More German Lessons

Issue date

11 Dec 2012

More German Lessons

TUC submission to the Environmental Audit Committee inquiry into the Energy Intensive Industries' compensation scheme:November 2012

Executive Summary

The TUC is the voice of Britain at work. Our overall objectives are to raise the quality of working life and promote equality for all. The TUC believes that a strong manufacturing sector belongs at the heart of the British economy. We have for many years championed the need for the development of a comprehensive and modern industrial policy. So while we have welcomed the government's recognition of manufacturing's importance, we also know this will require a commitment to actively support a future for manufacturing in a low carbon economy.

Reflecting a shared concern over the future of the energy intensive industries in the UK, the TUC and the EIUG (Energy Intensive Users Group) have undertaken a number of joint initiatives in support of government policy to align manufacturing and energy policy. A joint study in 2012, Building our low carbon industries^{^[i]}, found that energy intensive industries (EIIs) provide direct employment for 160,000 workers in the UK and total employment including supply chains of 800,000 jobs. They are among the largest contributors to our Gross Domestic Product (GDP), with a combined turnover of £95bn in 2008, or 20% of UK manufacturing. And they pay around half of all manufacturing taxes.

We therefore welcomed the Autumn Statement 2011 announcement that the Government intends to implement a package of measures to reduce the impact of policy on the costs of electricity for the most electricity-intensive industries, beginning in 2013. It earmarked up to £250 million for this over the Spending Review period, of which £210m will help alleviate some of the escalating cost of the EU Emissions Trading Scheme (EU ETS) and the Carbon Price Floor (CPF), or carbon tax (Figure 1).

The Government has not published an estimate of industry's costs under the CPF and EUETS over the remainder of the Spending Review period (2012-2015). However, the TUC estimates that these costs are approximately £4.1bn (table 1 and figure1). The two-year, £210m package will therefore account for about one twentieth of heavy industry's costs attributable to these two climate change and energy policies alone over the Spending Review period. Of course, other UK climate change policies^{^[ii]} also contribute to the production costs and overall industrial competiveness of energy intensive industries, such as the grid access charges and the Climate Change Levy.

The Government should therefore move as rapidly as possible to set up and run the UK's initial compensation scheme, including taking on board during the current consultation such improvements as can be accommodated to improve the scope and level of support.

In drafting this submission we have also turned to Germany for insights into that country's approach to industrial policy. The TUC's report, German lessons: developing industrial policy in the UK^{^[iii]} (December 2011) set out to understand the practical measures the UK could take to rebalance our economy in the years ahead. The report highlighted the German Government's predisposition to support its manufacturing base. Referring to industrial policy in the context of tackling climate change, German Lessons noted: 'A good example is the need for a package of measures to support the UK's energy intensive industries, an issue that has already been addressed in Germany.'

As this submission shows, a range of German Government industry policy interventions provide German industry as a whole, including its energy intensive industries, with a range of long established reliefs from energy and climate change-related duties, levies and taxes:

Over the period 2010-2012 Germany's support for its EIIs were worth 26bn euros, or some 8bn euros (£6.4bn) a year (table 2).
Support covers thousands of firms. Unlike the UK package, support is not confined to specific sectors.
At company level, in Germany compensation is available for 90% (or in the case of larger and energy intense consumers, 100%) of electricity taxes.
In contrast, the UK package appears to cover about 10% of total UK additional costs on electricity attributable to the EU ETS and CPF.

In Germany an array of schemes are well established and provide long-term policy certainty, against which companies are better placed to assess long-term investments in new plant and technology. Comprehensive compensation arrangements for businesses competing at the international level is an integral part of Germany's energy and industrial strategy, and is set to continue for the longer term.

The TUC therefore believes that in parallel with its work on the current compensation package, the Government should urgently undertake a further round of discussions with industry and trade unions across the energy intensive industries with a view to developing a second, fully comprehensive, long term set of measures supporting energy costs and investment commensurate with support given to our leading European competitors. Integral to this review is the development of a long term low carbon manufacturing strategy in the UK.

Graph of carbon taxes

Figure 1: Government revenue estimates from the EU ETS and Carbon Price Floor

Source: Jobs, growth and warmer homes, Consumer Focus 2012.

