Energy-intensive Industries

Alex Cunningham Excerpts

Thursday 11th September 2014 Commons Chamber

[Alex Cunningham (Stockton North) (Lab)]

I beg to move,

That this House welcomes the measures announced in the 2014 Budget Statement which reduce cost pressures created by the imposition of carbon taxes and levies; notes that without such measures, there is a serious risk of carbon leakage; further notes, however, that UK manufacturing still pays four times as much for carbon compared with main EU competitors because of taxes such as the carbon floor price; and calls on the Government to build on the measures announced in the Budget by producing a strategy for energy-intensive industries, as recommended by the Environmental Audit Committee in its Sixth Report of Session 2012–13, HC 669, in order to produce a fairer and more efficient system which delivers genuine potential for investment in a low-carbon economy.

I am delighted to have the opportunity today to open this debate and to move the motion in my name and that of the hon. Member for Redcar (Ian Swales). I am grateful to the Backbench Business Committee for granting time in the Chamber for this important debate about the impact of taxation on our country’s energy-intensive industries, which employ or support up to half a million jobs.

I know that other hon. Members, many of whom have energy-intensive industries in their constituencies, would have liked to be here today to contribute to this debate, but have rightly chosen to travel to my homeland to chat to my fellow Scots who have yet to make a final decision on whether or not to vote to keep the United Kingdom together. Just as I am sure they are here with us in spirit, I am sure that most, if not all of us, recognise and support their mission, which will have a direct impact on the issues that we are discussing today.

Before I get into the main body of my speech, I formally declare my membership of the all-party parliamentary group for energy-intensive industries, which campaigns on the issues to be raised today and whose members helped to secure this debate. Much of the debate will centre on the impact that carbon taxes and levies are having on our energy-intensive industries—EIIs—and will seek to encourage progress in working towards a strategy for EIIs that will deliver genuine potential for investment in a low-carbon economy.

Whether it be through petrochemicals, nitrate fertiliser or steel production, the Tees valley, where my Stockton North constituency sits, has long been synonymous with heavy industry and the thirst for energy that it necessarily entails. The town of Billingham, which is home to a large chemical centre, has played a particularly significant role in Britain’s industrial back story. The cooling towers and chimney stacks that still adorn, if not dominate, parts of the region’s skyline—along with the famed transporter bridge—are testimony to Teesside’s proud industrial heritage, but the decline of those industries will be hastened if actions are not taken to lessen the burdens imposed by carbon taxes and levies.

As Member of Parliament for Stockton North, I shall be speaking for Teesside and highlighting the various hurdles that many of our EIIs are facing there; but as a member of the energy-intensive industries all-party parliamentary group, I shall be speaking not just out of local or regional interest, but to highlight issues that are having an impact on industries the length and breadth of the country. The reach and scale of the problems extend far beyond the north-east, and to products such as cement, glass and ceramics.

If I may borrow a phrase from my hon. Friend the Member for Southampton, Test (Dr Whitehead), the next Government will come to power at a time when the three prongs of an “energy trilemma” are driving potentially competing agendas that must be addressed by any emerging energy policy. That means that, at the same time as taking steps to guarantee that our energy supply is secure, we require measures to ensure that energy prices for consumers, both domestic and industrial, are affordable, as well as movement towards decarbonising supplies to ensure that the energy sector contributes to carbon reduction rather than undermining it.

As I have already made clear, EIIs form the cornerstone of the United Kingdom’s manufacturing sector and, by virtue of that, the cornerstone of the wider economy. Figures for the sector vary, but the Environmental Audit Committee has suggested that EIIs employ 125,000 people in the UK. The UK’s foundation industries, which have a significant overlap with EIIs and account for higher numbers of supply-chain jobs, are reckoned to employ nearly half a million people—which amounts to roughly 20% of total manufacturing employment—generating gross value added worth £24.6 billion. Those industries account for between 3% and 4% of GVA across the UK economy as a whole. In the Tees valley alone, the process sector consists of more than 1,400 local firms in the supply chain, generating sales worth more than £26 billion a year and £12 billion of exports and comprising 50% of the UK’s petrochemicals GDP, while producing 60% of its chemical exports.

As well as being a key source of productivity, investment and employment, EIIs are central to our successful transition towards a low-carbon economy, manufacturing such “green economy” products as lightweight plastics, insulation, and components for wind turbines. For every tonne of carbon dioxide produced by the chemicals industry, more than two are saved downstream by its products. However, if we are to meet the carbon reduction targets set by the last Government—which, as Members will know, bind the UK to reducing carbon emissions by a third of 1990 levels by 2020, and 80% by 2050—significant reductions in emissions are required throughout the economy. In addition, as part of its EU obligations, the EU must obtain 15% of its energy consumption from renewable sources by 2020, which represents a fourfold increase on 2010. Electricity generation is expected to contribute most to the meeting of that target, primarily through the use of wind and nuclear power generation, but also through carbon capture and storage.

