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Clima Climate te cha hang nge e po poli licies cies and and th the UK e UK bu busine siness ss se sect ctor or: : Ov Over erview view, , impa impact cts s & & su sugge gest stion ions s for or r ref efor

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Clima Climate te cha hang nge e po poli licies cies and and th the UK e UK bu busine siness ss se sect ctor

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: Ov Over erview view, , impa impact cts s & & su sugge gest stion ions s for

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WCERE Istanbul, 1 July 2014

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)

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Research questions

 What are the key climate change policies affecting UK firms?

  • How do they overlap?
  • What price do they place on carbon?

 How do they impact firms’ competitiveness?

  • CCA/CCL
  • EU ETS

 Can the current policy regime be improved?

  • Rationale & Proposal
  • Illustrative example (2013 and 2020)
  • Recommendations
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Method

  • Review of literature and current data on policies and coverage
  • Estimate implicit carbon price using marginal carbon content
  • Econometric analysis (matching) for competitiveness impacts

(Antoine Dechezlepretre)

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Key focus of the paper:

  • CCL
  • CCA
  • CRC

And indirect costs of

  • ETS
  • CPF
  • RO and FITs

What climate related policies affect UK firms?

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

VED Fuel duty Landfill tax RO/CfD CCL/CCA EU ETS CERT/CESP/ECO CRC FiT RHI Green Deal CPF Capacity Mechanism EPS NFFO CERT

CERT/CESP

ECO CFD RO RO/CFD

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Policy overlap

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

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  • EU ETS and pass-through costs

What (implicit) carbon price do firms pay?

10 20 30 40 50 60 70 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 Carbon price (£/tCO2) EU ETS CPSR RO FiT

Source: Authors’ calculations

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  • CCL/CCA

Uneven carbon prices across firms and fuels

10 20 30 40 50 60 70 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 Carbon price (£/tCO2) EU ETS CPSR RO FiT CCA CCL

Source: Authors’ calculations

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  • EII/ETS sectors bear the lowest C price, non-CCAs sectors the highest
  • Electricity has the highest implicit carbon price

Uneven carbon prices across firms and fuels

10 20 30 40 50 60 70 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 Carbon price (£/tCO2) EU ETS CPSR RO FiT CCA CCL CRC

Source: Authors’ calculations

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Competitiveness and carbon pricing

  • Can different carbon prices be justified if there are competitiveness

concerns?

  • Analysis of CCL/CCA and ETS competitiveness impacts

Fuel CCL CCA unit 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

Rates 2013/14

Source: HMRC (2013a)

  • Discount on CCL: 65% fossil fuels & 90%

electricity (80% until April 2011)

  • targets agreed with Government

CCL/CCA analysis:

  • Update research by Martin et al. (2011)
  • Data: ~3000 CCA and ~4,000 CCL

companies from 2001 to 2010:

  • Matching:
  • similar characteristics (turnover,

employees, energy intensity,…);

  • Operate in same sectors (same

international competition);

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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
  • 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: e.g. CCL~ £4-13 t/CO2

Higher carbon prices may have competitiveness impacts for some sectors

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Can policy be improved?

Rationale for reform

  • Apply a uniform carbon price: Each tonne of CO2 does approx.

the same damage no matter who emits  apply same carbon price to all sectors and fuels

  • Carbon price rebates are not justified on competitiveness

ground: CCL more effective at reducing emissions; no empirical evidence that CCL harms competitiveness more than CCA;

  • Minimise administrative burdens and overlaps as they reduce

efficiency – e.g. companies report high admin cost for CRC. Merge CCL, CCA and CRC into a single instrument (retaining CCL design), applied to all sectors;

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Illustrative reform: Electricity & gas

Source: Authors calculations based on Advani, Bassi, et al. (2013)

20 40 60 80 100 120 140 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Carbon price (£/tCO2) - marginal ETS CPSR RO FiT CCA CCL If CCL applies CRC

2013 2013

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Illustrative reform: Electricity & gas

Source: Authors calculations based on Advani, Bassi, et al. (2013)

20 40 60 80 100 120 140 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Carbon price (£/tCO2) - marginal ETS CPSR RO FiT CCA CCL If CCL applies CRC £59/tCO2 New CCL+

2013 2013 Simulation: carbon price = £59/tCO2

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20 40 60 80 100 120 140 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Carbon price (£/tCO2) - marginal ETS CPSR CfD FiT CCA CCL If CCL applies CRC

Illustrative reform: Electricity & gas

Source: Authors calculations based on Advani, Bassi, et al. (2013)

2020 2020

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20 40 60 80 100 120 140 Electricity Gas Electricity Gas Electricity Gas Electricity Gas ETS EII non-ETS Medium / Large Small Carbon price (£/tCO2) - marginal ETS CPSR CfD FiT CCA CCL If CCL applies CRC

Illustrative reform: Electricity & gas

Source: Authors calculations based on Advani, Bassi, et al. (2013)

£76/tCO2 New CCL+

2020 2020 ? ? ? ? Simulation: carbon price = £76/tCO2

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Key conclusions & recommendations

  • We recommend a policy reform where CCA, CRC and CCL are

replaced by a single new CCL rate applying to all firms, of all size and sectors;

  • This will reduce admin burden and ensure a uniform carbon price

across the economy;

  • The reform will result in higher carbon prices for some of the

sectors, especially the EII. It can also generate significantly higher revenues to the Government;

  • Strong case for recycling at least some of the extra revenues to

address competitiveness, e.g. reduce other taxes, promote innovation Way ahead:

  • identify suitable (politically viable?) carbon price
  • Identify and support vulnerable sectors, without watering down carbon

price signal

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Thank you.

For further information please contact: Samuela Bassi: s.bassi@lse.ac.uk Antoine Dechezleprêtre: A.Dechezlepretre@lse.ac.uk The full paper is available at: http://www.lse.ac.uk/GranthamInstitute/publications/Policy/docs/Climate-change- policies-and-the-UK-business-sector.pdf