David Merlin-Jones: The Government's demands on carbon reduction are anti-industry and will drive business abroad

David Merlin-Jones is a Research Fellow at Civitas, where he specialises in economics, energy and industry and author of Chain Reactions: How the Chemical Industry Can Shrink Our Carbon Footprint.

‘We are sending a clear signal to the international community that the UK is committed to the low-carbon economy.’ So said Energy Secretary Chris Huhne when he announced the fourth carbon budget last month. The Government has been at pains to prove its green credentials ever since taking office, but has been doing so through measures that will raise the cost of energy, erode British industry, and undermine the low carbon economy they claim to value. With Huhne’s departure seemingly imminent, there has never been a better time for the Coalition to seriously reconsider its environmental wrecking ball.

Put simply, the demands of current green legislation ask for too great a reduction in emissions in too short a time frame. The UK is going much further than any other country, and has committed itself to reduce emissions on 1990 levels by 34% by 2020, 14% more than any other EU state. The fourth carbon budget will now legally bind a reduction of 50% by 2025, and again, no other country has set specific targets beyond 2020. The new carbon price floor will also make British companies pay more than the market rate for their EU emission credits. In total, costs for an average UK energy-intensive firm will soar from £3 million now to £17.5 million in 2020 - a rise companies in no other country face.

Huhne said that these unilateral decisions ‘give investors the certainty they need’. They do, but not in the way he intended – rather, they show investors the UK is anti-industry and not a good place to invest. This is because the energy price rises designed to curb usage, and consequently greenhouse gas emissions, will price many companies out of the UK.

Most energy-intensive firms face stiff international competition, which means they cannot raise consumer prices to offset any extra overheads. As a result, foreign-owned firms will move their business abroad and British companies will do likewise, or simply fold. Several weeks ago, Jim Ratcliffe, owner of INEOS, warned the Government that he will have to close his Runcorn chemical plant if carbon taxes continue to soar, at a cost of 1,800 jobs. Along with these closures, foreign investment will dry up, leaving the UK an industrial backwater.

The threat is a serious one, and the emigration has already begun, most recently with Tata pulling out of Scunthorpe. All energy-intensive industries are at risk of being ruined, and some of these are economically crucial. Take the example of the chemical industry: this has a turnover of £60 billion and is responsible for 15% of UK manufacturing exports. Its products are used in so many other consumer goods that a Royal Society of Chemistry report found that all chemical-reliant industries contributed £258 billion in value added to the UK economy in 2007. With 600,000 people employed in the sector, its loss would cause mass unemployment, concentrated in regions like the North East of England.

Forcing the chemical industry out of the UK would be economic suicide, but it appears even more irrational when one considers that the nascent low-carbon economy is developing in the chemical sector, and will emigrate as well.

How did it come to this? The Government has misunderstood what ‘low-carbon’ means, believing the term to apply to companies that use little energy and produce few absolute emissions. However, this only examines half the equation, ignoring the low-carbon benefits of goods produced. Examining the emissions produced to emissions saved ratio reveals a very different picture. On average, the whole sector saves two tonnes of CO₂ for every tonne it produces and this can rise as high as 233:1 for insulation. ‘Low-carbon’ is a relative term.

Given time and a favourable business environment, new innovations will be developed to deal with all our carbon-related issues. It is short-sighted to price the companies developing these technologies out of the UK, just to meet unrealistic, self-imposed targets. This will lead to the absurd situation of Britain wanting to build things like wind turbines, without actually having the means to do so.

Moreover, the rush is irrational – a 16% reduction is expected in just five years, from 2020 to 2025, while only a further 30% is required from 2025 to 2050.  We should be looking at the situation the other way, asking for slower initial reductions to maintain our competitiveness, and then expecting larger cuts as the technology becomes more effective. The fight to reduce emissions is a marathon, not a sprint.

At this rate, the UK will be dealing with the economic and social consequences of existing environmental policy, long after the current government has gone. It’s high time it realises that its ‘green’ policies are having the opposite effect and are hindering the entrenchment of low-carbon manufacturing. Instead, we need a policy that values long-term emission reductions, by creating a business environment that will foster the low-carbon economy through competitive energy costs.