Section two

The Government's compensation package

The Government's proposed approach^{^[iv]} to the compensation package provides for £110m to address the indirect impacts of the EU ETS on energy intensive industries (EIIs) over the Spending Review (SR) period; and a further £100m to offset the impacts of the carbon price floor (CPF). The scheme is subject to state aid guidelines. We also note that the package is to be funded 'from existing departmental budgets,' an approach which reflects a Treasury-led control cap on the compensation package, rather than an objective review on industries' cumulative costs and how best to alleviate them.

The Government's decision to develop a compensation package was conditioned by several factors:

International comparisons of energy costs: a BIS study^{^[v]} of energy policy costs faced by EIIs in a sample of OECD countries found that, 'The UK has relatively high incremental policy costs mainly due to renewable energy costs (in Germany for example, renewable energy costs for EIIs are very low due to the policy to limit added renewable energy costs to these installations) and also the UK carbon price floor (which is additional to the EU ETS which impacts all EU member states)' (page 12). However, perhaps because of its remit, this study did not quantify the scale of OECD states' support to offset climate policy cost burdens on their domestic energy intensive industries.
Representations by industry and trade unions: as noted above, the TUC and its affiliates Community, Unite, GMB and Unity, have developed a shared concern with the Energy Intensives Users Group (EIUG) over the future of the energy intense industries in the UK.A joint evidence-based study, The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries - Are Policies Effectively Focussed? (July 2010) found that, 'The cumulative impact of all climate change policies is significant, especially on energy intensive sectors. If the government continues to simply add one energy or carbon reduction levy after another on to the energy intensive sectors then the risk is that these industries will no longer be able to compete internationally and will simply cease to operate in the UK.' Both the TUC and EIUG both firmly support the shift to a low carbon economy as an essential response to the challenge of climate change, and believe that the energy intensive industries are vital to the success of this transition.

DECC's report, Estimated impacts of energy and climate change policies (2011): DECC concluded that, 'Policies are estimated to be adding between 3% and 12% to energy bills for [energy intensive] users in 2011, and between 2% and 20% in 2020. Businesses that are large energy intensive users [Figure 2] - where energy costs represent a significant proportion of their total operating costs - directly account for around 4% of gross value added (GVA) in the UK. Impacts depend on their mixture of gas and electricity use, on-site generated electricity and their ability to use their buying power to negotiate lower prices.' In reality, many energy intensive industry companies, especially SMEs, are not in a position to negotiate significantly lower prices.

HMT's impact assessment of the CPF^{^[vi]}: This assessment concluded that 'Carbon price support scenarios might lead to increases in average non-domestic retail electricity prices of between 1% and 2% in 2013 and between 1% and 6% in 2020. This is likely to have a significant impact on a small, but important number of energy intensive sectors: aluminium production; cement production; chemicals-industrial gases, fertilisers; clays and kaolin; glass manufacture; iron and steel manufacture; lime production; malt production; non-woven textiles; and paper manufacture and wood board manufacture.'
For HMT, 'A key concern when considering the impact on businesses is competitiveness and the risk of carbon leakage - the relocation of investment or production to countries without carbon constraints - resulting in an overall increase in global emissions and a loss of employment and economic activity for the carbon constrained economy.'
Figure 2: Impact of energy and climate policies on energy prices and bills, DECC

Section three

Cost impacts of energy policy on UK energy intense industry

Government economic modelling of energy costs impacts on industry does not include published estimates of the total costs of the CPF and EU ETS to energy intensive industries as a whole. However, using available data, we estimate that over the remainder of the Spending Review period (2012-2015) the costs to all industries of CPF and EUETS policies combined will be approximately £4.1bn - see table 1. The TUC's estimates are in the footnote.

The two-year, £210m package will therefore account for about one twentieth of heavy industry's costs attributable to the two taxes alone over the Spending Review period.

The carbon price floor announced in Budget 2011 begins at £16/tCO2 in 2013 and follows a straight line trajectory to £30/tCO2 in 2020^{^[vii]}, rising to £70/tCO2 in 2030 (2009 prices). The carbon price floor escalator will increase by £2/tCO2 per year from 2013 to 2020. The carbon price support rates for 2013-14 represent the difference between the Government's target carbon price (the floor) and the futures market price for carbon in the EU ETS in 2013. Budget 2012 set the 2014/15 carbon price support rate at £9.55/tCO2.

