Why Labour is right to oppose Britain’s new carbon tax

By 2015, the coalition's carbon price floor will be inextricably linked with rising energy prices.

Just after 7pm on 5 July last year a significant but largely unnoticed piece of political positioning took place that will increasingly take centre stage at Westminster.  As MPs debated the Finance Bill, line by line, Labour’s Shadow Economic Secretary, Kerry McCarthy, announced that the party would oppose the coalition’s plans to impose a carbon price floor on electricity generators and industry from April 2013. 

The then Economic Secretary, Justine Greening, sought common ground in the debate but Labour stood firm and refused to withdraw its amendment. The House divided and the legislation passed with a majority of 59. Some nervous Tory MPs decided to raise their valid concerns over the impact of a new high carbon tax and three voted against the coalition's clause with many abstentions, but this was well before coalition policy U-turns had become an established fact of Westminster proceedings.

So why was this significant, and why could this play well for Labour in the run up to the next election? Ironically, one has to look at Australia where the incumbent Labor government has just introduced its own carbon price floor (known commonly as the carbon tax) and is now trailing the Liberal/Conservative opposition by up to 20 per cent.

So what is the problem? The price of carbon, traditionally set in the market through the European Union Emissions Trading Scheme (EU ETS), is arguably far too low at around £5/6 per tonne, and therefore, it is argued, too uncertain for the long-term low carbon investment decisions that need to be made. In response, the coalition has decided to impose a unilateral UK carbon price floor to set a guaranteed minimum price for carbon. It has turned its back on the EU scheme, which has kept carbon prices in the UK level with those across Europe.

In effect, the new policy will introduce a UK floor on the price of carbon emissions facing power generators and industry in the UK. If the ETS price is ever above the floor, the tax would be zero; if the EUA price is below the floor, the new tax would make up the difference.

The 2011 Budget confirmed the introduction of this tax from 1 April 2013. The floor will start at £16 per tonne of carbon dioxide (tCO2) and follow a linear path to target £30/tCO2 in 2020 (both in 2009 prices), rising to £70/tCO2 in 2030. According to Treasury, the new tax would raise £3.22bn in tax revenues by 2015-16, which is (unsurprisingly enough) roughly about the amount HM Treasury offered in giveaways at the 2011 Budget. But Britain’s policy to now go it alone with its own carbon price floor from next April risks, undermining any effective and consolidated move to deliver a similar minimum price for carbon in other countries, especially across our main economic competitors in the EU.

So Britain will abandon the EU Emissions Trading Scheme where its absence will allow the price of carbon on the continent to fall to new lows. Today, the price of carbon in recession-hit Europe is only around £5/6 per tonne. It is highly likely that from April next year, when British generators and industry are paying £16 per tonne for carbon, our European competitors could be paying a third of the price. 

Also, given that over 70 per cent of UK electricity is generated from coal and gas plants, this is likely to help electricity bills to spike from 2013 further boosting fuel poverty.  By leaving the EU ETS the government has abrogated its right to lead the fight for a pan EU carbon price floor which would have allowed the UK to operate on a level playing field with the rest of Europe.

The ongoing political debate has confirmed what investors have known ever since the policy was introduced - that the "floor" is nothing more than another fuel duty escalator that can't possibly be banked on, that it won't actually reduce net emissions in the EU; that the best way of introducing a carbon price floor is at a European level and this has been largely been ignored; and that it is a policy that will do nothing for investor confidence, except for providing a windfall to existing low carbon generation, particularly existing nuclear power stations.

So Labour goes to the general election opposing the coalition’s new carbon tax, which by 2015 will inevitably have its fingerprints all over rising energy prices and will have caused some sections of energy intensive industry to scale back plans and cut jobs. Whilst Ed Miliband might not sound or look like Australia’s Tony Abbott, his opposition to Britain’s new carbon tax could prove just as effective as Abbott’s, but with Britain’s voters.

Tony Lodge is a Research Fellow at the Centre for Policy Studies.  His new pamphlet, The Atomic Clock – How the Coalition is Gambling with Britain’s Energy Policy, is published by the CPS.

 

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Debunking Boris Johnson's claim that energy bills will be lower if we leave the EU

Why the Brexiteers' energy policy is less power to the people and more electric shock.

