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Climate change policies
and the UK business sector:
Overview, impacts and suggestions for reform
London, 1 November 2013
Authors: Samuela Bassi, Antoine Dechezleprêtre & Sam Fankhauser
Grantham Research Institute on Climate Change and the Environment at LSE
and Centre for Climate Change Economics and Policy (CCCEP)
Content
Policy landscape
Emission from the business sector
Policy coverage
Policy overlap
Uneven carbon pricing
Competitiveness issues
Proposal for policy reform
The policy landscape.
Climate change context: Emissions from
the business sector
0
50
100
150
200
250
Energysupply
Business Transport Residential Agriculture &waste
Mill
ion
to
nn
es
CO
2 Source
End-user
160 mtCO2
40% total CO2
So
urc
e: D
EC
C (
20
13
a)
Climate Change Act: statutory 80% reduction in 2050 (from 1990)
Carbon Budgets: 5-year targets – Fourth: 50% reduction by 2025
Key focus of the paper:
- CCL
- CCA
- CRC
And indirect costs of
- ETS
- CPF
- RO and FITs
Policy coverage
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
VED
Fuel duty
Landfill tax
RO/CfD
CCL/CCA
EU ETS
CERT/CESP/ECO
CRC
FiT
RHI
Green Deal
CPF
Capacity Mechanism
EPS
NFFO
CERT CERT/CESP ECO
CFD RO RO/CFD
Policy coverage: inconsistencies
1) Different policies apply to different firms (depending on sector,
size, activities, energy consumption, etc.) and several overlap
2) The carbon prices embedded in each policy are different
Many firms pay a carbon price several times over
1) Policy overlap
Sourc
e: S
ee B
assi et al (2
013)
and s
ourc
es there
in
2) Policies’ carbon price
0
5
10
15
20
25
30
35
40
45
50
CC
L
CC
A
CR
C*
EU E
TS
CP
SR
RO
/CfD FiT
CC
L
CC
A
CR
C
CC
L
CC
A
CC
L
CC
AElectricity Gas LPG Coal
Car
bo
n p
rice
(£
/tC
O2
)
2013
Marginal rates of carbon taxation (£/tCO2), 2013
Policies expressed in different units (£ per kwh, tonne CO2, kg etc)
Converted into carbon pricing (£/tonne CO2) for comparability
Electricity Gas LPG Coal
Source: Author’s calculations based on Advani, Bassi, et al. (2013)
2) Policies’ carbon pricing
0
5
10
15
20
25
30
35
40
45
50
CC
L
CC
A
CR
C*
EU E
TS
CP
SR
RO
/CfD FiT
CC
L
CC
A
CR
C
CC
L
CC
A
CC
L
CC
AElectricity Gas LPG Coal
Car
bo
n p
rice
(£
/tC
O2
)
Increase in 2020
2013
Marginal rates of carbon taxation (£/tCO2), 2013/14 and 2020
* Decrease in 2020
Policies expressed in different units (£ per kwh, tonne CO2, kg etc)
Converted into carbon pricing (£/tonne CO2) for comparability
Electricity Gas LPG Coal
Source: Author’s calculations based on Advani, Bassi, et al. (2013)
EU ETS and pass-through costs
Uneven carbon prices across firms and fuels
0
10
20
30
40
50
60
70
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
EII ETS EII non-ETS Medium/large Small Verysmall
Car
bo
n p
rice
(£
/tC
O2
)
EU ETS CPSR RO FiT
Source: Authors’ calculations
CCL/CCA
Uneven carbon prices across firms and fuels
0
10
20
30
40
50
60
70
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
EII ETS EII non-ETS Medium/large Small Verysmall
Car
bo
n p
rice
(£
/tC
O2
)
EU ETS CPSR RO FiT CCA CCL
Source: Authors’ calculations
EII/ETS sectors bear the lowest C price, non-CCAs sectors the highest
Electricity is the most heavily taxed in all sectors!
Uneven carbon prices across firms and fuels
0
10
20
30
40
50
60
70
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
Gas
LPG
Co
al
Elec
tric
ity
EII ETS EII non-ETS Medium/large Small Verysmall
Car
bo
n p
rice
(£
/tC
O2
)
EU ETS CPSR RO FiT CCA CCL CRC
Source: Authors’ calculations
Competitiveness impacts.
Competitiveness and carbon pricing
Different carbon prices may be justified if there are
competitiveness concerns
Carbon taxes have a relatively larger impact of energy-intensive
business
In the absence of global carbon price firms exposed to
international competition can loose market share
Risk of closure or relocation (carbon leakage)
How to minimise impact? Lower carbon prices or compensation
Crucial to correctly identify companies under threat
Focus: Climate Change Agreements (CCA)
• Introduced in 2001 to reduce impact of CCL on energy
intensive companies
• Discount on CCL: 65% on fossil fuels and 90% electricity
(80% until April 2011)
• + targets agreed with Government
Eligibility:
• Energy intensity: 10% (energy cost/value of production)
• OR Energy intensity 3% and import penetration 50%
(sector imports/UK sector sales + net imports)
around 7,000 installations (3,000 firms)
Fuel CCL CCA unit Electricity 0.524 0.052 p/kWh
Natural gas 0.182 0.064 p/kWh
LPG 1.172 0.410 p/kg
Coal 1.429 0.500 p/kg
Rates 2013/14
Sourc
e: H
MR
C (
2013a)
Martin et al. (2011) compares ~700 CCA companies with ~4,000 CCL
companies from 1999 to 2004 :
• The analysis compares companies sharing similar characteristics
(statistically similar) – such as turnover, number of employees and
energy intensity;
• They operate in the same economic sectors and therefore face the
same international competition;
We update the analysis with larger and more recent data sample
(~3,000 CCAs in 2001-2010).