While the decarbonisation of electricity generation will be critical, along with measures to improve the energy efficiency of homes and transport, industry—which accounts for about a quarter of UK emissions—is rightly expected to make a substantial contribution. Given that EIIs account for more than 50% of industry-related emissions, they are expected to deliver reductions of at least 70% from 2009 levels by 2050. However, those obligations, although noble and justifiably ambitious, come with a set of associated difficulties.

EIIs operate in highly competitive global markets, and energy is typically their largest production cost. For instance, INEOS, which provides several hundred jobs at its Seal Sands site in Stockton North, tells me that electricity constitutes 70% of production costs associated with its manufacture of chlorine. As a consequence, energy price is business-critical, and it is only possible for the industries concerned to operate in countries with competitive energy prices. In other words, energy costs are influencing, if not directing, investment decisions for EIIs. At a time when the UK’s energy prices compare unfavourably with those in much of Europe and the rest of the world, that is bad news for the manufacturing sector as industries are driven towards more competitively priced markets such as the United States.

Let us take the cement industry, for example. Cement imports currently stand at 14% of UK consumption, up from just 3% in 2001. As the UK has enough cement import capacity to replace domestic manufacturing, there is a real risk that industries in the sector could take the decision to offshore production where costs would be lower. Such a decision would have damaging knock-on consequences. Not only will cement and concrete be vital for the construction of a new, low-carbon energy infrastructure, but the UK would stand to lose out on £2.84 of economic activity generated for every £1 spent on construction. Indeed, such “carbon leakage” can already be seen in the energy-intensive sector, with high-profile closures caused by these uncompetitive energy prices. BASF and Tata, for instance, last year announced closures resulting in over 600 job losses, doubtless a decision influenced by the energy costs, which are more than 50% higher than those of direct competitors elsewhere in Europe.

At the same time, other international companies are redirecting investment en masse to more competitive locations. While wholesale prices are driven by high gas prices, that is distorted by the very high policy costs imposed in the UK. Energy costs for industrial users in the UK are around 45% higher than in France and around 70% higher than in Germany—a competitiveness gap that is wider still in comparison with the US and China, where wholesale prices and policy costs are extremely low.

A stark example that hammers home the extent of this competitiveness gap is offered by GrowHow, based in my Stockton North constituency and at Ince near Chester, which has told me of the struggles it faces as a result of relatively high energy costs. Gas—GrowHow’s main feedstock—costs more than three times that of their Russian competitors, who operate on state-fixed gas cost. Similarly, German electricity prices on a delivered basis for very large users in 2013 equated to €38 per MW against £70 per MW in the UK.

The situation is set to get much worse over the next decade. The Department for Business, Innovation and Skills forecasts that UK energy and climate change policies will add around £30 to every megawatt of electricity for EIIs by 2020, substantially more than for any other country in the world. Needless to say, that is a huge threat to the entire energy-intensive sector—a threat that the next Government, regardless of colour or composition, must take steps to meet.

[Joan Walley (Stoke-on-Trent North) (Lab)]

I congratulate my hon. Friend on securing this debate. Does he agree that the huge energy security and energy affordability issues that we face place our manufacturing industries right at the cutting edge of how this debate is to be taken forward, but we must also not lose sight of the need in the long term to decarbonise, and in doing that we will be making our manufacturing industries more competitive? As my hon. Friend rightly says, there is a short-term issue in terms of transition to that low-carbon economy and it is for that reason that the Environmental Audit Committee, which I chair, recommended that there should be a particular strategy for companies that are intensive users of energy. We have not really seen any progress on that, and I hope that when the Minister replies to the debate we can really look at how we can make our manufacturing companies competitive, losing no time in making sure that we have an international agreement on climate change—because we must not lose sight of that—but keeping our manufacturing processes there in the short term to be there for the long term.

[Alex Cunningham]

My hon. Friend gives a comprehensive summary of where I think we should be, and I hope to develop some of the points she made later in my speech. This is not just about the short term; it is about planning for the future as well.

Of course, the situation with regard to these energy costs is set to get much worse over the next decade. As I have said, the Department for Business, Innovation and Skills forecasts that UK energy and climate change policies will add around £30 to every megawatt of electricity for energy-intensive industries by 2020—substantially more than for any other country in the world.

[David T. C. Davies (Monmouth) (Con)]

I have a great deal of sympathy with what the hon. Gentleman is saying. Does he agree that it is now time to scrap these ludicrous carbon taxes?