Table 1: Budget 2012 - Office for Budget Responsibility forecast revenues from EU ETS and CPF 2010-2016

Tax	Actual Revenue Raised 2010/11	Actual Revenue Raised 2011/12	Revenue Forecast 2012/13	Revenue Forecast 2013/14	Revenue Forecast 2014/15	Revenue Forecast 2015/16
EU ETS	£0.4bn	£0.3bn	£0.7bn	£1.5bn	£1.6bn	£1.7bn
Carbon Price Floor	0	0	0	£0.6bn	£1bn	£1.2bn
Total	£0.4bn	£0.3bn	£0.7bn	£2.1bn	£2.6bn	£2.9bn

HMT, environmental taxes, July 2012.

Note to table 1: TUC estimates -

3.4 Taken together, CPF and EU ETS will add approximately £4.1bn to industry's costs over the Spending review period.

3.5 According to the HMT impact assessment^{^[viii]} of the costs of the CPF, 60% will be borne by industry, the balance by households. Over the remainder of the Spending Review period (2012-2015) industry's costs of the CPF will be approximately £1.7bn (i.e. industry's 60% share of the £2.8bn raised from the CPF).

3.6 Over the remainder of the Spending Review period (2012-2015) industry's costs from the EU ETS will be £4.8bn. There is no official data^{^[ix]} on the extent to which heavy energy users purchase these allowances. However, in a previous study, we estimated that the energy intensive industries (EIIs) account for roughly half of UK industrial energy consumption. On this basis, we estimate that energy intensive industry's costs due to the EU ETS will be £2.4bn.

Energy intensive industries: contribution to the UK economy

JOBS

Direct employment: 160,000 workers in the UK. Total employment including supply chains: 800,000 workers.

ECONOMIC POWER

EIIs are among the largest contributors to our Gross Domestic Product (GDP), with a combined turnover of £95bn in 2008, or 20 per cent of UK manufacturing total and 3 per cent of UK GDP.
As capital-intensive industries, they generate higher added value in their production processes. Their combined Gross Value Added (GVA) was £14bn in 2008, or 11 per cent of the UK manufacturing total. And in most industries, value added is significantly above the UK average.

PURCHASING POWER: EIIs play an important role in sustaining their suppliers through the purchase of goods, materials and services, with a purchasing power of £68.6bn (2008), or a fifth of the UK manufacturing total.

WAGES AND TAXES

Employment costs: £6.6bn (2008) in wages, national insurance and pension contributions, or an average of £38,000 per employee.
Corporate taxes and levies: £12bn in 2008 from the Climate Change Levy and other taxes, or around half (47 per cent) of all manufacturing taxes.
Source: Building our low carbon industries, TUC-EIUG, 2012 http://www.tuc.org.uk/tucfiles/352/Buildingourlowcarboninds.pdf

Section four

How a key competitor, Germany, supports its heavy industries

The TUC's report, German lessons: developing industrial policy in the UK (December 2011) set out to understand the practical measures the UK could take to rebalance our economy in the years ahead. 'The search for expertise led to Germany, a powerhouse of the European economy and a country that has never lost sight of the value of its manufacturing sector. Through meetings with senior managers, works council members and trade union officials in leading German companies, including Volkswagen, Siemens and BMW, we tried to see how the UK could learn from German manufacturing successes.'

The report called for a 'new manufacturing ecosystem for the UK: a range of policies needed to bring the country back to its rightful place as a major manufacturing nation. Skills, investment, procurement, helping small firms to expand, finance for strategic sectors and the role of government.'

The EAC inquiry into Carbon Budgets (2011) recognised the importance of policy measures to help energy intensive industries, but concluded: 'Before any are introduced a comprehensive and robust assessment of the actual risk to each sector affected, on a case by case basis, should be made.' (para. 19).

For the TUC, carbon leakage risk assessments should take account not only of the impact of CO2 mitigation policies in competitor countries, but the extent to which Governments offset these effects through 'transitional' measures such as subsidies and tax or cost reliefs. Within the EU, the EUETS provides for an apparent 'level playing field', policed by supposedly clear state aid guidelines. But European competitors have nevertheless introduced national level policies to protect their energy intensive industries (EIIs).

Here, we consider the case of Germany.

