Overview, impacts and suggestions for reform Authors: Samuela Bassi, - PowerPoint PPT Presentation

Climate change policies and the UK business sector: Overview, impacts and suggestions for reform 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) London, 1 November 2013

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  Climate Change Act: statutory 80% reduction in 2050 (from 1990)  Carbon Budgets: 5-year targets – Fourth: 50% reduction by 2025 160 mtCO 2 250 40% total CO 2 Source Source: DECC (2013a) Million tonnes CO2 200 End-user 150 100 50 0 Energy Business Transport Residential Agriculture & supply waste

Policy coverage EPS Key focus of the paper: Capacity Mechanism - CCL CPF Green Deal - CCA RHI - CRC FiT CRC And indirect costs of CERT ECO CERT/CESP/ECO CERT/CESP EU ETS - ETS CCL/CCA - CPF RO RO/CFD CFD RO/CfD NFFO - RO and FITs Landfill tax Fuel duty VED 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

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 Source: See Bassi et al (2013) and sources therein

2) Policies’ carbon price  Policies expressed in different units (£ per kwh, tonne CO 2 , kg etc)  Converted into carbon pricing (£/tonne CO2) for comparability Marginal rates of carbon taxation (£/tCO2), 2013 50 45 Gas LPG Electricity Coal Carbon price (£/tCO2) 40 35 30 2013 25 20 15 10 5 0 CCL CCA CRC* EU ETS CPSR RO/CfD FiT CCL CCA CRC CCL CCA CCL CCA Electricity Gas LPG Coal Source: Author’s calculations based on Advani, Bassi, et al. (2013)

2) Policies’ carbon pricing  Policies expressed in different units (£ per kwh, tonne CO2, kg etc)  Converted into carbon pricing (£/tonne CO2) for comparability Marginal rates of carbon taxation (£/tCO2), 2013/14 and 2020 50 45 Electricity Gas LPG Coal Carbon price (£/tCO2) 40 35 * Decrease in 2020 30 Increase in 2020 25 2013 20 15 10 5 0 CCL CCA CRC* EU ETS CPSR RO/CfD FiT CCL CCA CRC CCL CCA CCL CCA Electricity Gas LPG Coal Source: Author’s calculations based on Advani, Bassi, et al. (2013)

Uneven carbon prices across firms and fuels  EU ETS and pass-through costs EU ETS CPSR RO FiT 70 Carbon price (£/tCO2) 60 50 40 30 20 10 0 Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity EII ETS EII non-ETS Medium/large Small Very small Source: Authors’ calculations

Uneven carbon prices across firms and fuels  CCL/CCA EU ETS CPSR RO FiT CCA CCL 70 Carbon price (£/tCO2) 60 50 40 30 20 10 0 Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity EII ETS EII non-ETS Medium/large Small Very small Source: Authors’ calculations

Uneven carbon prices across firms and fuels  EII/ETS sectors bear the lowest C price, non-CCAs sectors the highest  Electricity is the most heavily taxed in all sectors! EU ETS CPSR RO FiT CCA CCL CRC 70 Carbon price (£/tCO2) 60 50 40 30 20 10 0 Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity Gas LPG Coal Electricity EII ETS EII non-ETS Medium/large Small Very small 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 Rates 2013/14 Source: HMRC (2013a) (80% until April 2011) Fuel CCL CCA unit • + targets agreed with Government 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 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)

The impact of CCL on energy efficiency and competitiveness : a comparison with CCA 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).

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/CO 2 )  ETS analysis based on ETS carbon price (£15-30 t/CO 2 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 CO 2 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 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Non- 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 76 76 Traded Traded 3 4 4 4 4 4 5 5 12 19 26 33 41 48 55 62 69 76 Source: DECC (2013b) Simulation assuming carbon price = non-traded sector: £59/tCO 2 in 2013 and £66/tCO 2 in 2020

Illustrative reform: Electricity & gas 2013 2013 140 Carbon price (£/tCO2) - marginal ETS CPSR RO FiT CCA CCL If CCL applies CRC 120 100 80 60 40 20 0 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Source: Authors calculations based on Advani, Bassi, et al. (2013)

Illustrative reform: Electricity & gas 2013 2013 140 Carbon price (£/tCO2) - marginal ETS CPSR RO FiT CCA CCL If CCL applies CRC New CCL+ 120 100 80 £59/tCO 2 60 40 20 0 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Source: Authors calculations based on Advani, Bassi, et al. (2013)

Illustrative reform: Electricity & gas 2020 2020 ETS CPSR CfD FiT CCA CCL If CCL applies CRC 140 Carbon price (£/tCO2) - marginal 120 100 80 60 40 20 0 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Source: Authors calculations based on Advani, Bassi, et al. (2013)

Illustrative reform: Electricity & gas 2020 2020 ETS CPSR CfD FiT CCA CCL If CCL applies CRC New CCL+ 140 Carbon price (£/tCO2) - marginal 120 100 ? ? ? ? 80 £66/tCO 2 60 40 20 0 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Source: Authors calculations based on Advani, Bassi, et al. (2013)