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Environmental Audit Committee publishes report on compensation scheme for Energy Intensive Industries

Environmental Audit Committee publishes report on Energy Intensive Industries Compensation Scheme

4 January 2013

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The Environmental Audit Committee has today published the report of its inquiry into the Energy Intensive Industries Compensation Scheme

The Government's £250 million compensation scheme to help energy intensive companies with the cost of carbon must be tightened up to avoid over-compensating large companies already profiting from the over allocation of EU Emissions Trading System allowances, according to MPs on the Environmental Audit Committee. 

The Committee scrutinised the Government’s proposal for a compensation scheme to help offset some of the future electricity price rises that energy intensive industries will face as a result of the EU Emissions Trading System and the Government's Carbon Price Floor.

Across Europe a large surplus of emission allowances in the EU Emissions Trading System worth 4.1 billion Euros had been accrued by large industrial companies as a result of pre-recession overly optimistic forecasts of growth and fierce lobbying by heavy industry. Sales of these allowances had already raised 1.8 billion Euros for these companies. In the UK, the Government’s proposed rules do not take the value of these excess allowances into account when calculating compensation.

Chair of the Committee, Joan Walley MP said:

"I welcome the Government helping energy intensive companies cope with additional carbon price rises to stop them moving jobs abroad. But it shouldn’t throw good money after bad by giving compensation to those already making windfall profits from the Emissions Trading System when allowances were allocated free-of-charge."

Background information

  • Concerns have been raised that without protection industries in the UK could be at risk from ‘carbon leakage’ due to European and UK policies being more stringent than those elsewhere. Principal among these industries are those generally described as energy intensive. These are characterised by the exceptional energy demands of their key processes. They include iron and steel, chemicals and cement industries.
  • In response to these concerns, Autumn Statement 2011 allocated £250 million over the remainder of the Spending Review period to help reduce the impact of energy and emissions policies on the costs of electricity for the most electricity-intensive industries. Subsequently, in October 2012 the Government launched a consultation on the design of the compensation scheme to operate from 2013. The compensation scheme deals with indirect costs from the EU Emissions Trading System (ETS) and the Carbon Price Floor (CPF). The £250 million is earmarked until the end of the current spending review (April 2015) and eligible companies will claim a rebate for a proportion of costs from Government.
  • The ETS has created a Europe-wide cap-and-trade market for carbon that aims to reduce emissions at the lowest possible cost. Implicit in that scheme is a price signal—price of carbon—which aims to drive low carbon investment by internalising the external cost that greenhouse emissions impose on society. In the UK, the Government has introduced a CPF to ‘top up’ the carbon price to a target rate, thus reducing revenue uncertainty and improving the economics for investment in low-carbon generation. The target carbon price will start at around £16 per tonne of CO2 in 2013 rising to £30 per tonne in 2020. This equates to a Carbon Price Floor support rate of £4.94 per tonne in 2012-13 and is expected to raise £740 million in 2013-14 for the Treasury.
  • These two schemes will mean that energy intensive industries face ‘indirect costs’ because they will pay higher electricity prices as a result of generators burning fossil fuels and passing ETS and CPF costs onto them.
  • The Committee had previously explored the issue of ‘carbon leakage’ as part of its 2011 inquiry on carbon budgets. (1)
  • The Committee also calls for an energy intensive industries strategy, as part of a wider UK manufacturing strategy, to set out a path for their maximum feasible decarbonisation and help guide and support companies to reduce their dependence on fossil fuels. Such a strategy should identify by how much these industries can feasibly decarbonise and improve their energy efficiency and how the Government will help to ensure that this is achieved, including through energy consumption reduction measures and incentives, and support for innovation, technological research, development and investment.
  1. Environmental Audit Committee, Seventh Report of Session 2010-12, Carbon budgets, HC 1080, pp 29 -33 (PDF 591.94 KB)

Further Information