ETS compensation scheme "nonsensical"

Government plans to compensate manufacturers for the impacts of climate change policy on electricity prices risk rewarding firms already profiting from an oversupply of carbon credits, warns the environment audit committee

In a report examining the government’s proposals, MPs concluded that it was “nonsensical” to compensate energy-intensive firms for the impacts of the EU emissions trading system (ETS) on electricity bills when the same companies are benefitting from selling excess allowances.

“The government shouldn’t throw good money after bad by giving compensation to those already making windfall profits from the ETS, when allowances were allocated free-of-charge,” argues Joan Walley, chair of the environment audit committee (EAC).

The MPs concluded that without accurate data as to how the ETS and the planned carbon price floor will affect electricity prices – as generators pass on the costs of compliance – it was impossible for government to know how much compensation was actually necessary to ensure UK companies remain internationally competitive.

“Getting the amount of compensation wrong risks creating further distortion and poor value for money for tax payers,” states the report.

After hearing evidence from DECC, the business department, industry bodies and the committee on climate change, the EAC concludes that the government must take a flexible approach, allowing the budget to be increased or decreased in response to the levels of claims for compensation they receive.

The report also criticises the government’s failure to account for companies generating their own electricity in its proposals, arguing that firms applying for compensation must deduct the costs of self-generated electricity from their requested rebates.

While the committee states that the government’s goal of ensuring energy intensive firms remain competitive is laudable, the planned compensation schemes are a short-term approach that fails to address the most pressing barriers to companies becoming more energy-efficient, which it states are a lack of technology and investment.

It calls for the government to set out a strategy for energy-intensive sectors, identifying how much such each industry should be required to improve its efficiency in the long term and how government policies, such as decarbonisation requirements and incentives, will support these goals.

Such a strategy should not be limited to piecemeal funding, argues the committee, but should look more broadly at measure than can help the sectors to “develop in a more sustainable way”.