The impact of CCL on energy efficiency and
competitiveness : a comparison with CCA
Findings
CCL firms abate more: 20% reduction in energy intensity compared to CCA
No evidence of competitiveness impacts: no difference between CCL and
CCA in terms of employment, gross output, probability of exiting the market
Applying the CCL to all plants would have increased energy efficiency
without jeopardizing profits or employment
Similar results were found for EU ETS:
- No competitiveness impacts in comparison to non-ETS
- And: EU ETS firms tend to be more innovative (R&D, patents)
Caveats
Some sectors difficult to match – e.g. power, cement
Relatively low carbon prices
CCL/CCA analysis comparing to CCL rates (~ £4-13 t/CO2)
ETS analysis based on ETS carbon price (£15-30 t/CO2 in the
period)
A reform with higher carbon prices may have competitiveness
impacts for some sectors
A proposal for policy reform.
Rationale
Uniform carbon price: Each tonne of CO2 does approx. the same
damage no matter who emits;
Competitiveness issues: no empirical evidence that CCL harms
more than CCA (output, employment), and CCA less effective at
reducing emissions;
Minimise administrative burdens and overlaps as they reduce
efficiency – e.g. companies report high admin cost for CRC.
Policy reform proposal
Short term:
Merge CCL, CCA and CRC into a single instrument (retaining CCL
design), applied to all sectors;
Apply uniform carbon price at point of emissions – implies:
lower CCL on electricity: it already bears implicit carbon price of
ETS/CPF, RO, FiTs;
lower CCL for ETS sectors: ETS price already paid on fossil fuels
May raise significant revenues compensate where necessary if
competitiveness concerns arise
Long term:
Apply carbon tax on coal, gas and LPG further upstream.
What carbon price?
Politically sensitive
No firm recommendation, but should in principle lead to same
price for EU ETS traded and non-traded sectors
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
Non-
Traded 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 76 76
Traded 3 4 4 4 4 4 5 5 12 19 26 33 41 48 55 62 69 76
Simulation assuming carbon price = non-traded sector: £59/tCO2 in 2013
and £66/tCO2 in 2020
Source: DECC (2013b)
Illustrative reform: Electricity & gas
Source: Authors calculations based on Advani, Bassi, et al. (2013)
0
20
40
60
80
100
120
140
Electricity Gas Electricity Gas Electricity Gas Electricity Gas
ETS EII non-ETS Medium / Large Small
Car
bo
n p
rice
(£
/tC
O2
) -
mar
gin
al
ETS CPSR RO FiT CCA CCL If CCL applies CRC
2013
Illustrative reform: Electricity & gas
Source: Authors calculations based on Advani, Bassi, et al. (2013)
0
20
40
60
80
100
120
140
Electricity Gas Electricity Gas Electricity Gas Electricity Gas
ETS EII non-ETS Medium / Large Small
Car
bo
n p
rice
(£
/tC
O2
) -
mar
gin
al
ETS CPSR RO FiT CCA CCL If CCL applies CRC
£59/tCO2
New CCL+
2013
0
20
40
60
80
100
120
140
Electricity Gas Electricity Gas Electricity Gas Electricity Gas
ETS EII non-ETS Medium / Large Small
Car
bo
n p
rice
(£
/tC
O2
) -
mar
gin
al
ETS CPSR CfD FiT CCA CCL If CCL applies CRC
Illustrative reform: Electricity & gas
Source: Authors calculations based on Advani, Bassi, et al. (2013)
2020
0
20
40
60
80
100
120
140
Electricity Gas Electricity Gas Electricity Gas Electricity Gas
ETS EII non-ETS Medium / Large Small
Car
bo
n p
rice
(£
/tC
O2
) -
mar
gin
al
ETS CPSR CfD FiT CCA CCL If CCL applies CRC
Illustrative reform: Electricity & gas
Source: Authors calculations based on Advani, Bassi, et al. (2013)
£66/tCO2
New CCL+ 2020
? ? ? ?
Key conclusions & recommendations
• We recommend a policy reform where CCA, CRC and CCL are
replaced by a single new CCL rate applying to all firms, of all size
and sectors;
• This will reduce admin burden and ensure a uniform carbon price
across the economy. It will also be consistent with the proposed
households carbon price;
• The reform will result in higher carbon prices for some of the
sectors, especially the EII. It can also generate significantly higher
revenues to the Government;
• Strong case for recycling at least some of the extra revenues to
address competitiveness and reduce other taxes
