State Aid delays prompt fresh calls to scrap carbon floor price

Heavy industrial customers have stepped up calls on the Treasury to scrap the UK carbon floor price in light of delays to compensation for the sector.

Proposals to shield energy-intensive industries from the cost of the surcharge on the European carbon price have been snarled up in the State Aid process. Ministers originally expected approval from the European Commission by summer 2013; it is now considered unlikely to go through before the end of the year.

Tata Steel and chemical giant BASF told the Telegraph the hold-up was harming UK manufacturers’ competitiveness.

Munir Hassan, head of clean energy at law firm CMS, said the UK government had to convince the Commission it had a robust basis for compensating heavy users, which was proving more complex than anticipated. He said: “If the EU does not allow Government to compensate energy intensive industries to provide relief from the full effects of the tax, it is not clear whether the carbon price floor could survive in its current form.” 

At last week’s Conservative Party Conference, energy minister Michael Fallon expressed sympathy with industry concerns about rising costs and a desire to cut back on green levies. “We should not be putting our industry out in front compared to the rest of Europe,” he said. That would be “assisted suicide”.

The party is also under pressure to find ways to help consumers with the cost of living, after Labour threw down the gauntlet with a pledge to freeze energy prices for 20 months. The carbon floor price adds £5 to bills this year, rising to an estimated £26 in 2015/16.

The carbon floor price is seen as the most plausible green levy to cut. Its status as a tax means it would be easier to reverse than renewable subsidy contracts or statutory energy efficiency schemes.

One source close to Conservative backbenchers said there were rising hopes chancellor George Osborne could use his Autumn Statement to announce a U-turn. “The chances are still slim but I would have said it was impossible before. It would be a piece of meat for the Tory faithful,” the source said.

However, if the Treasury were to scrap the measure, it would lose predicted revenues of £975 million, rising to £2,200 million in five years’ time.

Conservative MP Peter Lilley, who sits on the Energy and Climate Change Committee, said: “The weakness of [the carbon floor price] is it automatically increases the subsidy that goes to existing windmills and nuclear power stations.”

He added that the Treasury “would be reluctant to get rid of something which brings in revenue”.