Green policies not unduly hampering UK competitiveness

Is UK industry overburdened by the costs associated with low carbon policy implementation? The simple answer, according to a report by Cambridge Econometrics, is no. However, energy-intensive industries such as the steel industry are disadvantaged by higher electricity prices compared to other key competitor countries such as Germany, USA and France.

Competitiveness impacts of carbon policies on UK energy-intensive industrial sectors

 

CE’s study forms part of the evidence base supporting the fourth Energy Prices and Bills report, which is the Committee on Climate Change’s (CCC) regular independent assessment of the impact of UK carbon budgets and related policies and how they affect both households and businesses.

UK disadvantaged by high wholesale and network costs…

Electro-intensive industries in the UK face higher electricity prices than most of the international competition despite substantial relief in the form of exemptions and compensation schemes to offset policy costs. In some cases, UK relief is lower than elsewhere, but the main factors that explain the price differential are higher wholesale and network costs in the UK. Crucially, larger firms in some of the key competing countries benefit from sizeable discounts (exemptions) in network and transmission costs.

… and the price gap will widen

The gap in electricity prices is expected to persist and, in some cases, widen. Based on our own projections, we expect the electricity price gap to persist until 2030. We also expect the gap between electricity prices for European industries and their US and Chinese competitors to widen, due to an expected increase in the EU ETS price. In the sectors that do not receive policy cost exemptions, the UK price increase is more pronounced than in most other countries

Graham Hay, Associate Director, leading the study adds:

“Whilst the scope of our study did not include policy recommendations, it seems clear to me that the UK has the opportunity to further explore the reasons behind its relatively high electricity costs and in doing so improve the competitiveness of its most energy-intensive industries.

With the development of the UK’s industrial strategy there is the opportunity to prioritise energy infrastructure upgrades, to deliver growth through clean energy and to ensure effective institutions are in place to monitor and regulate the electricity market.”

Recession more significant than low carbon policy costs

Low carbon policies and delays in providing compensation to businesses have impacted on energy-intensive industries but other market and industry factors have been more important at driving the contraction of industries.

The UK steel and aluminium sectors have been in long-term decline since the late-1990s, while cement production was stable over 1995-2007. A major driver of the contractions in the three sectors under study was a sharp fall in demand during the 2008-09 recession, driven by contractions in key customer sectors such as motor vehicles, construction and packaging, as household spending and investment fell sharply. Very quickly, production in each sector fell by 20-30% and since then it has remained flat or fallen further.

To find out more about our work on energy, climate change and the circular economy see Our Work. To find out how CE can support your work in this area, please contact Associate Director, Graham Hay.