Germany's Energy Package 2012

The German Government is undertaking a complete restructuring of its energy system. The bulk of its energy is to come from renewable sources by the middle of the century. At the same time, Germany aims to remain a competitive business location. The Government has therefore embarked on a long process toward a restructured energy supply, with a wide range of measures covering grids, power plants, energy efficiency, renewables, energy research and compensatory arrangements for businesses competing at the international level.

A key part of the Energy Package 2011^{^[xi]} involves far-reaching compensatory payments for energy-intensive businesses. Building on well established schemes, it includes measures to offset increases in the price of electricity due to emissions trading and renewable energy.

In summary, over the period 2010-2012, German industries, including energy intensive industries, benefitted from a range of reliefs from duties, levies and taxes worth 26 billion euros, or some 8bn euros a year - see table 2. These reliefs are set to continue for the longer term.

A review of Germany's environmental taxes by Germany-based energy consultants, Arepo, Immunities of the energy-intensive industries in Germany from energy taxes^{^[xii]} (March 2012) showed that:

The largest reductions in the years 2010 and 2011 resulted from exemptions from environmental taxes (Ecotax), together worth 5.7 and 4.7 billion euros respectively.
Special compensation is provided for the additional costs of Germany's rapid expansion of renewable energy under the Renewable Energies Act (EEG) worth 1.1 and 2.1 billion euros in 2010 and 2011;
Free allocations of CO2 allowances for industry were worth 1.6 and 1.4 billion euros respectively.
Industry, especially energy-intensive industries, were subsidised in the years 2010 and 2011 by a total of 8.591 and 8.223 million euros respectively. In 2012, this amount is expected to increase to 9.185 million euros - table 2.

Starting in 2013, an additional Euros 500 million will be set aside annually for this purpose in the Energy and Climate Fund. To this end, the European Commission will issue State aid guidelines on the basis of which compensation payments must be approved. In another move to relieve the burden on businesses, the compensation regulation for the renewables surcharge under the Renewable Energy Sources Act was eased. As a result, starting in 2012 more businesses can apply for a limit to their renewables reallocation charge. Industry's environmental taxes and their reliefs are shown in table 2.

Table 2: Total support for energy intensive industries (EIIs) in Germany 2010-2013

In millions of euros	2010	2011	2012	2013
Ecotax (Okostuer)	5,740	4,730	5,110	d/k
CHP bonus allocation	40	4	20	d/k
Special compensation rule, section 40 ff. of the German Renewable Energies Act (EEG)	1,125	2,080	2,315	2,500-3,200
Certificate allocation	1,643	1,408	1,408	d/k
Energy & climate funds	-	-	-	500
Network fee exemption	43	d/k	319	d/k
Industry levy	-	-	12	d/k
Total relief	8,591	8,223	9,185	d/k

Immunities of the energy-intensive industries in Germany from energy taxes, March 2012: www.arepo-consult.com

As the table shows, the main policy tools in Germany (Figure 3) include the power and energy control (Okostuer: 56%), emissions trading scheme (ETS), the Renewable Energy Sources Act (EEG: 25%) and the Combined Heat and Power Act (KWK-G), through which measures markets for preferred technologies are created. The rise in prices for energy, which is caused by all these instruments, aims to provide 'an incentive to conserve energy resources.'

Pie chart of table 2.
Figure 3: Share of individual reductions in the total relief package, 2012

Source: Arepo, 2012.

Special compensation under section 40 ff. of the German Renewable Energies Act (EEG)

According to a report^{^[xiii]} from the Federal Office of Economics and Export Control (BAFA: Annual report 2011-2012), in Germany, public utility companies are subject to priority purchase of electricity generated by renewable energy from the transmission system operators. Since the revenues thus generated are lower than the feed-in tariffs payable under the Renewable Energies Act, a revenue shortfall has to be met. This shortfall is passed on as a surcharge by the public utilities to all consumers in Germany.

The Federal Office of Economics and Export Control (BAFA) may upon request by electricity-intensive manufacturing enterprises and rail operators limit this surcharge to Euros 0.05 cents per kilowatt hour 'to maintain the international competitiveness of manufacturing enterprises and rail operators.' For consumers as a whole, the surcharge on electricity bills is Euros 3.59 per kilowatt hour in 2012.