[Alex Cunningham]

Carbon taxes have been imposed by consecutive Governments for very good reason, but if our industries are to be competitive, the time has come to examine them carefully and to determine how we go forward. This is not just about taxation, however; we must also take into account the issues that my hon. Friend the Member for Stoke-on-Trent North (Joan Walley) raised a moment ago.

Needless to say, the rise in energy costs is a huge threat to the energy-intensive sector, and it is one that the next Government must address. That brings me back to the trilemma that I mentioned. The present Government have designed policies that focus on reducing carbon emissions from industry, but those policies, influenced by regulatory activities in the EU, rely heavily on measures that seek to enhance energy efficiency while putting a price on industry’s carbon emissions. A cap-and-trade market for carbon was created through the EU’s emissions trading system, introduced in 2005. That market spans the EU and aims to reduce emissions at the lowest possible cost while incentivising low-carbon investment by making emitters financially liable for their emissions. It is intended that, from 2013 onwards, the capping level will fall by 1.74% a year for power stations and industry, so that total emissions are 21% lower in 2020 than they were in 2005.

The Government responded to industry concerns with a compensation package of £250 million announced in Budget 2011 for the period 2013-15, boosted by a further £150 million and extended to 2016 in Budget 2013. But, by December 2013, the emissions trading system compensation scheme had paid out only £18 million to 29 companies in the energy-intensive industries sector. Part of the problem is that although member states are permitted to compensate those at risk of carbon leakage arising from the emissions trading system, there is no obligation to do so. This results in energy-intensive industries being burdened with additional costs, be it through burning fossil fuels and buying allowances to match their emissions, or indirectly through the higher electricity prices that result from generators burning fossil fuels. As we know, the costs are passed on to consumers.

However, because the weak carbon price in the emissions trading system was deemed too low to incentivise lower-carbon investment, the Government then added a further policy cost to the price of energy by introducing a UK carbon price floor to top up the carbon price to an acceptable target rate. This undoubtedly limits the competitiveness of EIIs, many of which are unable to pass those costs through to their customers.

In my role as a member of the all-party group—not to mention as an MP representing an industrial centre—I have regular contact with those in the energy-intensive sector and frequently listen to the issues that they find themselves contending with. Through those conversations, I understand that no other country has imposed a policy similar to the carbon price floor here in the UK, nor are there plans to do so. It has been widely acknowledged that the carbon price floor does not, in fact, reduce emissions from power generation; those are capped at EU level. Instead, the carbon price floor significantly increases the proportion of decarbonisation costs that is borne by UK electricity users. Those are costs that drive investment decisions and can lead to companies relocating overseas rather than developing their businesses in the UK.

To be sure, the EIIs that I have spoken to strongly support the drive for greater energy efficiency. In many cases, energy efficiency is more cost-effective than subsidising low-carbon generation. For instance, GrowHow tells me that, since 2010, it has reduced carbon emissions associated with its main fertiliser product by 40%. By reducing nitrous oxide emissions, it has made savings equivalent to more than 4 million tonnes of CO_2, which means that, relative to its competitors, it is very efficient, and as much as three times as efficient as Russian producers.

Despite the fact that industry has delivered substantial energy and carbon savings over recent decades through investment and innovation, the cumulative impact of energy and climate policies is now putting extraordinary pressure on EIIs, necessitating continuous improvements in energy efficiency to remain competitive—although that is not to suggest that they are not doing that anyway.

Indeed, as industries approach the limits of what is realistically achievable with current technologies, the capacity of businesses to invest in the UK is ultimately undercut and the sustainability of the entire sector in the UK placed under threat. That, of course, brings with it the simultaneous possibility of the loss of jobs and investment to other countries with less vigorous climate change policies. That is disheartening, not just because of the obvious negative impacts for local economies and for the national economy more broadly, but because it overlooks the necessity to safeguard our existing industries and the employment they provide in order to make that all-important transition towards a low-carbon economy. Only through the continued provision of support to these industries can we hope to attract new investment.

We need look no further than Air Products in my constituency for an example of the types of investment in low-carbon industries that successful industrial clusters can attract. Shortly after committing to invest in building one of the world’s largest renewable energy plants on Teesside, the company announced investment in a second similar plant, influenced no doubt by the favourable business conditions that will see the wide availability of feedstock while allowing for local knowledge, skills and infrastructure to be used constructively and competitively. It speaks volumes that Sembcorp is developing with SITA a similar 35 MW plant on Teesside also to provide electricity from waste, further highlighting the potential for investment in the low-carbon economy that can result from the development of strong industrial clusters.

