Energy Intensive sectors – a tax framework

I spoke on this subject to the BDI conference on 30 November in Berlin (my presentation slides are on the website). Since then I’ve had some feedback which I should share.

My primary message was that governments need to develop a policy framework for Energy Intensive Sectors which is holistic or joined up. That framework needs to include both environmental and energy policy with fiscal policy and should be designed to support energy intensive sectors in the short, medium and long term given the investment horizons of these sectors. Put another way, what sort of energy intensive sector do governments seek to encourage in 2050? Do their fiscal and other policies match up to their goal?

Tax policy is important in this, given its effects on input costs and in particular on energy and electricity costs, and on their competitive position within a global economy with different pricing models for energy and environmental protection. Governments have to decide what is the purpose of tax in this area? Is it to raise revenue per se or does it have energy and/or environmental policy objectives?

I used the example of the Aluminium sector in Europe to describe the dilemmas involved. Aluminium is highly energy intensive to produce but is very energy efficient in use given its weight to strength ratio. Aluminium is a key input to the European economy with demand growing at 1 -1.5 % per annum, but production in Europe has fallen by 26% between 2004 and 2011 due to rising input costs and has been  replaced by capacity outside Europe (mainly in China) generally with lower environmental standards and higher emissions. This doesn’t seem to be a sensible policy to pursue in terms of global environmental goals. Tax and environmental policy drive this. But this erosion of European production has implications for security of supply and affects the economics of European customers (inventory levels). In the UK, of the three aluminium plants at 2004, one – Lynemouth – has closed due to costs of coal power generation and delays in deciding whether carbon capture is appropriate. A second – Anglesey – closed due to dithering over nuclear policy in the UK and the one survivor – Lochaber – is a Scottish hydro powered plant. The UK has lost two thirds of its aluminium capacity in 5 years – was this the intention of government?

Responsible business agrees with the long term framework for the transition to a low carbon economy. But such a framework has to recognise global competitive pressures for those countries who seek to take a lead in environmental policy. Europe and the UK need to stand back and consider what they are trying to achieve in terms of energy intensive sectors in the short, medium and long term, not sleep walk into the slow attrition of this sector. This is not crying wolf, look at the facts for Aluminium.


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