Up until 2012, the eligibility criteria for electricity-intensive manufacturing enterprises were:

electricity consumption of more than 10 GWh per delivery point; and
electricity costs of more than 15% of the gross value added.

These companies shared the cost of the first 10% of the electricity consumption, for which they had to accept the full Renewable Energies Act surcharge. The qualifying companies, the added costs cannot exceed Euros0.05 cents per kilowatt hour. Companies with over 100 GWh electricity consumption and whose electricity costs represent 20% of gross value added were exempted from cost sharing.

Information from the Federal Ministry of Economics and Technology (2012) shows that 979 businesses received support in a wide range of qualifying sectors - see box below. In addition to the ten sectors that the TUC and EIUG consider to be energy intensive industries, the German compensation scheme covers: mining and quarrying; rail track; services for the production of oil and natural gas; food and drink industries, including baking; textile industry; distribution of electricity; heat and air conditioning supply; water, gas, heat and air-conditioning installation; hazardous waste; and rail track companies.

In 2011, the Federal Office of Economics (BAFA) received 821 applications from businesses for relief (covering 1,142 sites). The scope of relief to be decided upon for 2012 is in the region of 2.5 billion euros.

The added costs of electricity are distributed among all consumers. This year, electricity consumers will pay over 14 billion euros due to the energy levy. In July, the Government announced^{^[xiv]} an increase in the energy levy in 2013 means that costs are set to rise to around 20 billion euros next year.

As noted above, amended EEG compensation rules from 2012 propose that the maximum added cost to EIIs from renewable energy is Euros 0.05 cents per kilowatt hour (KWh) for enterprises consuming more than 200 GWh; and for which the cost of electricity exceeds 20% of gross value added (GVA). For consumers as a whole, the surcharge on electricity bills is Euros 3.59 cents per kilowatt hour in 2012.

Sectors eligible for compensation under section 40 ff. of the German Renewable Energies Act (EEG)

Rail track
Mining (including lignite); quarrying: limestone, gypsum, chalk and slate
Food and drink: Meat and meat products, meat processing; fruit and vegetable manufacture & processing; milk processing; grain milling; bakeries; animal feed; soft drinks, mineral waters.
Clothing & textiles: spinning, weaving; manufacture of other textiles.
Timber & wood products: sawmills; manufacture of wood products, containers.
Pulp and paper: manufacture of paper and board products; printing newspapers.
Chemical: refined petroleum products, industrial gases, dyes and pigments; manufacture of inorganic basic chemicals, fertilizers, nitrogen compounds; manufacture of plastics & synthetic rubber; plastic products.
Glass: manufacture, shaping and processing
Ceramics: manufacture of ceramic wall and floor tiles and slabs
Cement, lime and plaster manufacture
Iron, steel and ferro-alloys; casting of light metals, forging, pressing.
Electronics: manufacture of electronic components and boards; batteries, accumulators; other electrical equipment
Electricity, gas and water: gas trade by pipeline; water supply; treatment and disposal of non-hazardous waste; gas, water, heat and air-conditioning installation; services for production of oil and natural gas.

Source: Federal Ministry of Economics and Technology (2012).

Ecotax changes

Exemptions from the environmental tax (Ecotax) represent more than half of the energy-related subsidies to industry and are one of the largest industry subsidies in Germany. The Ecotax is made up of the electricity and energy tax.

There are broadly three reasons for exemptions from these taxes:

Exemptions for certain energy-and energy-intensive processes
A "general discharge" for companies above a certain total consumption.
A tax cap for those firms that benefit relatively little from relief on the pension system.

As part of the strategic Energy Concept of the Federal Government (2011) the Electricity Tax Law (Stromsteuergesetz, StromStG) was amended in 2011 so that the Ecotax (Euros 12.3/MWh up to 2011) is fully reimbursed for the following production processes: electrolysis, glass, ceramics, cement, lime, metals, fertilizers and chemical reduction methods. The company pays the tax in full and then applies for 100% reimbursement for the electricity used in eligible processes.

Overview of support for energy-intensive industries in Germany

According to Arepo, almost 97,000 companies benefit from the "general discharge" from environmental policies. In 2011, 23,000 companies were given compensation for peak power costs. About 1,000 firms involved in certain processes, such as metal fabrication, are entirely exempt from the electricity tax. Since the year 2011, up to 600 highly energy-intensive companies are completely free of net fees (Netzgebühren), representing a saving of 300 million euros.

