11 October 2021

British industry is bearing the brunt of climate unilateralism

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The UK can either be net zero or have secure and affordable energy. It cannot have all three, at least not with current technology, and the path to solving that trilemma is long, difficult, and a planet-sized challenge, not something that’s going to be fixed by flag-waving eco-stunts on this small island.

The failure to grasp that impossibility, with year after year of declaring emergencies, conferences, energy acts, schemes, subsides and taxes, has proven ruinous for British industry. Particularly energy-intensive industries for whom the power and heating bills can be 20-70% of their operating costs.

These are major industries that can only thrive in Britain as global export hubs, rather than cottage industries servicing the local market. Size matters when you’re producing commodities like steel, base chemicals, paper, glass, fertiliser and ceramics. Even if you invest heavily in better kit and manufacturing techniques, if you’re paying 25-100% more for most of your cost-base, you’re still not competitive, even compared to a much less efficient plant abroad.

This is not a new problem, nor has it only been made urgent and material by the current gas price crisis. Rather, this has been a simmering row for over a decade – one in which the Government has felt obliged to offer exemption schemes to the worst affected, or odd schemes like demand-side response in the capacity mechanism. Here profitable industries are paid to shut down to prevent blackouts, something most cannot do affordably, given the ruinous cost of stop-start operations.

With the spike in gas prices come demands for new plans for relief, and an exemption from any plan to shift further policy pain onto gas bills.

The pattern is always the same, the Prime Minister or another part of government gets an attack of climate zeal, low carbon businesses and NGOs lobby for new policy and subsidies to deliver it, and the consequences show up in bills. The manufacturing groups then point out that this renders them uncompetitive. The Government usually waits for a few to go bust at the margins, then grudgingly offers a gesture measure through a costly, complex qualification scheme. Then the cycle starts again. The investment signal, however, is clear: don’t invest in energy-intensive industry in the UK. This is punching down on the communities where many of these industries are based, which happen to overlap with those where ‘levelling up’ is most needed.

Trying to fix this is how the Government ends up owning a steel plant and paying a fertiliser company to produce COat the same time as hosting a global summit with the aim of reducing carbon emissions. The problem is the policies, not a lack of special exemptions. At best, these just create temporary shelters for the most precarious zombie firms, while leaving those on the margins of qualification entirely exposed. It’s like trying to fix a sinking ship by removing panels to cover the holes, creating new holes in the process.

The Helm Cost of Energy review in 2017 had some sensible thoughts on this. Current climate policies that add cost to energy bills should be put into a bad bank, much like the costs of old nuclear industry that we are still paying off today. The taxpayer must unfortunately bear the cost for the incompetent promises of past governments. That removes one distortion to competitiveness. Rather than picking winners, new low-carbon incentives could be based on a single low carbon price that reflects international prices for carbon, not headline-chasing target setting. Helm thought carbon border taxes would help, but this doesn’t help exporters, or importers when other countries retaliate.

The UK could also get on with fracking and sweep away policy barriers to further investment in the North Sea as a hedge against over-reliance on imported gas. The taxes from both could be preserved for investment in reducing the cost of the low carbon technology that will one day replace the fossil fuels that we are stuck with for some time to come.

All of these measures would be a sign of pragmatic global climate leadership, adjusted to the reality of the costs of climate unilateralism both to British industry and the Government’s levelling up agenda.

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Andy Mayer is Chief Operating Officer at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.