The UK government surprised investors on Wednesday by saying renewable power will no longer be exempt from its climate levy, sending shares in clean energy companies tumbling and knocking 28% off the value of utility Drax.
Low-carbon energy investors had already been on edge ahead of the Conservative majority government’s first budget announcement after media reported that it was planning to review many climate policies as it looks to make sweeping spending cuts.
Today’s move, which effectively turns the climate change levy into an energy tax, reflects the fears of many big EU utilities, which favour a stronger EU ETS to drive cleaner energy investment rather than a patchwork of national incentives they deem to be at greater risk of falling victim to changing political winds.
UK finance minister George Osborne announced that businesses using renewable electricity would no longer be exempted from the Climate Change Levy (CCL).
“This change compromises the effectiveness of the CCL as a form of carbon pricing which tackles the market failure resulting from the fact that the price of products and services involving emissions of greenhouse gases do not reflect the costs of climate change,” said professor Sam Fankhauser, deputy director at the ESRC Centre for Climate Change Economics and Policy at the London School of Economics and Political Science.
“This change will increase the costs for businesses that are supplied with electricity from renewable sources but will leave electricity from fossil fuel sources untouched.”
Osborne also said the CCL as well as the Carbon Reduction Commitment (CRC) energy efficiency scheme would be reassessed via a consultation this autumn.
“The government will review the business energy efficiency tax landscape and consider approaches to simplify and improve the effectiveness of the regime,” the finance ministry said.
However, the government’s carbon price floor may have won a reprieve.
Some media outlets had reported that the Carbon Price Support rate, currently frozen at £18 per tonne of CO2, would be in the government’s crosshairs due to its perceived burden on British industry and as the government targets green energy taxes.
“Now we have a long-term framework for investment in renewable energy in place, we will remove the outdated climate change levy exemption for renewable electricity that has seen taxpayer money benefiting electricity generation abroad,” Osborne told the UK parliament.
The CCL, first introduced in 2001, is a tax on businesses’ use of electricity, natural gas and solid fuels including coal and lignite, with its rates dependent on the type of fuel used.
Drax, one of the biggest emitters in the EU ETS, benefits from this indirect government support through its conversion of two of its six coal-fired units to burning biomass. It is planning to convert a third next year.
Shares in smaller renewables providers also took a hammering, with Active Energy down 4% and Infinis Energy down 8%.
The change to the CCL, originally intended to encourage non-industrial businesses to cut their carbon footprint, left some baffled.
“This is totally bizarre, making renewable electricity pay a carbon tax is completely counterproductive – like making apple juice pay an alcohol tax,” said Alasdair Cameron of green group Friends of the Earth.
The CRC, another programme to be reviewed by the government, is an energy efficiency scheme launched in 2007. It applies to large non-energy-intensive organisations in the public and private sectors, and compliance is fairly inexpensive.
The review of the clean energy taxes levied on business was welcomed by industry groups.
“Fifteen years of layering and tinkering with policy has left us with a vast patchwork of expensive, inefficient and incoherent policy drivers for decarbonisation,” said Paul Raynes, director of policy at UK manufacturers association EEF.
“We urgently need to revisit the policy landscape to reduce costs, improve the business environment and better deliver on our policy objective of reducing emissions.”
Meanwhile, the carbon price floor – an additional fee to EU ETS obligations intended to raise the carbon cost for fossil fuel-burning utilities and help fight climate change – was spared from scrutiny this time around.
Osborne last year announced it would be frozen this year after it doubled to its current £18/tonne level in April.
The Carbon Price Support rate has been blamed for contributing to the closure of several plants across the UK since its 2013 introduction, and observers have warned it could hurt profitability at more power stations this year and force them to halt generation.
Taxes on new cars will also be overhauled by removing exemptions for low-emission cars, with all proceeds going to funding improvements in the country’s road infrastructure, Osborne said.
The government will continue to promote the low-carbon investment and innovation needed to support global action on climate change, “focussing on the best value for money policies to keep costs down for consumers,” the budget said.
“The government will push for a global climate deal later this year that keeps the goal of limiting global warming to 2 degrees firmly within reach.”
Osborne also confirmed that previously announced tax reductions for the oil and gas industry will go ahead:
“Building on action set out in the March 2015 Budget, the government will expand the North Sea investment and cluster area allowances to include additional activities which will maximise economic recovery. The government will also bring forward proposals for a sovereign wealth fund for communities that host shale gas development (fracking).”
By Mike Szabo and Ben Garside – firstname.lastname@example.org