2012: Energy and carbon reduction issues dominated

2012 was a year dominated by energy and carbon reduction issues and 2013 is unlikely to be any different.

As an Energy Intensive Industry (EII), Paper Manufacturers need security of energy supply at internationally competitive prices in order to fend off the threat of import penetration and to exploit export opportunities. They also need to be profitable in order to attract much needed capital investment.

It remains far from certain that these needs will be met as we head into a period of escalating renewable energy costs, tightened targets for energy and carbon reduction, and the closure of so many of our coal-fired power stations.

The Government has shown signs of understanding the issues faced by EIIs but the compensation measures announced so far only go a fraction of the way to offsetting the true cost of its Climate Change Policy.

In its recent evidence to the Environmental Audit Committee, the TUC claimed that the German Government recompensed its EIIs to the tune of £6.4bn a year, equivalent to between 90% and 100% of Climate Change related duties, levies and taxes. It also claimed that the UK’s support measures only accounted for about 10% of these costs.

Potentially the most damaging of the UK Government’s policies relates to the Carbon Price Floor which for 2013 sets a carbon price of £16 per tonne compared to the current EU price of circa £5 per tonne. This price is set to rise by £2 per tonne every year until 2020, by which time our carbon price will be £30 per tonne against a forecasted EU price of £12 per tonne.

The real “game changer” has been the recent development of shale gas reserves in North America which has resulted in huge reductions in energy costs for American industry – for both gas and electricity. It is encouraging that the UK Government has announced the formation of the Office for Unconventional Gas and measures to encourage the exploitation of our own shale gas reserves. To meet our energy needs in the short-term, we must invest in gas which needs little or no subsidy. Another measure could be for the UK Government to seek derogation from the Industrial Emissions Directive so that we can run on our coal-fired power stations beyond 2015.

Confederation of Paper Industrieswould also call upon Government to abandon the Carbon Reduction Commitment altogether, as this is proving to be a huge cost to manufacturers not caught by Climate Change Agreements or the EU Emissions Trading Scheme.

If Government really wants to support industrial energy efficiency, it should immediately restore incentives to install and operate on-site Combined Heat and Power plants.

In the current economic climate, UK manufacturing cannot afford to absorb the costs associated with Climate Change measures and expect to remain internationally competitive.

Energy policy needs to be at the heart of industrial policy, with the overarching objective of secure supplies at internationally competitive prices. Unless this happens – and soon – manufacturing in the UK will not be in a position to play its part in re-balancing the economy.