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22 September 2021

The UK government’s deal on CO2 production isn’t the end of the energy crisis

Higher bills will make the looming cut to Universal Credit more painful for individuals and, perhaps, the government.

By Stephen Bush

The British government has reached a deal to subsidise the production of CO2 (which is used to carbonate fizzy drinks, to stun pigs and chickens before slaughter, in food packaging, in nuclear power plants, in the health service and elsewhere) after the US company CF Industries shuttered two of its UK plants in response to the rising global cost of gas.  

The bill for the government – at most around £20m over the next three weeks – is derisory, but the real political and economic fireworks will come at the end of the three-week period, when these and other proposed measures to sustain the United Kingdom through the initial price disruption end.  

The underlying difficulty for the UK’s energy and gas producers, whether they are commercial or domestic suppliers, is that their business model is based on beating the market by charging their customers more than the cost of producing energy. The contract your energy supplier agreed with you in March is based on its best guess about what it will cost when you whack on the thermostat in September: and the global rise in gas prices means that most companies are getting caught short and some of them aren’t well-hedged enough to weather the economic shock. 

What Kwasi Kwarteng, the Business Secretary, has done, is essentially to prioritise maintaining the flow of gas and energy by giving the industry support for long enough that it can adjust to the new circumstances. Of course, what “adjusting” means in this context is “increasing prices, resulting in a higher energy bill for the consumer”. Where CO2 is used to carbonate fizzy drinks or to slaughter livestock, that cost will be passed on through higher prices for chicken nuggets and Coca Cola. Where gas is used to heat homes, it will be passed on through higher energy bills. 

Now, some of that increase is a result of mistakes made by this government and previous governments. If John Major and Tony Blair had built nuclear plants at the rate Margaret Thatcher did, then domestic customers would be less exposed to the rise in gas prices. If David Cameron had been more enthusiastic about renewables it would also have reduced consumer exposure to rising gas prices. But in the here and now, it means that the looming cut to Universal Credit will become more painful for individuals and perhaps, therefore, for the government.

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