Huhne: Forget the carbon budget, US shale gas is the biggest threat to UK competitiveness
Former energy secretary Chris Huhne has told Carbon Brief that it is “very unlikely” a coming review of UK climate commitments will result in a lowering of ambition without a change in the law. In response to concerns about UK competitiveness, Huhne says the Chancellor should encourage the US to export its indigenous gas and equalise world energy prices.
The UK’s climate change advisor, the Committee on Climate Change, will tomorrow release the second half of a report investigating whether there is any basis for changing the fourth carbon budget. While the first part focused on the scientific basis for the budgets, the coming publication will address concerns over whether the UK is harming its competitiveness by cutting emissions faster than other countries.
Carbon budgets are limits on the total amount of greenhouse gases the UK should emit over a five year period in accordance with the Climate Change Act. The fourth carbon budget’s target is to halve UK emissions by 2027, relative to 1990 levels. The chancellor, George Osborne, is widely expected to use a coming review of the budget to argue the target should be weakened.
Huhne is well aware of the current concerns about UK competitiveness as a result of its low carbon policies, however. As secretary of state for energy and climate change until 2011 when he stepped down as the result of a police investigation, he negotiated the setting of the fourth carbon budget.
He claims:
“The Treasury did not want the fourth carbon budget agreed at all, while the department of business was worried about the impact on tradeable companies because of carbon leakage [when energy-intensive businesses move abroad].”
As a result, Huhne agreed to a review next year of the level of the budget, which extends from 2023 to 2027. Huhne says he saw his agreement as a “small concession”, explaining:
“Getting a deal was pretty significant in the sense that we got the support of the Prime Minister [for the fourth carbon budget] despite the opposition of George Osborne and the Treasury”.
The review in 2014 will assess whether the UK is getting too far ahead of EU partners’ emissions cuts.
In addition, DECC agreed the government would make sure energy intensive industries would receive support to ensure they aren’t put out of business by rising costs, a policy that is also common practice in countries like Germany.
Huhne says:
“I don’t think the Treasury understood the nature of the fourth carbon budget decision because the only people who can conduct a review which leads to any proposal for change is [government advisor] the Committee on Climate Change (CCC) under the Climate Change Act.
I didn’t think that I was conceding an awful lot since I can’t believe this government would be prepared to change the Climate Change Act.”
He adds:
“The only way the fourth carbon budget can be amended is if there’s a proposal from the Committee on Climate Change under the terms of the act. So I don’t think that was really more than a nod in the direction of the Treasury”.
The CCC is due to issue its report on the budgets this week. It has pre-empted the review to announce that it sees “no legal or economic basis” for weakening the target because current EU climate policy is no less ambitious than UK climate targets.
The bigger picture
Huhne says departments such as the Treasury, who are worried about the UK’s competitiveness, are looking in the wrong place. He tells us:
“The main threat to competitiveness is the artificially low gas price in the US.”
US gas prices have plummeted over the past few years as the result of a boom in home-grown shale gas extraction. Huhne says that trend is making the US a more attractive destination for energy-intensive investors such as petrochemical companies.
But his won’t last, Huhne says. The US plans to ramp up its gas exports to the point where it will be a net gas exporter by the 2020s. As the US carries out plans, global energy prices will start to equalise. Huhne continues:
“If the Treasury is worried about competitiveness, it should make sure the US is approving more gas export terminals. The sooner that happens, the sooner the world’s gas price will start to equalise.”
Huhne says if the US fails to start exporting its cheap gas, it risks falling foul of international trade laws on export restrictions. US industries are well aware of the cost advantage they currently have. As the FT recently wrote:
“A vocal lobby of energy-intensive manufacturers, including Dow Chemical and Alcoa, has urged the administration to limit export permits, arguing unrestricted LNG sales overseas could erode the energy cost advantage created by the shale boom’s cheap gas.
“However, US officials believe that being seen to restrict exports for the benefit of domestic industry would send a terrible signal about the country’s support for free trade.”
If Huhne is right, the government’s real test isn’t the struggle over green taxes, it will be persuading President Obama to ignore US domestic industry and start selling gas.