Policy justification and commentary

The policy relief available to energy-intensive industries is based on the grounds that increased energy costs put them at a competitive disadvantage and threaten profitability. 'Electricity costs in Germany have traditionally been higher than in many neighbouring countries in Europe, so that the loss of jobs and economic strength is feared,' Arepo argues. Some industries 'are in strong competition with non-European sites and very low energy prices.'

However, the Arepo study also looks at policy alternatives to the Government regularly negotiating 'blanket exemptions'. There is a case, Arepo argues, for the Government to set long term and consistent price signals for emissions and energy consumption, specifically as a motivational tool in combination with 'innovation-oriented aid.' A long-term industrial policy is needed, comprising long-established and predictable reduction of subsidy accompanied by an equally long-term industrial innovation (decarbonisation) and investment strategy 'to mobilize the strengths of innovation in Germany for climate policy.'

Meanwhile, the Federal Ministry of Economics points out that electricity prices are central to the competitiveness of German industry, claiming that Germany 'has been placed at a competitive disadvantage in this respect for many years. This is also linked to the associated taxes and levies which have risen steadily since 2000, accounting for almost 40 % of the price of industrial electricity in 2011. Benchmarked against our European neighbours, the price of electricity in Germany is above average. Industrial electricity is available for less in France and Scandinavia.'

The energy cost burden has also increased significantly for private consumers in recent years, climbing from an average of Euros 2,295 per year in 2000 to over Euros 3,900 in 2011. As a percentage of net income, energy costs have risen from over 5% to over 7% during this period. 'Against this backdrop, any restructuring of the energy system must not lead to an excessive cost burden and competitive disadvantages. Therefore the cost-competitive and market-based implementation of the Energy Package is of central importance.'

Section five

UK compensation package: review and next steps

Eligibility for compensation

BIS is now consulting on the qualifying criteria it proposes to adopt to target the £210m compensation package. The criteria include:

Sectors most at risk for carbon leakage. Based on 'objective and transparent criteria' adopted by the EU, this covers 14 energy intensive industry sectors/sub-sectors.
An additional filter, carbon intensity, defined as carbon costs (EU ETS and CPF) in 2020 of at least 5% of company-level GVA. For carbon price floor compensation, the Commission's sector list will also apply, but with an additional test at company level concerning costs of carbon in electricity as a proportion of GVA in 2020.
A carbon intensity factor applied to the compensation calculation that is based on the marginal carbon content of energy supplied to the UK grid. Currently, gas is considered to be the marginal supplier, with a CO2 intensity of 0.411 tonnes of CO2 per Megawatt hour (0.411tCO2/MWh). The UK average across all energy supplied, including higher carbon coal, is 29% higher at 0.58tCO2/MWh.
Company-level compensation, rather than process/plant level. This is because of 'the difficulty in collecting data needed to calculate electricity intensity at the site or process level. Companies collate their accounts at different levels, with only some able to provide financial data at site or process level^{^[xv]}.'

Compensation package issues

The EU ETS compensation fund will only be available to businesses in the sectors identified by the European Commission as being exposed to significant risk of carbon leakage. This excludes key electro-intensive installations in other energy intensive industries identified by HMT as exposed to the Carbon Price Floor, including ceramics, glass and cement and lime manufacture.

However, BIS has indicated that there may be some scope to compensate businesses in other sectors from Carbon Price Floor costs. They must demonstrate that their extra carbon cost (EU ETS and CPF) for electricity in 2020 will amount to 5% of GVA. However, the UK will still have to make a case for State Aid to the European Commission here and there is no guarantee at this stage of a success.

5.4 According to the British Ceramic Confederation, some ceramics installations are amongst the most electro-intensive in the UK, e.g. electric arc furnaces and electric induction furnaces. The TUC is concerned that there has been some relocation of jobs from these types of installations recently to those in other EU countries such as France and Germany with electricity prices / taxes cited as a major contributory factor. It is essential to ensure that the most electro-intensive ceramic companies and processes within such sectors are compensated to the same extent as those in other sectors. But this is impossible with the current proposals. Acknowledging this concern, the consultation asks companies or trade association for further evidence eligibility.

