Thursday, 15 July 2010

CLIMATE POLICY RISKS UK RECOVERY

Climate change policies risk major damage to the economic recovery

A preoccupation with 'green' energy policies at any cost undermines the competitiveness of manufacturing industry

A newly published report from the independent think tank Civitas reveals that the increased costs of energy arising from 'green' energy policies are set to increase significantly. Increased costs will hurt manufacturing at a time when much depends on the sector to generate the economic growth the country needs, and to rebalance the economy.

In British Energy Policy And The Threat To Manufacturing Industry, Ruth Lea and Jeremy Nicholson examine the impact of the recent Labour Government's policy on energy prices. They argue that Labour's aim to reduce carbon emissions and increase the proportion of energy generated from renewable sources, significantly increased costs for energy consumers. Lea and Nicholson's analysis provides a timely warning because under the new Coalition Government, energy policy could be as damaging to manufacturing industry as it was under Labour.

Business electricity bills already incur a 21% 'surcharge' because of 'green' commitments

Lea and Nicholson cite evidence that the recent Labour Government's climate change strategy hiked up electricity bills. For example, BERR estimated in 2008 that the 'surcharge' on electricity prices, attributable to climate-change policies, amounted to an extra 14% for domestic users and 21% for business. Furthermore, DECC's The Renewable Energy Strategy (2009) suggested that these surcharges could be as high as 33% and 70% by 2020 respectively.

Lea and Nicholson highlight the two major legislative commitments responsible:

1. The Climate Change Act (2008) - including a legally binding target of at least an 80% cut in greenhouse gas emissions by 2050.

2. The EU's Renewables Directive (2008) - under which the UK must meet 15% of its final energy consumption through renewable sources by 2020.

Britain will bear a greater cost than other countries

This country is particularly badly placed for such commitments. First, Britain is starting with a very modest renewables industry, so the burden of the EU's Renewables Directive will be substantial:

'The proportion of renewables to total energy consumption in 2005 was just 1.3%, compared with an EU27 average of 8.5%.' (p.6)

Secondly, even without the extra costs associated with climate change policies that are due to be imposed, Lea and Nicholson argue, Britain's industrial electricity prices already tend to be amongst the highest of any major economy. This puts British business and, in particular, energy intensive users at a cost and international competitiveness disadvantage. Moreover, given the expected increases in the climate change surcharges, Britain's cost disadvantage will almost certainly increase, thus undermining competitiveness further.

'Such extra costs would inevitably tilt the balance for many businesses and render them unviable in Britain.' (p.10)

Energy intensive industries to be hardest hit
- with a domino effect on downstream industries

Energy intensive users, including steel, glass and ceramics, bulk chemicals, industrial gases and cement, are especially vulnerable. These are important contributors to GDP not only in their own right but also because of their inter-dependent relationship with 'downstream' industries. As Jeremy Nicholson comments:

'Britain is already losing energy intensive businesses because of the lack of competitiveness... There is no doubt that high energy prices have already been a factor behind industry closures.' (pp.10-11)

Lea and Nicholson outline specific examples of the layers of 'fall out' from such closures - for example, the INEOS Chlor plant in Cheshire manufactures chlorine and caustic soda which are vital inputs to a wide-range of 'downstream' industries including disinfectants, plastics, pharmaceuticals, soaps and detergents.

'Rather than import the basic chemicals, many of the downstream businesses would migrate to countries where they were still domestically produced for reasons of reliability of supply and transport costs.' (p.13)

Policy must help rather than hinder

As the economy struggles to emerge from the economic crisis of 2008-2009, it is widely assumed that the manufacturing sector will contribute positively to the general recovery and the rebalancing of the economy. Under these circumstances, the report calls on the new Coalition Government to ensure that manufacturing industries are supported by policies that help rather than hinder their competitiveness to enable economic growth and therefore lead to fewer public spending cuts. According to Ruth Lea:

"The economy desperately needs a competitive and thriving manufacturing sector if it is to prosper. Competitive energy prices are vital to the success of manufacturers, especially energy intensive users. Government energy policies are, however, remorselessly driving up energy costs thus risking the 'migration' of manufacturing plants to economies where the costs are lower." To read the full booklet use this link.

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