There can be no doubt that the Tees valley’s successful process industry cluster is central to the region’s position at the centre of the UK’s move towards a high-value, low-carbon economy, attracting significant investment over recent years and developing a reputation for green excellence. The area continues to work with government on a low-carbon action plan, on industrial carbon capture and storage, and on industrial heat networks as part of the city deal agreement, leading the way on bio-industries and energy from waste while increasingly being seen as a destination for green investment.

Such examples confirm the UK’s potential competitiveness on the international stage, but EIIs need access to secure internationally competitive energy supplies if they are to continue locating in the UK and investing in areas such as the Tees valley. That means having a level playing field for EIIs within the single EU market, taking account of the cumulative burden of climate policies on industrial energy prices. We cannot mistake the fact that the Chancellor deserves credit for capping the carbon price floor at £18 per tonne of CO₂ from 2016 to 2020 instead of allowing a linear rise to £30 per tonne by 2020, as was originally planned. Calculations indicate that such a move could save UK EIIs in the region of £4 billion over three years, but that cannot disguise the fact that industries are still exposed to an expensive unilateral tax and received no form of compensation for the first year of its operation. With the compensation being announced a few years at a time, there is no long-term certainty about business costs, which deters investment in the sector in the UK.

Estimates suggest that the carbon price floor has already added 5% to EIIs’ energy prices and budget reforms will cap the impact at 8% from 2016 to 2020. Although that is certainly an improvement on the original trajectory, which would have added 14% by 2020 and 26% by 2030, we must recognise that even after this modest reform UK industrial electricity users still face four times the carbon cost borne by EU competitors, let alone competitors outside the EU, which do not face carbon costs at all.

Similarly, EU energy and environmental state aid guidelines published earlier this year limit compensation for the impact of the Government’s carbon price floor on electricity prices, so it can be paid only to EIIs in sectors already eligible for emissions trading system compensation. The Government therefore have no legal means of compensating EIIs for the impact of the carbon price floor in sectors such as cement, glass and ceramics, even where clear evidence exists of energy intensity and risk of carbon leakage. So despite the fact that indirect emissions trading system costs to the cement sector during the period 2014 to 2020 are estimated at £82.7 million, and the cost of carbon price support over the same period is estimated at £104 million, the European Commission’s guidelines conflict with UK domestic policy to allow support against the carbon price support tax for the cement industry.

Incidentally, representatives from that industry have pointed out that cement did not make it on to annex II of the EU ETS indirect CO₂ aid guidelines because the tests that were applied were based on trade intensity of cement, which is currently only moderately traded, rather than the raw product before grinding—cement clinker—which is traded much more intensely. That leads to the conclusion that unless every EII sector is deemed eligible at the EU level for emissions trading system compensation, the only equitable solutions available to address this industrial competitiveness problem are withdrawal of the carbon price floor or efforts to reform the emissions trading system itself to encourage a stronger, more robust carbon price signal.

There can be no doubt that the UK must strive to avoid meeting its carbon targets by offshoring state-of-the-art energy-efficient EIIs. The objective must be sensible and economically sustainable decarbonisation, not de-industrialisation. In that respect, the UK’s status as the least energy-intensive economy in the G7 should perhaps be treated with caution rather than celebration.

We must think outside the box and look beyond punitive taxation schemes for alternative means to decarbonise, sending a signal to the rest of the world that it is possible to retain industry and decarbonise simultaneously and leading by example. A report last year by the American Chemistry Council found that 97 chemical industry projects worth a staggering $71.7 billion have been announced as a result of the US’s shale gas boom.

As a result of shale gas extraction, the price of energy and petrochemical raw materials in the US has plummeted, allowing a boom in the chemicals industry—so much so that INEOS tells me that the majority of its profit now comes from one-third of its business sales in the US. Although I am under no illusion that the UK will be able to replicate the US’s experiences entirely, extracting shale gas is likely to reduce energy and petrochemical raw material costs significantly. I also appreciate that fracking for shale gas is a controversial process and recognise the potential risks that it brings. But the appropriate response to concerns about the safety and environmental impact of shale gas extraction is to ensure that we have the right regulatory and monitoring framework in place. Any questions are best answered on the basis of evidence gathered from carefully regulated and comprehensively monitored exploration.

Although there is little prospect of fracking in north-east England, the abundant offshore coal reserves and potential for gasification present an opportunity to secure the future of EIIs—both in the Tees valley and the wider UK—while safeguarding thousands of jobs and helping to drive a much-needed economic recovery in the area. A failure to explore such options further would be an opportunity wasted.

