NCPA - National Center for Policy Analysis

Industrial Masochism: The Carbon Floor Price and Energy Intensive Industry

December 1, 2011

The carbon floor price introduced in Britain in 2011 threatens to increase energy prices while reducing them elsewhere in Europe.  Combined with other measures that increase prices such as renewable energy subsidies it will increase bills for domestic customers.  But it will also create particular problems for energy intensive industries, says Matthew Sinclair of the Taxpayers' Alliance.

  • For some major industries -- such as steel -- energy represents between a quarter and well over half of total costs, with any substantial increase in those costs seriously affecting their ability to compete.
  • The largest energy consumers are already at a disadvantage relative to government-sheltered competitors in Germany and France that pay 10 to 25 percent less and 60 to 75 percent less, respectively, than British industries.
  • The carbon floor price alone will add another 10 percent to their energy costs by 2020.

The consequences of this policy, adopted in addition to a complex emissions trading scheme that is already in place in the EU, are substantial, while the benefits that it purports to supply are insignificant.

  • Due to the phenomenon of carbon leakage, energy-intensive industries will simply move operations out of the United Kingdom to other countries with lower standards and less efficient capital, raising emissions in the long run.
  • As this policy is not accompanied by a decrease in the carbon cap for emissions in the EU as a whole, total emissions will remain constant and will simply be redistributed out of the United Kingdom and toward other major European economies.
  • It is estimated that the new policy, combined with the emissions trading scheme, will not only increase energy costs in the United Kingdom but will decrease them by 8 percent in other countries, lending credence to theories about redistribution without reduction.

This new tax, therefore, has the potential to be deadly to the business model of energy-reliant industries without actually delivering the benefits of reduced emissions.  The fallacy of unilateral climate-change policies is again evident, as markets will simply respond to higher costs in on region by moving operations to another.

Source: Matthew Sinclair, "Industrial Masochism: The Carbon Floor Price and Energy Intensive Industry," Taxpayers' Alliance, November 16, 2011.

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