Decarbonisation costs on industry are ‘basically trivial’

The impact of high energy costs on British industry due to decarbonisation is “basically trivial”, a former chair of the Committee on Climate Change has claimed.

Lord Turner said issues of competitiveness “are important” but are restricted to a “very, small part of the total economy”.

“The reason why I said it was trivial is that the problems, although they are important to deal with, relate to a very small percentage of GDP and an even smaller percentage of employment,” he argued, giving evidence before the House of Lords Economic Affairs Committee.

Turner said energy costs are not a problem for the services sector, which makes up the majority of the British, because energy accounts for a very small proportion of their overall costs.

The same is true for a “large slice of industry” including sectors such car manufacturing and food processing. Although they are “heavy users… the total importance of electricity in their cost base is not large enough to make a difference to the location of manufacturing industry.”

“The issue really comes down to very specific subsets of the economy,” Turner added. “They are the chemicals industry, pulp and paper, cement, and iron and steel.” The most important of these is iron and steel but even in this sector “the dominant issue is not electricity costs but other costs” such as wages and trade access.

He continued: “The estimates that I have seen suggest the total impact of all the measures we’ve taken to drive a low-carbon economy have probably increased the net cost of energy to the iron and steel industry by somewhat less than one percent.”

This may become a bigger issue in the future, according to Turner, “in particular if we move to away from blast furnaces to electric arc furnaces” which are more power hungry. International cooperation may be need to address “competitive reallocation effects”.

“I think we may eventually have to consider tools such as what are called border tax adjustment to allow for carbon intensity of products are the border,” he concluded.

Turner was responding to comments made by the former energy secretary Lord Lawson, who appeared alongside him to give evidence to the committee. Lawson said the UK’s decarbonisation policy is “driving UK energy intensive industry abroad… without doing anything at all to reduce global carbon dioxide emissions”.

He said it should be made “subordinate to the objective of supplying the British economy and British households with cheap and reliable energy”. Lawson opposed Turner’s suggestion that the UK could eventually introduce a ‘border tax adjustment’, dismissing it as “protectionism”.

The House of Lords Economic Affairs Committee has been examing the energy market to see whether the “present mix of policy interventions and subsidies” has resulted in market failures. Launching the investigation in June, it said the current state of affairs suggests “a dysfunctional energy market or a conflict of government policies”.