Similarly, with the Tees valley already producing around 50% of the UK’s hydrogen and having an established hydrogen pipe network, the application of carbon capture and storage, as detailed in the region’s city deal, along with investments such as Air Products and the potential extraction of hydrogen from industrial sources mean that there is a significant opportunity to produce green hydrogen in Tees valley, which is capable of supplying the increasing demand for hydrogen fuel cells.

Our EIIs need support through this place, with a re-examination of taxes, carbon capture development and new energy sources. As recommended in the Environmental Audit Committee report, we need to set that path for maximum feasible decarbonisation, and I hope that we will do that soon.

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[Ian Swales]

The hon. Gentleman makes an extremely good point, which I will return to later. When I see the UK’s attitude to these sorts of policies, I often feel like we are playing cricket, while other countries are playing rugby, boules or other sports that we do not recognise.

At the first meeting of the Energy Intensive Users Group, I was stunned not just by the number of outside attendees from industry, but by their seniority. We quickly realised that it was a huge issue that faced many industries, some of which have been mentioned. I do not think that paper has been mentioned. That is yet another industry that sent a representative from its trade body. As a result, there has been a great deal of representation to the Government. I am pleased to see at least some bending in response.

UK businesses that are involved in the generation and consumption of energy are saddled with up to seven different carbon taxes from the UK and Europe. Interestingly, even the senior executives of those businesses cannot always describe clearly what all the taxes are and what they do. Despite the action that the Government are taking, the trends are not great. It is estimated that political costs will increase the electricity bills of industry by a third by 2019-20. Policy makers do not seem to understand that if a company spends millions of pounds a year on energy, it already has quite an incentive to use less. It does not need to be beaten with a stick by the Government to persuade it to use less energy, let alone seven sticks. These companies know that they are spending a lot of money on energy, and are already doing a lot about it. They know that energy costs are a competitive issue, whether there are taxes or not. The irony of a heavy tax burden is that it removes cash from those companies that they could otherwise devote to energy-saving initiatives. Many companies work on thin margins or in commodity businesses that do not have high margins. The more taxes they pay, the less likely they are to be able to invest in reducing carbon consumption and generation.

A Minister from the Treasury rather than from the Department of Energy and Climate Change is responding to this debate, and I wish to ask about the attitude of the Treasury towards these taxes. Does it take the broad view about business competitiveness, look at the overall picture, and compare the taxes being rendered with those rendered from Europe, or is it just a way of raising money? These businesses are almost all competitive and traded internationally, so in this regard the UK is no more an island than the EU is. Our policy decisions affect these businesses on an international basis.

The hon. Member for Warrington South (David Mowat) mentioned the EU. The minute we want anything done, the standard response from civil servants is “State aid”. That is a perfect method of obfuscation and delay, which, in many areas, we as politicians are buying when we should instead be fighting a lot harder. I know there are specific issues with the steel industry and the EU, but many other industries are not as limited. Politicians should not allow state aid to be used as an excuse for delay or for no action, particularly given that some of the things we are talking about are, ironically, UK-only initiatives. I cannot see how the European Union can interfere with initiatives such as the carbon price floor, which are taken only in this country. I would like Ministers to be a lot more aggressive with civil servants, not just about whether state aid issues apply, but if they do, about how quickly they can be removed. Some of the issues I am thinking of have been washing around for most of the four years that I have been in this place.

Europe has the emissions trading scheme, which has not totally met its objectives, as the allowances originally given to companies were fairly generous but the tight market that was expected to lead to carbon trading has not occurred. Ironically, however, Sahaviriya Steel Industries in my constituency has a specific problem because it was virtually out of business during the reference period when the allowances were decided. It now pays $1 million a month in carbon cost to the EU, because it does not have enough allowances to operate. It is also expanding, so carbon costs are yet another handicap.

Businesses can do many things to reduce energy use, but as the hon. Member for Newcastle upon Tyne Central said, there are physical and chemical limits. I do not disagree with some of the EU moves on best available technology, or with new moves to look at what is technically feasible and ensure that companies in the EU move towards that best available technology. I hope that we do not get regulatory regimes that drive everybody else out of business if they are not the best, as that will not help anybody. However—I hope the Government will take notice of this—when the best available technology frameworks are established for different businesses, that will at least show what is possible with regard to reducing energy consumption and contribution to climate change. If a company is doing something in another country, we can do it here; if it is not being done anywhere, we must ask whether it is sensible to try to drive a company to use 50% less energy, for example. I would like to see constructive work with the EU on that, ensuring that we are as bold as we should be when dealing with its requirements.

Investment has been mentioned, and the manufacturing industry has been declining. During the previous Government, it went from being 19% of the economy to 10%, although some growth is occurring. I worry about these businesses because there is capital investment inertia. It is not about whether company A is operating today, tomorrow or next year; it is about what investment decisions are being taken. Are the plants being kept up to date and maintained? Above all, would the company concerned re-invest in such a business?

