UK steel crisis solution may hinge on carbon pricing

Published 16:14 on April 4, 2016  /  Last updated at 23:05 on September 15, 2020  /  Carbon Taxes, EMEA, EU ETS  /  No Comments

The UK’s carbon floor price is coming under closer scrutiny as a potential suitor for Tata’s stricken UK steelmaking operators said its interest depends on the government rolling back the policy.

The UK’s carbon floor price is coming under closer scrutiny as a potential suitor for Tata’s stricken UK steelmaking operators said its interest depends on the government rolling back the policy.

Indian conglomerate Tata last week put one of the UK’s last steel plants on the brink by deciding to sell the business, citing deep losses from low global steel prices and high energy costs.

Commodities trader Liberty House has emerged as a potential buyer of Tata’s Port Talbot plant, but is only interested if the UK reforms its carbon pricing policy, newspaper City AM reported on Sunday.

Liberty aims to convert the plant from a largely self-sufficient integrated unit to an electric arc furnace-based operation, which would drastically cut its EU ETS-regulated CO2 emissions but still leave more exposed to indirect carbon costs by becoming a major power buyer.

Its plan is dependent on the extent of the investment Liberty House would be expected to commit, how much the government and Tata would put in, and whether a deal can be reached on the carbon component.

“German and Italian producers are not subject to the same carbon tax giving them an unfair advantage and that discussion will need to be had,” a spokesperson for Liberty House told City AM.

Liberty owns a nearby electric arc furnace steelworks at Newport, which its sister company Simec supplies with electricity from its Uskmouth coal-fired generator. Owner Sanjeev Gupta has said such power stations should be exempt from carbon pricing because they directly support heavy industry.

Gupta, who is also an investor in the nearby breakthrough Tidal Lagoon clean power project – has said he would prefer to convert Uskmouth to run on low-carbon biomass, but has warned that government support for this was under threat from state aid rules.

Separately, financier brothers Marc and Nathaniel Meyohas of investment firm Greybull are poised to announce their purchase of Tata’s other major steelworks in Scunthorpe, the Telegraph reported on Monday, adding that the pair will invest £400 million in the facility.  It was not suggested that the acquisition involves any deal struck with the government on rolling back the carbon levy.

THE UK CARBON FLOOR PRICE

The UK’s carbon floor price has since 2013 charged coal and gas-fired utilities an additional carbon emissions fee to their EU ETS obligations, leaving British industry facing higher energy bills than their competitors in Europe – a gap which widened as EU prices fell.

Critics said the tax provides no climate benefit, because UK emission cuts are offset by increased CO2 output up to the level of the EU ETS cap across the rest of the EU, effectively swapping cheap carbon savings in Europe for expensive carbon savings in Britain.

Some say the floor price was also intended to help catalyse the development of the country’s fracking industry by making coal more expensive in relation to gas.

In March, the UK Treasury said that due to ongoing low EU carbon prices, it will maintain its £18/tonne freeze on the carbon floor price, uprating it with inflation in 2020-21.  However, it added that the government would set out the rate’s long-term direction in its Autumn 2016 budget.

COMPENSATION INADEQUATE

The UK aims to compensate its industry for any increased energy bills owing to the floor.

Steelmakers have received this since 2014, but it only covers around 60-65% of the cost because the government is wary of falling foul of EU state aid guidelines, according to Richard Warren of UK manufacturers lobby EEF.

“In the round, it’s not the biggest issue for UK steelmakers, but if the government allows current trajectories to continue without EU ETS reform then the difference between UK and EU costs for industry will be huge over the next decade,” he added.

Germany has handed over 40 times more in energy subsidies to its heavy industry since 2013 – paying out €9 billion versus €160 million in the UK as part of wide industry exemptions to its clean energy transition, the FT reported on Sunday.

Vince Cable, business minister in the previous government, told the FT: “We were aware of the energy cost problem back in 2012, but it has taken time to get the reliefs together. In Germany, they were ‘grandfathering’ previous schemes so they were able to push ahead more quickly.”

The Committee on Climate Change, the UK’s climate policy adviser, has suggested electricity costs make up only around 6% of total overheads for producers like Port Talbot. Industry does not dispute this figure and UK business minister Sajid Javid has echoed this, estimating energy makes up 5-10% of production costs.

Despite its relatively light impact on the steel industry’s current woes, altering the UK’s energy and climate policy would be one of the few levers available to lawmakers in this instance, as they have less influence on other, more decisive factors such as global steel prices or currency rates.

By Ben Garside – ben@carbon-pulse.com

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