A further concern is that the Government intends to use a 'carbon intensity' factor that potentially reduces the level of compensation available to companies. The compensation available to businesses includes a calculation that factors in the carbon intensity of UK electricity supply - in this case, the marginal carbon content of gas energy supplied to the UK grid, which is a third lower than the average carbon intensity of UK energy. Of course, the average carbon intensity is higher because its takes account of energy from high carbon coal as well as zero carbon renewables. The proposed formula will therefore depress the compensation available. A CO2 intensity factor does not appear to apply in Germany.

Wider considerations

More broadly, a range of other factors will add significantly to the energy intensive industries' cost base over the next few years. For example, the EU's Briefing for the Pulp and Paper Industry^{^[xvi]} is currently being revised with proposed environmental limits and best available technique approaches that will inevitably add significantly to industry's costs.

Companies participating in the TUC-EIUG study^{^[xvii]} on cumulative energy costs 'reported increasing reluctance by their owners to commit to any investment in the UK given not only the scale of climate change costs, but the ongoing uncertainty surrounding the climate change regime and its impact on energy prices.' It is this investment that helps maintain a well paid, skilled work force and delivers lower carbon products.

Comparison with Germany

The British Chambers of Commerce^{^[xviii]}, in its recent energy market survey among 3,500 members, commented: 'The UK should follow the example of countries, such as Germany, and offer more substantial relief to industries during the transition to a less carbon-dependent economy. The £250 million package of measures announced in 2011 to help offset the impact of rising costs is welcome but it will only make a dent in some of these companies' rising costs and tax obligations.'

The following schematic comparison between the compensation packages offered in Germany and the UK (table 3) shows that compensation in Germany is evidently an integral, long-term and substantial part of the Government's energy and industry strategy. Key points include:

Coverage: Germany support covers thousands of firms, and is not confined to specific sectors.
Total compensation appears to be far more generous in Germany: some 8bn euros (£6.4bn) annually, compared with £70m annually in the UK (i.e. £210m over the SR period 2013-2015).
At company level, in Germany compensation is available for 90% (or in the case of larger consumers, 100%) of energy costs. The UK package appears to cover about 10% of additional costs attributable to the EU ETS and CPF.
Duration: the Germany scheme is well established and provides long-term policy certainty, against which companies are better placed to assess long-term investments in new plant and technology.

Table 3: Schematic comparison of compensation arrangements, UK and Germany

	UK	Germany
Amount of compensation	£210m over 3 years, £70m pa	8bn euros annual average
Time period	2013-2015	Not time limited
Sectors	15 of European Commission's sectors at risk from carbon leakage, based on trade intensity and cost impacts.	Wide range of industrial sectors under section 40 special compensation: no apparent sector limit.
Level	Company	Company and process level: for example, about 1,000 firms in certain processes, such as metal fabrication, are exempt from electricity tax.
Number of companies benefitting	Figure not available	97,000 cos benefit from the "general discharge". 23,000 cos compensated for peak power. 1,000 firms 100% exempt from electricity tax.
Energy intensity	Company carbon costs (CPF and ETS) in 2020 = at least 5% GVA	Electricity consumption of more than 10 GWh per delivery point (subject to 10% cost share); and electricity costs of more than 15% of GVA added. Companies >100 GWh electricity and electricity costs > 20% GVA exempted from cost sharing.
Maximum compensation per eligible installation	Linked to UK marginal emissions factor: gas emissions at 0.411tCO2/MWh	Information not available
Exemption from energy taxation of mineralogical processes	None	Exemption for mineralogical transformation processes (applies to ceramics, cement, lime, glass), for example, ?5.50 / MWh on gas.

Recommendations

The Government should move as rapidly as possible to set up and run the UK's initial compensation scheme, including taking on board during this consultation such improvements as can be accommodated to improve the scope and level of financial support.
In parallel, the Government should undertake a further round of discussions with industry and trade unions across the energy intensive industries (EIIs) with a view to developing a second, long-term and comprehensive set of measures applicable across all energy intensive industries supporting energy costs and investment, commensurate with support given to our leading European competitor.
As an integral part of this review, the Government should consult with industry partners on the development of a long term, low carbon manufacturing strategy in the UK.

