Could cutting carbon taxes lead to lower emissions?

Senior reporter

Siemens’ decision to base its wind turbine production site in the UK shows how supporting — not punishing — manufacturing can help us achieve our carbon goals.

Sometimes it feels that when it comes to Britain’s efforts to move to low-carbon energy sources, for every one step forward we take two steps back. At the start of the week we were hailing Siemens’ decision to invest £160m in wind turbine manufacturing facilities in Hull. Today, the UK’s largest renewable energy generator, SSE, announced it was shelving plans for three new offshore wind farms, following similar announcements on the company’s proposals for onshore wind, wave and biomass projects.

So often, these kind of problems and plan revisions are due to instability caused by changes – or potential changes – in government policy. Last week’s budget saw a freeze in the carbon price floor (the minimum amount of tax companies have to pay to emit carbon dioxide), which immediately prompted warnings that fossil fuel projects would become more attractive to investors and  make renewable schemes less so.

SSE’s decision to reduce renewable investment to help pay for an energy price freeze follows Labour’s proposals for an industry-wide freeze and so appears to be, at least in part, an attempt to create some stability in the face of possible upheaval following the next general election.

True, certain levels of government tax and subsidy are more likely to encourage investment in low-carbon projects, but without a relative degree of certainty about the possible income available, companies are unlikely to make any plans for new ventures at all.

However, this doesn’t mean government policy should be set in stone. And what the events of the last week demonstrate is that there is more to developing the UK’s low-carbon economy than simply subsidising wind farms.

Wind turbine plant
Siemens has announced plans to base its wind turbine production facilities in Hull following the government’s freeze on carbon tax.

If we raise costs for industry too far and too fast we won’t force it to decarbonise, we’ll just force it to go elsewhere. This will not just cost the UK jobs and income but also likely lead to a rise in total worldwide carbon emissions as firms move to countries with much looser pollution laws.

But find the right balance to encourage companies to become more energy efficient while remaining in the UK and we can build stronger manufacturing industry, which in turn will help bring down costs for the low-carbon sector as supply chains grow and push forward innovation. And so, we may need less tax and subsidy to achieve our goals.

That’s what George Osborne was hoping to achieve with the freeze in the carbon price floor and the extension of help for energy-intensive industries. And the Siemens’ decision suggests this may work. The company has indicated that government policy still provides enough of an incentive to continue the growth of the offshore wind sector but now also makes it viable for turbine production to be based here.

In the long-term, we need an effective way of encouraging investors to choose low-carbon generation projects over fossil-fuel ones and slashing industrial emissions at the same time – and a rising carbon price floor will probably play a part in that. But in the meantime, the government seems to have realised that the manufacturing sector is part of the solution, not the problem, in the move to a greener economy.