I remember my experience as a financial director in the chemical industry. We decided to get out of a business, but 24 years later that business is still running. It has never been renewed, but it has been patched up and sold three times since then. Those are the types of decisions taken. If we have an unattractive climate for investment in this country, things will close down not overnight but steadily, and we are seeing some of that.

The Engineering Employers Federation, which covers all the businesses we are talking about, says that energy costs are its No. 1 issue for growth and investment. Many of these companies are foreign owned. The biggest employers in my constituency are Singaporean, Thai, Indian, Saudi Arabian and Korean. Decisions are being taken not in the north of England or London, but in Seoul, Riyadh, Bangkok and so on. If our energy infrastructure costs do not look competitive and sensible, companies do not need to come here or re-invest.

Despite sounding somewhat critical, I welcome the Government initiatives. The mitigation moves that they have mentioned are helpful for big energy users in my constituency. I hope the initiatives will take place with due speed—that has been an issue—that there will be certainty and that they are not a one-off. We are talking about long-term businesses taking long-term decisions. If the Government believe that throwing a carrot towards a business for 12 months makes a difference—well, obviously it makes a difference to its cash flow in those months, but it will make no difference to its strategy. Uncertainty does make a difference in the wrong direction.

I welcome the fact that the UK Green Investment Bank is majoring in investing in industrial energy reduction, as well as renewable technology, and I welcome the renewable heat incentive, which should help. The regional growth fund has put money into such businesses—most recently, £9 million went into a huge project at Sabic in my constituency, which will result in the petrochemical cracker being able to crack gas. I am pleased about the Tees valley city deal, which I helped to push for and even construct. It will get carbon capture and storage around Teesside, which I still regard as the No. 1 location for investment in carbon capture and storage for industries outside the energy sector, although we have the energy sector as well.

[Alex Cunningham]

I am grateful to my new hon. Friend for giving way, and I believe that that is the central issue on Teesside. Will he join me in congratulating the industrialists on Teesside who, despite being competitors, have come together because they know that the future is about investment in carbon technology?

[Ian Swales]

I agree with the hon. Gentleman. Such a technology will create an infrastructure that will benefit all those sectors, and they do not compete that much with one another. The Tees valley can be a hotbed of competitive steelmakers, chemical producers and so on. Strategically, the country should get on with that.

All hon. Members have mentioned the importance of energy-intensive industries. They are important to the economy, to the development of green industries—let us think of the amount of steel involved in tidal power—and to the security of the country. We should not kid ourselves when we count carbon. In a debate a while ago, the hon. Member for Warrington South asked, “Is the carbon for my Volkswagen car mine or the Germans’?” We are kidding ourselves if we think we are doing the right thing by de-industrialising this country, exporting jobs and importing carbon. That is one point on which I depart from the hon. Member for Newcastle upon Tyne Central.

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[The Exchequer Secretary to the Treasury (Priti Patel)]

I welcome today’s debate and congratulate the hon. Members for Stockton North (Alex Cunningham) and for Redcar (Ian Swales) on securing it, not least because it puts me through my paces in understanding the remit, this whole field and carbon taxes. It has been an insightful debate. The Government’s position has been discussed by a number of hon. Members, but we are clear in recognising the significant role that energy-intensive industries play in the UK economy. As my right hon. Friend the Chancellor said back at Budget 2011, we are committed to ensuring that manufacturing is able to remain competitive during the shift to a low-carbon economy and have pledged to do everything we can to help manufacturers play a valuable role.

We also recognise the difficulties that EIIs have faced as a result of high energy costs, and various cases and accounts of challenges that companies have faced have been cited in today’s debate. That is why we introduced a package of reforms at Budget 2014 radically to reduce the costs of energy policy for business, particularly for manufacturing, while improving security of supply—all right hon. and hon. Members would emphasise that we must do that—and maintaining the Government’s ambition for renewable generation deployment. That package will benefit every household, business and region in the country, saving a total of up to £7 billion by 2018-19. Businesses alone will save a total of £6 billion and the package will particularly benefit the most energy-intensive manufacturers, about 80% of which are based in the north of England, Scotland and Wales, as we have heard. The package will improve incentives for companies to return their manufacturing to the UK and help existing firms to compete in the global race. I do not want us to underestimate that term: we are about competition, we are open for business, and the Chancellor has consistently made the case that this is about British jobs and keeping the United Kingdom a competitive place for manufacturing in EIIs.