Boris Johnson and Michael Gove have promised that they will end VAT on domestic energy bills if the country votes to leave in the EU referendum. This would save Britain £2bn, or "over £60" per household, they claimed in The Sun this morning.

They are right that this is not something that could be done without leaving the Union. But is such a promise responsible? Might Brexit in fact cost us much more in increased energy bills than an end to VAT could ever hope to save? Quite probably.

Let’s do the maths...

In 2014, the latest year for which figures are available, the UK imported 46 per cent of our total energy supply. Over 20 other countries helped us keep our lights on, from Russian coal to Norwegian gas. And according to Energy Secretary Amber Rudd, this trend is only set to continue (regardless of the potential for domestic fracking), thanks to our declining reserves of North Sea gas and oil.


Click to enlarge.

The reliance on imports makes the UK highly vulnerable to fluctuations in the value of the pound: the lower its value, the more we have to pay for anything we import. This is a situation that could spell disaster in the case of a Brexit, with the Treasury estimating that a vote to leave could cause the pound to fall by 12 per cent.

So what does this mean for our energy bills? According to December’s figures from the Office of National Statistics, the average UK household spends £25.80 a week on gas, electricity and other fuels, which adds up to £35.7bn a year across the UK. And if roughly 45 per cent (£16.4bn) of that amount is based on imports, then a devaluation of the pound could cause their cost to rise 12 per cent – to £18.4bn.

This would represent a 5.6 per cent increase in our total spending on domestic energy, bringing the annual cost up to £37.7bn, and resulting in a £75 a year rise per average household. That’s £11 more than the Brexiteers have promised removing VAT would reduce bills by. 

This is a rough estimate – and adjustments would have to be made to account for the varying exchange rates of the countries we trade with, as well as the proportion of the energy imports that are allocated to domestic use – but it makes a start at holding Johnson and Gove’s latest figures to account.

Here are five other ways in which leaving the EU could risk soaring energy prices:

We would have less control over EU energy policy

A new report from Chatham House argues that the deeply integrated nature of the UK’s energy system means that we couldn’t simply switch-off the  relationship with the EU. “It would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks,” they argue. “A degree of continued adherence to EU market, environmental and governance rules would be inevitable.”

Exclusion from Europe’s Internal Energy Market could have a long-term negative impact

Secretary of State for Energy and Climate Change Amber Rudd said that a Brexit was likely to produce an “electric shock” for UK energy customers – with costs spiralling upwards “by at least half a billion pounds a year”. This claim was based on Vivid Economic’s report for the National Grid, which warned that if Britain was excluded from the IEM, the potential impact “could be up to £500m per year by the early 2020s”.

Brexit could make our energy supply less secure

Rudd has also stressed  the risks to energy security that a vote to Leave could entail. In a speech made last Thursday, she pointed her finger particularly in the direction of Vladamir Putin and his ability to bloc gas supplies to the UK: “As a bloc of 500 million people we have the power to force Putin’s hand. We can coordinate our response to a crisis.”

It could also choke investment into British energy infrastructure

£45bn was invested in Britain’s energy system from elsewhere in the EU in 2014. But the German industrial conglomerate Siemens, who makes hundreds of the turbines used the UK’s offshore windfarms, has warned that Brexit “could make the UK a less attractive place to do business”.

Petrol costs would also rise

The AA has warned that leaving the EU could cause petrol prices to rise by as much 19p a litre. That’s an extra £10 every time you fill up the family car. More cautious estimates, such as that from the RAC, still see pump prices rising by £2 per tank.

The EU is an invaluable ally in the fight against Climate Change

At a speech at a solar farm in Lincolnshire last Friday, Jeremy Corbyn argued that the need for co-orinated energy policy is now greater than ever “Climate change is one of the greatest fights of our generation and, at a time when the Government has scrapped funding for green projects, it is vital that we remain in the EU so we can keep accessing valuable funding streams to protect our environment.”

Corbyn’s statement builds upon those made by Green Party MEP, Keith Taylor, whose consultations with research groups have stressed the importance of maintaining the EU’s energy efficiency directive: “Outside the EU, the government’s zeal for deregulation will put a kibosh on the progress made on energy efficiency in Britain.”

India Bourke is the New Statesman's editorial assistant.