The government’s goal in planning a carbon price floor is that it “will provide certainty and support for low-carbon investment”. It’s a worthy ambition, but will it work? There is a Catch 22 behind the carbon price floor, which goes like this. Pitch it too low and business will take it on the chin and treat it like a tax, but do little to invest in low-carbon technology. Pitch it too high and the government will face a backlash from businesses overburdened by tax in a recession, but it will make investment in low-carbon energy more viable.
The budget of 2011 was used to announce the introduction of a carbon price floor starting 1 April 2013 at around £16 per tonne of carbon dioxide. It is planned to follow a linear path to a target of £30 per tonne in 2020, based on 2009 prices. The government thinks that, over the long term, a price floor at the £30 per tonne level will provide £1.9 billion of net present value benefits. To put this figure in perspective, it is also predicting that we will need up to £110 billion of investment in new generation and grid connections by 2020 to replace the quarter of all existing UK power plants due to close by that date.
If carbon reduction goals are going to be met, this new generation capacity will have to be a mix of nuclear (politically very sensitive) and renewables (still proving its viability). However, if you went to UK plc tomorrow and said “here is a new market worth £110 billion” they would be addressing it now. This market does exist. It is energy sustainability for the UK.
Currently, business is faced with these choices. Accept the carbon price floor, soon to be around £30 per tonne, and live with this cost going forward forever. Avoid the carbon price floor by investing in energy-saving solutions, say £300 per tonne. This will have an impact on profit and loss reporting, and a case will need to be made justifying the investment now with future savings. But how long will it take to say we have achieved a return on this investment and will the board and shareholders buy into this? Finally, we could choose to offset our carbon liability. This is cheaper than any energy solution, say £100 per tonne, so we will save money, but our shareholders and other stakeholders may not find this acceptable because of the risk of negative publicity associated with offsetting. Like the carbon price floor, we will also have to live with the cost going forward forever.
To help decide which option to select, we can create a crude calculation table that looks like the one shown, excluding indexing.
Investment in energy solutions delivers as a long-term investment, but in today’s economic environment, it will be difficult to push through. Businesses need to take an imaginative look at energy solutions and consider models like energy performance contracts or engaging an energy services company, which can help with funding now and take on future energy risk.
Apart from the carbon price floor, there are three key factors driving the drop in carbon emissions in the UK at the moment. These are:
Energy price rises. Our, conservative, forecast is that energy inflation will be around 81 per cent over the next ten years. Dealing with energy inflation is the best incentive for business to invest in low-carbon energy reduction measures. Businesses have by and large addressed a range of overhead costs like human resources and property as best they can. Now energy costs will eat into profits at an alarming rate. We calculate that this level of energy inflation, if unaddressed, could produce a £23 billion hit on margins over the next ten years for the FTSE 100 as a whole.
Exporting the problem. In many cases, businesses are considering outsourcing emissions to factories in BRIC (Brazil, Russia, India, China) economies. Unfortunately for UK plc, this means the work and jobs go with it, so it is a case of shifting the carbon problem, creating another problem and solving nothing. This can never be a universal solution, because there are a great number UK businesses that are simply “unexportable” and must remain where they are.
The economic downturn. The slowdown creates its own energy reduction and there is no immediate prospect of a quick economic upturn. Encouraging business by tax breaks, grants and avoidance of major future costs to invest in low-carbon and energy reduction measures could in itself provide the massive economic stimulus we need and one in which the UK can lead the world. We know that businesses are finding it tough, but many companies do have considerable cash reserves. The challenge is that we need to make the business case for them to use some of these reserves to invest in energy reduction and efficiency. The potential £23 billion hit on margins they face because of energy inflation could be just the incentive they need.
Affordabile low-carbon investment is key, not
just to solving climate change, but as a possible kick-start to the UK economy. It makes both environmental and economic sense. Both government and
business need to commit billions of pounds to meet the challenges presented by our carbon reduction commitments and by the prospect of severe energy inflation over the next decade. . Without a sustainable level of energy consumption, there is no sustainable economy.
Tony Slade is the energy solutions director at Power Efficiency, a Balfour Beatty company
This article first appeared in Utility Week’s print edition of 23rd November 2012.
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