Tuesday, March 22, 2011

Pale green budget tomorrow will cancel CCS levy and forbid Green Investment Bank from borrowing

George Osborne's first budget tomorrow will say that the Green Investment Bank will not be allowed to raise its own finance for some time.

And the levy on electricity bills which had been proposed to raise finance for carbon capture and storage (CCS) plants is to be dropped.

The levy was touted in last autumn's Spending Review as a means of raising billions of pounds for flagship CCS projects. In the review, Osborne said £1 billion was set aside for at least one CCS pilot, with a further three projects to be financed either by the levy or by public money.

But the levy is no longer on the cards following lobbying from industry. This argued that effectively there will already be four carbon taxes, which is complicated enough, and the levy would be a fifth - just too much. The four taxes are:

  • the Climate Change Levy (CCL) - since 2001, taxing fossil fuel energy supply to those businesses without a climate change agreement (CCA) with DECC (which gives 80% - reducing to 65% from next month - reduction on this tax)

  • the CRC Energy Efficiency Scheme - beginning in 2012, which will raise £1 billion a year by 2014-15 from businesses who consumed over 6,000 MWh in 2008

  • the EU Emissions Trading Scheme (affecting generators and the metals, mineral, and pulp and paper industries) - now, most permits are given away free, but the proportion will reduce significantly in 2013

  • the new carbon price support mechanism (CPSM), designed to tax fossil fuels used in electricity generation (by removing CCL exemptions from 2013) to make generators' investment in CCS, renewable and nuclear generation more favourable.

The carbon price support mechanism, currently the subject of a consultation, is also to be further described in tomorrow's budget.

City accountancy firm PricewaterhouseCoopers was amongst those arguing against the CCS levy. Its partner Mark Schofield has written: “The introduction of a floor price would be a significant change for many companies with high emissions, particularly if the Government decides to set this higher than the EU ETS traded permit price. It is likely that the Government will set a lower price initially, rising over time, but they can’t be too generous.

“One of the main criticisms from the industry is that the carbon floor price will add another layer of policy complexity to an already overcrowded energy supply chain policy mix. It may be difficult for potential investors in low carbon generation to distil from these overlapping policy measures a reliable carbon price signal to guide investment decisions, and for users of energy to understand the overall policy objective.”

This raises questions over how or whether the three further CCS projects will be built. Scottish and Southern Energy, Powerfuel Power Limited, Alstom UK and Ayrshire Power are amongst the companies competing to build them.

The prospect of being able to capture carbon from fossil fuel burning power stations has become key to many policies about tackling climate change while keeping business as usual. This is despite the fact that there is no large-scale commercial demonstration that the technology works anywhere in the world.

The EU will be part subsidising the projects. CCS supporters are hoping that the floor price for carbon will be set high enough to raise sufficient funding for CCS. But then so will renewable energy generators and nuclear newbuild supporters.

The Treasury itself says (in the CPSM consultation document) that around £110 billion in new generation and grid connections alone is required by 2020. The same amount again will be required for further upgrades.

The Green Investment Bank

Where will this investment come from? Great hopes have been pinned on the Green Investment Bank.

Osborne is expected to pledge tomorrow that £3 billion will be given to kickstart the Bank. He will say that he believes this will be enough to raise £18 billion of investment into green projects by 2014-15, with the rest coming from the private sector.

This is still a fraction of what is required, which has raised criticism of the Treasury for blocking Energy Secretary Chris Huhne's demand that the new Bank be able to borrow money itself.

Osborne will say tomorrow that the Bank will be able to issue bonds once the nation's debt is falling as a poor portion of grass domestic product–anticipated after April 2015. But for many this will not be soon enough.

Huhne has been locking horns with the Treasury, demanding that it be created as a fully fledged bank. The Treasury's line has been that allowing small investors to take part in the bank's investments would be too complicated, and any borrowing liabilities would be on the government balance sheet, thereby making the deficit appear worse.

“This throws into doubt Britain’s chances of building a low carbon economy and means we will now lose jobs and industries to places like China, Germany and Silicon Valley in California,” said John Sauven, Greenpeace executive director.

The bank is expected to be funded by sales of assets, such as the government one third share in Urenco, the company which enriches uranium for nuclear power stations.

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