As the UK government prepares to compensate its energy intensive industries from the carbon costs in their electricity, Sandbag was afforded two platforms over the last fortnight to caution them against being overly generous.

Our Senior Policy Advisor, Damien Morris, was called to give oral evidence to the Environmental Audit Committee earlier this week, and the week before presented on “The Practical Implications of the ETS for Industry” at the Westminster Energy Environment and Transport Forum.

Damien at EAC

In both forums, Sandbag advised that the government should account for the superfluous carbon leakage protections it awarded companies in 2008-2012 (in the form of free ETS allowances) before awarding them additional protections for their indirect costs over the next two years. As we put it to the Environment Audit Committee:

“We really think the UK Government is in jeopardy of pouring good money after bad in terms of the compensations for carbon leakage threats that it has awarded its industries. This is an excellent opportunity to limit that.”

This recommendation could have a very significant effect – to take one telling example, Tata Steel, one of the companies first in line for the compensation money, already holds surplus UK allowances whose value is roughly equivalent to the entire £250 industrial support package.

Information Tata provided Sandbag ahead of our July report Losing the Leadconfirms that their UK installations accrued 31 million surplus allowances over 2008-2011. With analysts expecting the 2013-2014 carbon price to hover around€10/t, these allowances will be worth approximately €310 million over the Spending Review Period, which is £250 million at current exchange rates. We note that Tata is not alone here, however, and that essentially every industrial sector in the UK has been oversupplied Phase 2 allowances.

In summary Sandbag recommends that UK government:

  • Resist providing additional ETS compensations to industry until the market price is restored to the €30 levels modelled in the European Commission’s 2008 Impact Assessment and its carbon leakage assessments.

  • Factor in surplus Phase 2 carbon allowances when calculating compensation for indirect ETS and CPF costs (except where industry can prove surpluses were obtained through low-carbon investment).

  • Narrow the production bands used to determine compensation when production declines below baseline levels and/or ensure the default risk is for under-compensating rather than over-compensating for each production band.

Sandbag’s Power Point presentation to the Westminster Forum can be found online here. Our televised EAC evidence session can be watched here.