Heavy industry claims carbon emission targets are 'death by a thousand cuts'

• EU aims to cut emissions by a fifth in 2020 against 2005 levels • Manufacturers warn higher carbon taxes will drive firms abroad

Tim Webb
The Observer, Sunday 11 April 2010

Both political parties have been falling over themselves to declare their new-found affection for British industry, which had been neglected for years in favour of a now discredited City. Business secretary Lord Mandelson talks of Labour promoting the "low carbon reindustrialisation" of the economy where British manufacturers deliver the new nuclear plants, wind farms and other technologies needed to meet the UK's tough carbon emissions targets. But high carbon emitters like steelmakers and chemical plants are becoming concerned that new environmental taxes could mean that within a decade, there won't be much of Britain's heavy industry left to lead this revolution.
In the next month, the European commission will decide how industry will meet tough new targets for the third phase of the EU emissions trading scheme, which begins in 2012. The scheme sets a cap on companies' emissions by issuing permits to pollute and imposes a penalty if they exceed this. Under the scheme, which runs until 2020, the cap is tightened each year. The EU wants the scheme to achieve its targets of reducing Europe's emissions by a fifth in 2020 compared with 2005 levels. But industry fears the extra costs will put them at a disadvantage against rivals outside the EU.
One large steelmaker in the UK, which spoke on the condition of anonymity, estimates that to maintain current production, it would have to buy millions more permits, at an estimated cost of at least €100m (£88m). The steelmaker warned that moving production overseas would be an inevitable consequence. One executive said: "This is death by a thousand cuts."
The chemical industry in the UK, which employs 180,000 people and represents about 12% of value added in manufacturing, is likely to be similarly affected. More than two-thirds of chemical companies are multinationals with overseas headquarters, making relocation more likely.
The EU trading scheme affects industry equally across Europe. But British companies fear that the UK's more ambitious policies will put them at a disadvantage to competitors. The government has pledged to reduce emissions by at least 34% by 2020 compared with 2005 levels, much higher than the EU's pledge of 20%. Much of the responsibility for meeting these targets falls on energy companies, requiring them to build new nuclear plants and wind farms. The government estimates that electricity bills for business could increase by 70% by 2020, much higher than in the rest of Europe. These higher energy costs would put manufacturers at a significant disadvantage. Moreover, reducing emissions from industry could allow sectors – such as aviation – to pollute more. To have any chance of maintaining existing production without having to pay large penalties, companies would have to invest billions of pounds in new technologies. Ian Rodgers, director of trade body UK Steel, complains that the government is only providing aid for carbon capture (CCS) technology to power plant owners. In Germany, by contrast, the government is providing €30m to steelmaker ArcelorMittal for a CCS project at one of its blast furnaces.
Some executives fear that the department of energy and climate change (DECC) is keen on reducing emissions whatever the economic cost. Jeremy Nicholson, from the Energy Intensive Users Group, said: "Talking to DECC officials about the extent of the recession, the enthusiasm at the reduction of electricity and gas consumption because of the recession was obvious. The plan is supposed to be decarbonising the economy while growing it, not shrinking it."
Industry is key to developing new energy efficient technologies to combat climate change, whether they are steelmakers making wind turbines or chemical plants developing greener fuels and materials. If they can't be provided by UK industry, because environmental regulations killed it off, the kit and technologies will have to be imported from overseas, ironically often from less energy efficient manufacturers. Rodgers adds: "The climate change agenda won't affect the amount of steel consumed, but will determine where it's produced."