Budget Statement

Baroness Worthington Excerpts

Thursday 21st March 2013 Lords Chamber

[Baroness Worthington]

My Lords, yesterday’s Budget speech by the Chancellor contained a number of tax break announcements that are intended to stimulate our economy. These included measures for business, such as reductions in national insurance payments and a cut in corporation tax, and measures for individuals, such as an increase in the tax-free income allowance and tax relief on childcare.

However, hidden in the detail of the Budget but not mentioned by the Chancellor was an announcement relating to a Treasury electricity tax that could significantly undermine money saved by those measures. The carbon floor price was announced in 2011 and will start to be added to electricity bills from 1 April this year. The logic of the tax is to increase the cost of carbon pollution to provide a benefit for lower-carbon sources of electricity. It is claimed to be necessary because the market price for carbon, set by the balance of supply and demand for carbon emissions at a European level, has crashed to very low levels, failing to incentivise investment. To address this, the Treasury has invented a top-up tax, which is intended steadily to increase the cost of carbon pollution over this decade.

Starting in April, UK electricity companies will be required to pay a £4.94 per tonne carbon top-up tax, which is roughly equivalent to adding £2.50 per megawatt hour to wholesale electricity prices. A year later, the level will double to £9.55 a tonne or £4.77 a megawatt hour and in 2015-16 the level that was announced yesterday—or, rather, was not announced—doubles again to £18 a tonne or £9 a megawatt hour. Over the next three years, this single policy will raise the Treasury an estimated £4 billion to £5 billion in revenue. Yet the Chancellor forgot to mention it.

I am not against polluters paying for pollution: in fact, I am all for it. However, in the fight against climate change it is absolutely imperative that when we impose costs on the economy, we do so for very good reason. Sadly, in this case it is so badly thought through that this policy risks holding back recovery, increasing inflation and giving carbon pricing a bad name, undermining our ability to introduce more sensible policies later.

The reasons why the Government’s carbon floor price is such a bad idea are numerous and have been pointed out repeatedly since it was first mooted. Opponents include business groups, consumer groups and green groups. Everyone appears not to like this policy. The first obvious problem is that the tax fails to do anything for the environment. It does not deliver any additional environmental outcomes. The emissions it targets are already capped at an EU level and simply doing something here means that our emissions saved will be traded away across Europe.

The second, blindingly obvious, problem is that being unilateral it damages UK competitiveness at a time when we need to be boosting our competitiveness. Electricity prices are an essential input to virtually all economic activity. Steep rises in prices increase everyone’s costs and are inflationary. It is no wonder that the Budget yesterday appeared to be indicating to the Bank of England to go soft on meeting the inflation target. But the effect of this policy is likely to make it harder than ever to bring it under control.

The third problem is that rather than paying electricity companies when they invest in new low-carbon projects that come on stream, as the renewables obligation does and as the contracts for difference will, the carbon tax simply pushes up wholesale prices of electricity for everyone, rewarding those who have already invested for doing nothing new. It is a huge windfall for projects that have already received generous subsidies, be they existing wind farms or old nuclear power stations. This is of course good news for some generators but bad news for industry and consumers, who are paying twice for no good reason. The floor price is intended in a not-very-clear way to give investors confidence. However, being a finance Bill measure, no investor worth his salt is going to place any confidence in this policy lasting, especially since it has been implemented so appallingly.

Recognising that increases in electricity prices will be damaging to industries which rely on it, the Treasury has pledged to make around £250 million available to certain sectors to compensate them. That is a fraction of the revenue that the policy will raise. However, there is nothing in the Budget to compensate consumers and this comes at a time when public money to help poorer families cope with higher energy bills is at an all-time low, having been slashed by this Government.

Some may argue that the main purpose of the carbon floor price is to disincentivise the burning of coal in existing stations, which would be a noble endeavour. However, this policy is the equivalent of taking a sledgehammer to crack a nut and even then it may not be successful. Coal is experiencing something of a reversal of fortunes thanks to lower global prices as unused coal from the US enters the market. This, combined with high European prices for gas, is causing us to burn more coal. The disparity between the two fuels is so great in cost that even the hefty carbon floor price may not be enough to switch us out of it. It requires something in the region of a £30 a tonne carbon price for us to do that.

What would Labour have done differently? First, we know that investors in low-carbon electricity infrastructure are absolutely necessary for getting this country back to growth. They need policy certainty, which is why we are committed to introducing a decarbonisation target for the electricity sector. The Government have failed to acknowledge this and are proposing to wait until 2016 before doing so. We would also use simpler policies, such as the energy performance standard to secure the steady phasing out of unabated coal and usher in carbon capture and storage. That is simple to understand and unambiguous, and provides the clarity investors need to commit to new projects.

We would also work around the clock to achieve a solution to the low carbon price at an EU level, which is the only level where it matters. Fortunately, we still have some credibility in Europe, unlike the Tories, and we are able to control our MEPs. As we speak, the Conservative MEPs in Brussels are mustering to rebel in a vote in April that would help to rebalance the European carbon market—doing precisely what this heavy-handed policy is intended to do. The Government line is to support it. Yet, disgracefully, the party is not able to persuade its members to vote that way in this forthcoming vote.

In the short time available I have focused exclusively on one measure in the Budget. However, I have done so consciously in order to try to compensate for the Chancellor’s grave and negligent error in omitting to mention it at all. As companies and families sit down this week to try to work out how the Budget will affect them, the hidden electricity tax is unlikely to feature in their assessments. Indeed, it features in scarcely any of the mainstream media’s assessment of the impact of the Budget. Yet it is raising large sums of revenue and has a very material impact on costs.

This makes me fear that either the Chancellor simply is unaware of the detail of his Budget or he is purposefully trying to hide a significant additional cost to the consumer. Will the Minister inform the House what the Government’s assessment of the impacts of this policy are on inflation, competitiveness and the poorer households which currently are struggling to pay their electricity bills?