Last month, the UK was issued a stark reminder of the constraints on its manufacturing industry when a report published by the Department for Business, Innovation and Skills (BIS) revealed that green energy targets had pushed up energy costs beyond those of its global competitors.

The report, released on 11 July, revealed in detail the consequences of the government’s aggressive pursuit of climate change policies and highlighted the fact that the UK is already paying £10 more for each MWh of electricity than China, its closest comparative.

In recent months, the base price for electricity in the UK has been trading in the range of between £40 and £50/MWh. And that figure is only set to rise, with £28.30/MWh to be added on top of the base electricity price by 2020, due to the imminent introduction of new, more stringent environmental policies.

The Energy Intensive Users Group (EIUG) has welcomed the report, saying it has confirmed its members’ fears. Director Jeremy Nicholson says: "There has been some reluctance from some parts of the government, particularly the Department of Energy and Climate Change, to put it in the public domain because the results are frankly embarrassing.

"It backs up what our members have been saying: that there are significant differences in the way climate policy costs are passed on to industrial energy consumers in the UK compared with elsewhere in Europe and further afield."

But he warns that the real issue lies with where new policy will lead the economy in the next decade.

On 1 April 2013, the government will implement the Carbon Price Floor (CPF), a new piece of legislation that incorporates the current Climate Change Levy and a duty on a number of fossil fuels that aims to stabilise the base price for carbon.

Knock-on effects

The CPF is being touted as a cost-effective way of encouraging emitters to invest in low-carbon technology, although its knock-on effect will undoubtedly raise electricity prices.

It will impose a minimum CO₂ emission price of £16/tonne from 2013, set to rise by £2 each year, reaching £30/tonne by 2020 and £70/tonne the following decade, which will be incorporated into businesses’ energy bills. The UK is the only nation to pass such a legislation despite already enforcing the highest energy taxes in the world.

Also in 2013, the European Union Emission Trading Scheme (EU ETS) will enter Phase 3, which ramps up restrictions with the aim of reducing carbon emissions by 21% between 2005 and 2020.

Under the EU ETS, which encompasses all 27 EU nations plus Iceland, Liechtenstein and Norway, the maximum level of permitted carbon emissions and traded carbon allowances is currently determined by countries’ National Allocation Plans (NAPs).

Businesses must surrender allowances equivalent to their emissions at the end of the year (one allowance is equivalent to one tonne CO₂ or the equivalent amount of another greenhouse gas) and, if they have exceeded their limit, will be directed either to buy more allowances or convert to less carbon-intensive energy sources.

Phase 3 will limit flexibility on ‘banking’ allowances, where businesses can roll over their emission allowances from Phase 2, forcing them to reduce their carbon emissions significantly.

It will also set an EU-wide cap of 1,846m allowances and ensure that at least 50% of permits are auctioned in each member state; in Phase 2, around 3% of permits are auctioned.

This abolition of individual NAPs in favour of an overall EU cap could potentially even things up, but BPIF chief executive Kathy Woodward argues that it is not enough.

She says: "Joining the EU was supposed to be about making sure there is a level playing field across Europe. Instead, policies are being implemented that make it difficult for UK manufacturers to compete with their European counterparts.

"Policies such as these climate change levies and the CPF are manacling UK manufacturing and making it difficult for businesses to manufacture cost-effectively."

A BIS spokesman insists: "We are committed to ensuring that manufacturing is able to remain competitive during the shift to a low carbon economy."

A £250m compensation package, announced by chancellor George Osborne in his 2011 Autumn Statement, aims to protect the most energy-intensive industries from the impacts of these looming policies.

EIUG’s Nicholson credits the government with recognising that there is a problem and offering support, but adds: "What we can’t live with is significantly higher prices here than elsewhere in Europe and other countries with which we are competing otherwise energy intensive industries will take their production and their jobs to where costs are lowest.

"If there is a genuine competitive advantage for moving overseas, that’s international competition at work and that’s a good thing for the global economy, but if we are artificially making our electricity prices uncompetitive here, that’s not solving a serious global environmental problem, it’s just moving industry elsewhere."

A statement from business minister Vince Cable on the BIS website says: "Manufacturing has a crucial role to play in respect of productivity growth in the UK, so providing the right framework of incentives will have a material effect on future rates of economic growth."

However, many industry leaders will be less than convinced that the government is serious unless it is prepared to reduce the burden on energy-intensive industries, a sector that adds £49bn GVA to the UK economy, supports 618,000 jobs and is vital to the renaissance of UK manufacturing as a whole.

• An investigation into global energy prices commissioned by the Department for Business, Innovation and Skills (BIS), revealed that the UK is paying more than any other country and the discrepancy is set to increase
• The UK is introducing a Carbon Price Floor from 1 April 2013, which will set base rates for carbon at £16/tonne immediately and rise to £70/tonne by 2030
• Phase 3 of the EU ETS will be enforced from January 2013, which will increase auctioning of permits for carbon emissions and limit banking of allowances from Phase 2, but determine allowances of each member state via an overall blanket body for the first time
• In the 2011 Autumn Statement, chancellor George Osborne pledged a compensation package of £250m to protect energy-intensive industry from the rising costs
• The energy-intensive industry contributes 4% of the UK’s total gross value added, amounting to £49bn, and provides 2% of UK jobs, a total of 618,000

Has the imbalance in energy prices affected UK business?

Philip Dodd
Managing director, Healeys
"If base prices are out of sync with the rest of the world, from a competitor’s point of view, it makes things very difficult for those companies that export. Being green involves time and money to register, then it’s an annual payment to make sure we are checked. Even on those terms, trying to be green has a cost implication. The cost of being green has to be an issue for all of us. At least if we’re using our environmental credentials in a marketing way, we can justify that expense."

Julian Long
National key account manager, Arjowiggins
"We want to see the UK print sector recover. Anything that reduces the competitiveness of the industry will be a blow. These levies will be another burden on an already hard-pressed sector. Arjowiggins is totally committed to a long-term carbon-reduction programme, but I don’t believe that this initiative is the right way to persuade manufacturers to reduce their energy use. Instead we need a better system of incentives and rewards rather than just schemes that increase the tax burden."

Andrew Pearce
Chief executive, IPIA
"It is a very challenging market. Our members are doing everything they can to run lean, profitable operations and all are environmentally aware. They are between a rock and a hard place because costs are increasing and some clients are demanding that prices go down. We understand the need for green commitments, but to set targets higher will put printers at an unfair disadvantage. We need to increase manufacturing in the UK to get out of our current economic situation and these costs are halting that."