don’t want to be importing steel for wind turbines from China,” they said.

However, renewables industry insiders were quick to warn that the changes would undermine investment in clean energy, as a lower than expected carbon price floor means more financial support will be required to make projects financially viable. Earlier this week, trade association RenewableUK warned that a price freeze would see up to 3GW of capacity put at risk through to 2020 without a commensurate increase in the levy control framework.

Dr Nina Skorupska, chief executive at the Renewable Energy Association, also voiced concerns about the impact of the changes and their effect on investor confidence. “By freezing the Carbon Price Floor, the Chancellor is rowing back on his own policy and once again moving the goalposts for investors in green energy,” she said. “Government must explain in black and white how investment in renewables is protected from the freeze, or risk undermining the investment required to replace ageing coal power stations with technologies that can keep the lights on without damaging the climate.”

In addition, concerns were raised this afternoon about the impact of the exemptions from the Renewables Obligation and other renewable energy subsidies now available to industrial firms, with some experts warning any business exemptions will mean households will have to shoulder more of the cost of various “green levy” schemes.

The Budget also featured a host of smaller green announcements, including confirmation of a new prospectus on the future of Garden Cities, a £140m increase in flood defence maintenance budgets, and an extension in the 2% a year increase in company car tax through to 2018/19 and an increased discount for ultra-low emission vehicles, as well as the establishment of a new centre for doctoral training for graphene – a technology that is expected to have numerous clean tech applications.

In addition, the Budget document confirmed tax changes meant the Budget was in line with the coalition commitment to increase environmental taxes as a share of overall revenues. “Measures announced at this Budget will result in the proportion of revenue from environmental taxes increasing from 0.5% to 0.8% over this Parliament,” the Budget stated.

However, the moves were largely overshadowed by the prospect of the boost for coal power provided by the carbon price floor freeze, as well as confirmation of a continued freeze in fuel duty and a reduction in Air Passenger Duty (APD) for some long haul flights, even if this was partially offset by a decision to extend APD to private jets.

Government sources defended the moves, arguing the changes to the carbon price floor would not undermine the UK’s overall decarbonisation efforts. “The government does remain committed to the carbon price floor, but it is also mindful about the impact on competitiveness with the rest of Europe,” said one source. “The CPF trajectory was set when the EU carbon price were expected to be higher through to 2020, but with them remaining relatively low we realise the price needs to be closer aligned with Europe.”

The source added that the government remained fully committed to mobilising investment in clean energy and insisted that the measures enabled through the Energy Act, such as the promised contract for difference mechanism, would provide the main driver for low carbon investors. They also said that the government’s carbon capture and storage funding and long term carbon budgets would ensure that the carbon price freeze does not result in the UK becoming overly reliant on unabated coal power.

However, Osborne’s promise of tax breaks for some of the UK’s carbon intensive industries coupled with his failure to acknowledge climate change risks, despite the Prime Minister’s recent assertion that they represent a serious threat to the UK prompted a flurry of protests from business groups and NGOs.

“If the government is committed to delivering a sustainable economy, it must provide consistent long-term policies that enable businesses to invest with confidence,” said Martin Baxter, executive director for Policy at the Institute of Environmental Management (IEMA). “The decision to freeze the Carbon Floor Price undermines the government’s approach to tackling climate change. Companies that have invested based on the government’s long-term price signal will be unfairly penalised.”

His comments were echoed by Gordon MacDougall, chief operating officer of RES, the UK’s largest independent renewable energy developer who warned that the changes “undermines the stability promised by the Government as the cornerstone of the new Energy Act”. “It will unnerve investors already spooked by a rapid succession of energy policy changes, raise the cost of capital for British businesses building new power plants and deter the new institutional investors needed to renew the UK’s ageing energy infrastructure, all of which will cost consumers in the long term,” he added.

John Alker, director of policy and communications at the UK Green Building Council also voiced disappointment with a Budget that did little for the green economy. “Any real hope that the Chancellor is committed to the green agenda faded long ago but what remains deeply disappointing is that he doesn’t recognise a growth opportunity when he sees one,” he said. “There continues to be a complete blind spot on the role that energy efficiency has to play in reducing consumer bills over the long-term, and generating home-grown jobs. A one-off £15 cut to household bills will be quickly forgotten – what is needed is long-term incentives to reduce the demand for energy in the first place.”

However, the CBI and manufacturers’ association EEF welcomed a package of measures that they had long argued was essential to the competitiveness of UK industry. “Today’s announcements are enormously welcome,” said Gareth Stace, head of climate and environment policy at EEF. “The Chancellor has backed his words on the importance of manufacturing in rebalancing the economy and tackling climate change in a cost effective manner with concrete action. This sends a clear signal that government recognises the serious competitiveness issues at stake from rising energy prices.”

But EnergyUK, which represents the Big Six energy companies, took a notably more nuanced position, raising concerns that the changes to the CPF could impact gas and clean energy investment. “In the overall interests of the UK the energy industry supports capping the carbon price floor to keep costs down for heavy industrial energy users, to reduce the potential to create a cliff edge for coal generation and to help make sure there is more capacity available,” the organisation said in a statement. “But it also has downsides – an important one is that it worsens the economics of the essential generation of electricity from gas. Energy is complex and complicated and you cannot move one piece without a knock-on effect across the board. Clear and stable policy is required to get the investment flowing to: start building our secure energy future now; bring new gas plant on stream to meet demand; provide the back-up needed for intermittent renewable generation; and create jobs.”

However, Greenpeace Executive Director John Sauven was left in little doubt that today’s budget marked a major blow to the government’s green credentials. “The most notable thing about this budget was its lack of ambition in connecting the economy with the environment, one of the key drivers of growth globally,” he said. “Four years ago we were told it will be the ‘greenest government ever’. Today, the absence of any green growth strategy or measures to deal with the risks of climate change is a damning indictment of a government that has clearly lost its way.”