Manufacturing fell from being 19% of the total economy in 1997 to 10% in 2010, as my hon. Friend the Member for Warrington South (David Mowat) mentioned, but it has grown strongly in the latest quarter, at 3.3% compared with a year ago. Currently, energy-intensive sectors are responsible for 35% of UK manufactured goods exports. Obviously, the Government want to make the recovery of manufacturing last for the long term and be sustainable, and to have growth that is balanced across the entire UK. I think we would all agree that lowering energy costs is therefore vital for the international competitiveness of UK manufacturing.

If we had not introduced any measures at Budget 2014, UK firms would have been paying just above the average price for electricity among the 29 members of the International Energy Agency, with the proportion of this price attributable to policy costs rising over time, reaching about one third by 2020. That is why the Government announced the series of measures at Budget 2014 radically to reduce the costs of energy policy for business, particularly in EIIs. The measures included capping the carbon price support rate at £18 per tonne of carbon from 2016 to the end of the decade; extending EIIs’ compensation for the cost of the carbon price floor and the emissions trading scheme until 2019-20—I will address the points raised about compensation shortly; introducing compensation for EIIs for the costs of the renewables obligation and feed-in tariffs from 2016 to 2020, which is worth almost £1 billion, in order to protect these energy-intensive manufacturers from the rising costs of the renewables obligation and the feed-in tariffs; introducing, from 2015, an exemption to the carbon price floor for fuels used to produce good-quality electricity by combined heat and power plants for on-site purposes; and introducing new measures to make energy markets more competitive for very small businesses and to help them use smart meters to cut their bills.

I met a range of small businesses this morning. Although we are talking about large EIIs in this debate, these things also have an impact on small businesses, and the Government are very committed to listening to their concerns and addressing the issues they face. I am pleased to say that all businesses will see their electricity bills reduce as a result of this package, provided it receives the necessary EU state aid approval, which was also a subject raised in today’s debate. There will be a total reduction for business of up to £6 billion by 2018-19. The companies that use electricity intensively will see radical cost savings, as, when previous announcements are taken into account, they are now compensated for all Government policy designed to support low carbon and renewable investment up until 2019-20.

A typical energy-intensive business receiving the compensation measures in the package will save about £19 million by 2018-19. Such businesses include Lotte Chemical UK Ltd in the constituency of the hon. Member for Redcar, and GrowHow in the constituency of the hon. Member for Stockton North. Other manufacturers will also see a reduction in their bills through the capping of the carbon price support, which it is estimated will save a typical heavy industrial firm about £800,000 and a typical mid-sized manufacturer £50,000 in 2018-19 alone. That will increase the competitiveness of the UK’s energy intensive industries, which is important as this is all about supporting those industries to be more competitive, particularly in the global race. All businesses have recognised that this is about international competition and our place in the world. The Confederation of British Industry stated that our 2014 Budget package will

“put the wind in the sails of business investments, especially for manufacturers.”

The chief executive of the Engineering Employers Federation said that the Government clearly recognise the need to make UK competitiveness a priority. It is fair to say that the Government are doing their utmost to ensure that the UK is a place in which to do business. We have always said that to achieve a resilient recovery, the UK must back manufacturing.

The chief executive of Tata Steel’s European operations, which has a plant in the constituency of the hon. Member for Redcar, said:

“The measures announced in the Budget are extremely welcome. The Government has listened to the concerns of the foundation industries by introducing a limit on the policy costs they face. These measures are a clear and meaningful contribution to forging a more competitive and sustainable future for UK steelmaking sites, which employ 18,000 people directly and several times that number indirectly.”

The package of measures proves that the Government are determined to see manufacturing remain at the heart of the UK economy and competitive on the international stage.

On carbon pricing, over the next decade we need to attract investment worth more than £100 billion to replace and upgrade our energy infrastructure and to diversify the energy mix. The investment will help to ensure that the UK meets our long-term legally binding greenhouse gas emissions reducing targets and, importantly, to safeguard the country’s long-term energy security, on which we have only just touched in this debate. Establishing a minimum carbon price sends a credible signal to help drive that level of long-term investment in low-carbon electricity generation—a point that was made by the hon. Member for Newcastle upon Tyne Central (Chi Onwurah). But diversification is not concerned with renewable energy alone. The Government are committed to developing a wide range of energy sources to ensure that energy prices remain competitive in the future, and of course nuclear energy and shale gas are central to that.

We welcome the announcement made by INEOS last month that it plans to enter the UK shale gas market, because we are convinced of the benefits that shale gas can bring to industrial production.

[Alex Cunningham]

The Minister mentioned shale gas and other issues, but in the north-east of England, coal gasification could be a huge saver both for our region and the country. I hope that she will encourage the development of that industry.

