Energy intensive industries asked to shape £250m Government funding package

The Government has issued a call for evidence (15-page / 104KB PDF) in support of its Energy Intensive Industries (EII) Package, which is aimed at reducing the impact of higher bills for industries whose international competitiveness is most affected by them.

Energy and climate change policies could add up to 28% to the average electricity prices paid by large businesses in industries such as steel, chemicals, paper and cement by 2020, according to Government figures.

Energy intensive businesses are responsible for 45% of the UK's business and public sector emissions, according to industry body the Carbon Trust. Legislation aimed at reducing emissions in the sectors includes the EU Emissions Trading Scheme (EU ETS). This is a 'cap and trade' scheme which puts a total cap on the volume of greenhouse gasses that can be emitted by businesses that come within its the remit. Businesses that are caught are required to purchase and surrender sufficient allowances at the end of each year in line with allocated emission allowances, thereby creating a market and price for carbon allowances.

In addition Climate Change Agreements (CCAs), which the Government has entered into with businesses across 10 energy-intensive sectors, give those businesses an 80% discount from the Climate Change Levy (CCL) as long as they meet additional carbon reduction targets. The CCL is charged on energy usage by businesses and the public sector.

The Government's White Paper on Energy Market Reform (EMR) (142-page / 1.8MB PDF), which was published in July 2011, proposes several measures aimed at decarbonisation including the introduction of a 'price floor' on carbon emissions. The Government said that, in practice, this is likely to be achieved by a tax on fossil fuel used for generating electricity which is currently exempt from the CCL in most cases. New legislation to introduce the EMR proposals is due to be approved in 2013, although much of the detail of the reforms is not expected to be in force until 2014.

The European Commission is due to publish guidance to member states to create a "broad framework" for compensation for the indirect costs of the ETS later this month. Member states will need to gain Commission approval before granting any aid, and must set out the details of how compensation will be applied including any "additional criteria" to ensure any compensation goes to the businesses that need it most. The Government will also seek state aid for a further scheme intended to provide additional compensation to businesses affected by the introduction of a carbon price floor, which it said was "analogous" to the ETS.

"A modest amount of compensation spread amongst many businesses will run the risk that overall investment behaviour remains unaffected and the risk of 'carbon leakage' is left unaddressed... There we need to determine what criteria to use to assess eligibility for compensation," the Government said in its call for evidence document.

In the document, the Government has asked companies and trade bodies to share information and data about their energy usage. This information will enable it to consult on the new scheme later this year for potential implementation in Spring 2013, as well as meet European state aid requirements by showing that the aid related to the carbon price floor is necessary and will not distort competition with businesses elsewhere in the single market. Other EU countries have not yet proposed a similar measure.

Business Secretary Vince Cable said that the funding package, which aims to provide "direct" financial assistance to those businesses in need of it, would enable manufacturers to "remain competitive during the shift to a low carbon economy".

"As we manage the transition to a cleaner energy mix, it's important that we are alive to adverse impacts felt by energy intensive industries which face tough competition overseas. The evidence we are calling for today will help us to target the financial support we have available to those businesses that need it most," Energy and Climate Change Secretary Ed Davey added.

Earlier this week, consumer body Which? called on the Government to scrap the carbon floor price in 2012 Budget. The organisation claims that a minimum price for carbon will not guarantee investment in green technologies but will instead be passed on to consumers through their energy bills.