Building our low carbon industries, TUC-EIUG, 2012: http://www.tuc.org.uk/tucfiles/352/Buildingourlowcarboninds.pdf

Other UK climate change policies contribute to the production costs and overall industrial competiveness of energy intensive industries. More information on some of them is given in TUC and the Energy Intensive Users' Group, The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries - Are Policies Effectively Focussed? (July 2010) - such as Climate Change Levy - where even if complying with the strict energy efficiency improvements of their Climate change Agreement, an energy intensive user will pay 35% of the tax on direct fuel such as gas. Moreover other increased costs for grid / transport / network and balancing charges and higher 'red, amber green charges' are partly attributable to incorporation of intermittent and distant renewables such as offshore wind: http://www.tuc.org.uk/extras/wwastudy.pdf

German Lessons (TUC, 2011): http://www.tuc.org.uk/industrial/tuc-20509-f0.pdf

Compensation for the indirect costs of EU ETS and Carbon Price Support - Consultation on scheme eligibility & design, BIS, October 2012.

[1] An international comparison of energy and climate change policies impacting energy intensive industries in selected countries, BIS, July 2012.

Carbon price floor consultation: the Government response, HMT 2011: http://www.hm-treasury.gov.uk/d/carbon_price_floor_consultation_govt_response.pdf

Impact Assessment of proposals to amend the climate change levy and fuel duty to support incentives for low-carbon electricity generation, HMT, 2010.

DECC communication, November 2012: The UK's auctions are open to those that fulfil the criteria set out in the relevant EU legislation and the membership requirements of the auction platform, and are therefore not limited to energy intensive industry operators. Therefore it is not possible to estimate how much of this revenue will be derived from energy intensive industries.

German Lessons (TUC, 2011): http://www.tuc.org.uk/industrial/tuc-20509-f0.pdf

Germany's new energy policy: Heading towards 2050 with secure, affordable and environmentally sound energy, Federal Ministry of Economics and Technology (BMWi), April 2012

Immunities of the energy-intensive industries in Germany from energy taxes (Befreiungen der energieintensiven Industrie in Deutschland von Energieabgaben), 2012: www.arepo-consult.com

http://www.bafa.de/bafa/en/the_office/publications/bafa_report_2011_2012.pdf

http://www.bmwi.de/English/Navigation/Press/press-releases,did=520702.html

Compensation for the indirect costs of EU ETS and Carbon Price Support - Consultation on scheme eligibility & design, BIS, October 2012, para. 6.11.

http://eippcb.jrc.es/reference/BREF/PP_D1_0410.pdf

http://www.tuc.org.uk/extras/wwastudy.pdf.

http://www.britishchambers.org.uk

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Building our low carbon industries, TUC-EIUG, 2012: http://www.tuc.org.uk/tucfiles/352/Buildingourlowcarboninds.pdf

German Lessons (TUC, 2011): http://www.tuc.org.uk/industrial/tuc-20509-f0.pdf

Compensation for the indirect costs of EU ETS and Carbon Price Support - Consultation on scheme eligibility & design, BIS, October 2012.

[v] An international comparison of energy and climate change policies impacting energy intensive industries in selected countries, BIS, July 2012.

Carbon price floor consultation: the Government response, HMT 2011: http://www.hm-treasury.gov.uk/d/carbon_price_floor_consultation_govt_response.pdf

Impact Assessment of proposals to amend the climate change levy and fuel duty to support incentives for low-carbon electricity generation, HMT, 2010.

German Lessons (TUC, 2011): http://www.tuc.org.uk/industrial/tuc-20509-f0.pdf

Germany's new energy policy: Heading towards 2050 with secure, affordable and environmentally sound energy, Federal Ministry of Economics and Technology (BMWi), April 2012

Immunities of the energy-intensive industries in Germany from energy taxes (Befreiungen der energieintensiven Industrie in Deutschland von Energieabgaben), 2012: www.arepo-consult.com

http://www.bafa.de/bafa/en/the_office/publications/bafa_report_2011_2012.pdf

http://www.bmwi.de/English/Navigation/Press/press-releases,did=520702.html

Compensation for the indirect costs of EU ETS and Carbon Price Support - Consultation on scheme eligibility & design, BIS, October 2012, para. 6.11.

http://eippcb.jrc.es/reference/BREF/PP_D1_0410.pdf

http://www.tuc.org.uk/extras/wwastudy.pdf.

http://www.britishchambers.org.uk

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