Overview, impacts and suggestions for reform Authors: Samuela Bassi, - - PowerPoint PPT Presentation

Climate change policies and the UK business sector: Overview, impacts and suggestions for reform

London, 1 November 2013

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)

Content

 Policy landscape

• Emission from the business sector
• Policy coverage
• Policy overlap
• Uneven carbon pricing

 Competitiveness issues  Proposal for policy reform

The policy landscape.

Climate change context: Emissions from the business sector

50 100 150 200 250

Energy supply Business Transport Residential Agriculture & waste Million tonnes CO2 Source End-user

160 mtCO2 40% total CO2

Source: DECC (2013a)

• Climate Change Act: statutory 80% reduction in 2050 (from 1990)
• Carbon Budgets: 5-year targets – Fourth: 50% reduction by 2025

Key focus of the paper:

• CCL
• CCA
• CRC

And indirect costs of

• ETS
• CPF
• RO and FITs

Policy coverage

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

Policy coverage: inconsistencies

1) Different policies apply to different firms (depending on sector, size, activities, energy consumption, etc.) and several overlap 2) The carbon prices embedded in each policy are different Many firms pay a carbon price several times over

1) Policy overlap

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

2) Policies’ carbon price

5 10 15 20 25 30 35 40 45 50 CCL CCA CRC* EU ETS CPSR RO/CfD FiT CCL CCA CRC CCL CCA CCL CCA Electricity Gas LPG Coal Carbon price (£/tCO2) 2013 Marginal rates of carbon taxation (£/tCO2), 2013

• Policies expressed in different units (£ per kwh, tonne CO2, kg etc)
• Converted into carbon pricing (£/tonne CO2) for comparability

Electricity Gas LPG Coal

Source: Author’s calculations based on Advani, Bassi, et al. (2013)

2) Policies’ carbon pricing

5 10 15 20 25 30 35 40 45 50 CCL CCA CRC* EU ETS CPSR RO/CfD FiT CCL CCA CRC CCL CCA CCL CCA Electricity Gas LPG Coal Carbon price (£/tCO2) Increase in 2020 2013 Marginal rates of carbon taxation (£/tCO2), 2013/14 and 2020 * Decrease in 2020

• Policies expressed in different units (£ per kwh, tonne CO2, kg etc)
• Converted into carbon pricing (£/tonne CO2) for comparability

Electricity Gas LPG Coal

Source: Author’s calculations based on Advani, Bassi, et al. (2013)

• EU ETS and pass-through costs

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

Source: Authors’ calculations

• 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

• EII/ETS sectors bear the lowest C price, non-CCAs sectors the highest
• Electricity is the most heavily taxed in all sectors!

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

Competitiveness impacts.

Competitiveness and carbon pricing

 Different carbon prices may be justified if there are competitiveness concerns

• Carbon taxes have a relatively larger impact of energy-intensive

business

• In the absence of global carbon price firms exposed to

international competition can loose market share  Risk of closure or relocation (carbon leakage)  How to minimise impact? Lower carbon prices or compensation  Crucial to correctly identify companies under threat

Focus: Climate Change Agreements (CCA)

• Introduced in 2001 to reduce impact of CCL on energy

intensive companies

• Discount on CCL: 65% on fossil fuels and 90% electricity

(80% until April 2011)

• + targets agreed with Government

Eligibility:

• Energy intensity: 10% (energy cost/value of production)
• OR Energy intensity 3% and import penetration 50%

(sector imports/UK sector sales + net imports)  around 7,000 installations (3,000 firms)

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)

Martin et al. (2011) compares ~700 CCA companies with ~4,000 CCL companies from 1999 to 2004 :

• The analysis compares companies sharing similar characteristics

(statistically similar) – such as turnover, number of employees and energy intensity;

• They operate in the same economic sectors and therefore face the

same international competition; We update the analysis with larger and more recent data sample (~3,000 CCAs in 2001-2010).

The impact of CCL on energy efficiency and competitiveness : a comparison with CCA

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
• And: 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

• CCL/CCA analysis comparing to CCL rates (~ £4-13 t/CO2)
• ETS analysis based on ETS carbon price (£15-30 t/CO2 in the

period) A reform with higher carbon prices may have competitiveness impacts for some sectors

A proposal for policy reform.

Rationale

• Uniform carbon price: Each tonne of CO2 does approx. the same

damage no matter who emits;

• Competitiveness issues: no empirical evidence that CCL harms

more than CCA (output, employment), and CCA less effective at reducing emissions;

• Minimise administrative burdens and overlaps as they reduce

efficiency – e.g. companies report high admin cost for CRC.

Policy reform proposal

Short term:  Merge CCL, CCA and CRC into a single instrument (retaining CCL design), applied to all sectors;  Apply uniform carbon price at point of emissions – implies:

• lower CCL on electricity: it already bears implicit carbon price of

ETS/CPF, RO, FiTs;

• lower CCL for ETS sectors: ETS price already paid on fossil fuels

 May raise significant revenues  compensate where necessary if competitiveness concerns arise Long term:  Apply carbon tax on coal, gas and LPG further upstream.

What carbon price?

• Politically sensitive
• No firm recommendation, but should in principle lead to same

price for EU ETS traded and non-traded sectors

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Non- Traded 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 76 76 Traded 3 4 4 4 4 4 5 5 12 19 26 33 41 48 55 62 69 76

Simulation assuming carbon price = non-traded sector: £59/tCO2 in 2013 and £66/tCO2 in 2020

Source: DECC (2013b)

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

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

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

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)

£66/tCO2 New CCL+

2020 2020 ? ? ? ?

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. It will also be consistent with the proposed households carbon price;

• 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 and reduce other taxes

Thank you.

Samuela Bassi: s.bassi@lse.ac.uk