[Priti Patel]

The hon. Gentleman is right that this is not about one or the other or even a trade-off, but about all players in the energy mix. We are talking about long-term energy, security of supply and competitiveness in the long-term energy market, and that requires diversity.

We are also continuing to look into the issues faced by energy-intensive industries. Today, Members have touched on the issues of carbon-reducing options and the competitive impacts. My hon. Friend the Member for Rugby (Mark Pawsey), who talked about CEMEX and the cement plant, touched on the fact that there are a range of sectors that are not on the European Commission’s list when it comes to exemptions and approval of indirect costs. Let me reassure Members that this is about not just an occasional conversation with the European Commission but about being absolutely firm and clear with it and pressing it on this issue. The Government, too, will look at the competitive impacts of their carbon reduction options through a series of road maps. I am talking here about the involvement not just of the Treasury but of the Department of Energy and Climate Change and the Department for Business, Innovation and Skills. This will help focus policy making more on the opportunities and barriers that energy intensive industries face, and allow Government and industry to agree on actions to deliver cost-effective decarbonisation while safeguarding competitiveness.

Over in Brussels, we will press the European Commission to review the list of energy-intensive sectors that are eligible for compensation, with the aim of extending it, given the higher energy costs they receive as a result of the EU emissions trading scheme and carbon price floor. This is an ongoing matter. It is fair to say that we are well placed when it comes to pressing the European Commission and to making our case.

We will press the Commission to provide a more targeted list of sectors most at risk from carbon leakage as a result of the EU emissions trading scheme, for its next phase which begins in 2021, so that the free allowances that these sectors receive can be best focused on those energy-intensive industries that need them the most. The Government are well aware of the cost pressures on the EIIs, and we have developed a suite of measures to reduce those costs, as well as the measures announced in Budget 2014.

Let me address the points that the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) made about compensation. In Budget 2011, we made it clear that £200 million was available, and much that has been spent thus far is within the eligibility of the constraints of the state aid clearance process, and that is all within the framework of the process that has been set out. The hon. Lady rightly said that the Commission published its guidance on eligibility schemes in April this year. That has not been lost on us. We are not thinking, “Well, that’s that. It’s been and gone.” We are absolutely on to this matter. I will if I may come back to the hon. Lady on this with some specifics. It is absolutely not the case that we are not looking at this any more. We want to do everything possible to ensure that that money is going where it is needed and supporting the EIIs that need that compensation. Of course, this comes back to the statement that was made by the Chancellor in 2011. We announced measures in the Budget this year, but we know that more needs to be done, so we will follow this matter through.

We are continuing work in this area securing investment in low carbon technologies; supporting the development of a wider range of alternative energy sources; and working with individual industries as they seek to improve their energy efficiency. It makes business sense for those industries to improve energy efficiency, and they are all going through that process. We welcome this opportunity to set out the wide range of work this Government are doing to support energy-intensive industries as the UK transitions to a low carbon economy.

[Alex Cunningham]

We have had an excellent and informed debate this afternoon. It is clear that both the Minister and shadow Minister recognise the importance of our energy-intensive industries not just for the jobs that they support but for the products they produce for both the domestic and export markets.

It has been a truly Back-Bench debate, because it went across the political divide. There were lots of things on which we could agree, and a few things on which we could not. We have heard today of a list of world-class industries and companies that are the backbone of our economy and that need the help of this place. In her opening remarks, the Minister said that she was here to learn and be put through her paces. I hope she has been put through her paces and that when she leaves this place today, she can think that it is not about what has been done thus far, but what can be done next to support those important industries.

I am grateful to everybody who has taken part in the debate today. We have made it clear that we have shared anxieties about the pressures faced by our industries, and that those pressures cannot be allowed to run on and on. I hope and am sure that Ministers have recognised the real problems facing these industries, which provide many jobs—the numbers vary and are given as anything from 120,000 to 800,000. The industry is all-encompassing and it is important that we protect those jobs and also protect our traditional and not so traditional industries. We need to find solutions not only so that these industries are strengthened but so that we ensure that they are not diminished.

Question put and agreed to.

Resolved,

That this House welcomes the measures announced in the 2014 Budget Statement which reduce cost pressures created by the imposition of carbon taxes and levies; notes that without such measures, there is a serious risk of carbon leakage; further notes, however, that UK manufacturing still pays four times as much for carbon compared with main EU competitors because of taxes such as the carbon floor price; and calls on the Government to build on the measures announced in the Budget by producing a strategy for energy-intensive industries, as recommended by the Environmental Audit Committee in its Sixth Report of Session 2012–13, HC 669, in order to produce a fairer and more efficient system which delivers genuine potential for investment in a low-carbon economy.