UK businesses will face sharply higher energy costs than continental peers if the European Parliament refuses to prop up the EU carbon market, industry figures have predicted.
This is because a contentious new UK carbon floor price, taking effect from April 1, is likely to keep British carbon prices much higher than those in the EU market, where they have crashed to record lows. This means UK companies will, in effect, face a higher tax on their greenhouse gas emissions than their EU counterparts.
The EU emissions trading market has been hit by weak economic conditions that have lowered demand for the carbon allowances that let companies emit CO2. This has driven down prices that had already been affected by a glut of allowances, which were handed to companies when the market was launched in 2005.
The EU parliament is preparing to vote in April on a plan to rescue the emissions trading system, its policy aimed at combating climate change.
The plan, known as backloading, is staunchly supported by the UK government, which does not want the EU carbon price to be sharply lower than Britain’s national carbon floor price – aimed at raising billions of pounds for Treasury coffers.
But the rescue efforts are being opposed by many MEPs, including the European Conservatives and Reformists Group led by a UK Tory, Martin Callanan.
“We’re not sufficiently persuaded this is worth doing,” Mr Callanan told the Financial Times. “It seems to us to be a bit pointless to introduce a market mechanism and then start adjusting all the parameters of that market mechanism.”
He said conservative MEPs were no longer convinced the emissions trading system was the right policy for the EU.
“When the ETS was introduced, this was because the EU was going to be a world leader in carbon reduction, and we were going to set the template for the rest of the world to follow. But over the past couple of years, with the recession and other political developments, it’s become very clear that the rest of the world is not following suit.”
If the backloading measure fails, carbon prices are likely to hover around €3 to €4 for “several years”, say analysts at Thomson Reuters Point Carbon, a research company.
The UK carbon floor price will require power generators to pay just over £18 a tonne of carbon emitted by 2015. Industry figures say this will be disastrous because it will be passed on to companies.
“By voting against backloading, Martin Callanan would be leading the UK Tories into severely penalising British industry,” said Miles Austin, executive director of the Climate Markets and Investment Association, a trade group.
“If he succeeds, British companies will be paying £18 a tonne to emit carbon while their rivals are likely to be paying less than the current price of about €4 a tonne.”
The UK manufacturers’ organisation EEF, said it was not as concerned about the backloading proposal as the carbon floor price, which it said would place a huge burden on industry.
“UK energy consumers are sleepwalking into a position where they will pay at least three times as much per tonne of carbon dioxide as their EU competitors,” said Gareth Stace, the EEF’s head of environmental policy.
Connie Hedegaard, the EU climate commissioner, said in an interview she believed that the backloading measure would pass, “because I think common sense will prevail”.
But the vote, due around April 16, is likely to be close, said Lady Worthington, a Labour peer and founder of Sandbag, a non-profit carbon markets watchdog.
A number of non-binding votes at committee level in recent weeks showed the parliament’s largest group, the European People’s Party, was divided over the measure. This meant a combination of EPP members and conservatives could create “enough of a blocking vote to make it difficult”, she said.
EU carbon prices fell to less than €3 earlier this year, having been as high as almost €30 in 2008. The low price does little to encourage companies to reduce emissions, so the European Commission has proposed the backloading measure to withdraw 900m permits from the system temporarily and push up prices.
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