Under the EU ETS there is a cap on greenhouse gas (GHG) emissions from prescribed energy intensive installations. Installations must purchase GHG emissions allowances, called European Union Allowances (EUAs), which represent the right to emit or discharge a specific volume of emissions in line with national allocation plans.
The Government has outlined plans to compensate businesses for the indirect costs they face as a result of complying with EU ETS requirements between the beginning of 2013 and April 2015. The Government has previously estimated that energy and climate change policies could add up to 28% to the average electricity prices paid by large businesses in industries such as steel, chemicals, paper and cement by 2020.
Under the compensation scheme only companies that manufacture goods that correspond to set European Commission categories will be eligible to claim compensation. Manufacturers of basic steel and iron, man-made fibres, paper and leather clothes are among those who will be eligible to claim.
Businesses involved in the manufacturing of the categorised items also, generally, will need to pass a '5% test', which involves them demonstrating that they are sufficiently exposed to electricity price increases in order to merit being awarded compensation. Businesses that do not pass the '5% test' can still be eligible for compensation under certain circumstances.
If businesses can show that they have only failed the test because "significant costs" associated to the manufacture of non-intensive products skewed the "overall aggregate level of electricity intensity" that is recorded for their firm, and that the specific energy intensive product "typically meets the 5% test", then those companies can claim compensation, the Government said in new guidance (17-page / 257KB PDF) it has issued.
The level of compensation to be issued will be determined according to set "electricity consumption efficiency benchmarks", it added.
The Government has set aside £113 million to allocate to eligible companies in the first round of compensation.
Energy law expert Simon Hobday of Pinsent Masons, the law firm behind Out-Law.com, welcomed the publication of the Government's guidance as opening the door to the scheme to support energy intensive industry. Support has been proposed in relation to costs associated with both the EU ETS and the Carbon Price Floor.
The Carbon Price Floor is another form of levy on the supplies of fossil fuel used in electricity generation. It is designed to "provide an incentive to invest in low-carbon power generation by providing greater support and certainty to the carbon price in the UK's electricity generation sector." according to a Tax Information and Impact Note published by HM Revenue & Customs (HMRC).
"The Government consulted on both the EU ETS scheme plans and the Carbon Price Floor scheme at the same time in October 2012; this Guidance in relation to EU ETS support is the first element of the support which is being made available to industry" Hobday said. "The European Commission has yet to give its sign off that the Government's Carbon Price Floor compensation plans are in line with EU state aid rules and the second element of the support will not be introduced until that occurs."
"While the Guidance on the Carbon Price Floor support has yet to be published, the EU ETS guidance is likely to serve as an example of how the Carbon Price Floor guidance will look, subject to some differences in the approach to calculation given the different basis for the underlying carbon costs," he added.
"The support for energy intensive industries is another piece of detail around the carbon electricity market review (EMR) and how it will impact on industry. The Guidance on the EU ETS aspects is to be welcomed as another piece of the puzzle but the Carbon Price Floor support remains open, as with so much of the detailed elements of EMR. Companies should be aware that they can start claiming compensation for indirect costs incurred as a result of the EU ETS programme from 3 June. Claims can be made for the period from 1 January 2013 but they must be submitted by 31 July 2013," Hobday said.
