Budget 2016: key climate and energy announcements

Wednesday 16 March 2016

Today, the chancellor George Osborne delivered a budget, which promised to “put the next generation first”.

But did this complement the government’s promises on climate change? Carbon Brief looks at the main policy details related to climate change and energy, as well as another key government announcement made earlier this week to enshrine into law a “net zero emissions” goal.

§ Carbon Reduction Commitment

The budget abolishes the Carbon Reduction Commitment, which it calls “bureaucratic and burdensome”. This was a scheme designed to promote energy efficiency in large UK organisations, by requiring reporting and pricing of every tonne of carbon emitted. Participants had to buy allowances from the government to cover their reported emissions.

The closure of the scheme follows complaints from businesses that the scheme was overly complex and ineffective, according to supporting documents.

§ Climate Change Levy

The Climate Change Levy will increase from 2019. This is a tax on energy use paid by businesses. In last year’s summer budget, the exemption for electricity from renewables was cancelled. This means that today’s announcement translates into a rise in the carbon tax for carbon-free renewable energy.

This will make up for the loss in revenue that comes from abolishing the Carbon Reduction Commitment, and should continue to incentivise energy efficiency among businesses, according to the budget document. Energy intensive industries will be protected from the higher rates, as the discount to which they are entitled on their electricity bills will increase.

§ Infrastructure

The budget promises to implement the recommendations of the National Infrastructure Commission, which focused on “smart power” as a means to saving consumers up to £8bn a year. Carbon Brief covered the findings of this report in detail.

Under Osborne’s plan, the government will allocate a total of at least £50m for innovation in energy storage, demand side response and other smart technologies over the next five years, in order to help bring them to the market.

The government has also committed to support the delivery of at least 9GW of interconnection capacity, which it says can make an “important contribution” to the future energy mix.

§ Renewables and nuclear

According to the budget, the government “is committed to driving down the costs of decarbonisation”. To this end, it has announced auctions of Contracts for Difference of up to £730m this parliament, which will support up to 4GW of offshore wind and other renewables.

The first auction will allocate £290m. Support for offshore wind will initially be capped at £105 per megawatt hour (MWh), which will fall to £85 per MWh by 2026.

The budget also pushes forward with plans to advance small modular nuclear reactors, by launching the first stage of a competition to identify the best value examples in the UK. It has said that it will allocate at least £30m for a research and development programme to develop nuclear skills capacity.

§ Levy Control Framework

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Glossary

Levy Control Framework: A nominal cap on the support for low-carbon energy which is paid via electricity bills. The cap has been set at £7.6bn in 2020/21. Subsidies may be allowed to temporarily exceed the cap by up to 20% as a result of external factors, such as wholesale energy price fluctuations. Above this headroom, the Department for Energy and Climate Change (DECC) must agree plans to control spending with the Treasury.

There was no update on whether the Levy Control Framework (LCF) cap on low carbon energy spending will be extended beyond its current lifespan of 2020/21 — although the budget does promise to announce further details in autumn on how it will control consumer bills.

However, the government’s support for offshore wind out to 2026 hints that the LCF could be extended. The Guardian’s Damian Carrington reports that the Treasury has said that this is “completely new money”.

#Budget2016 @hmtreasury tell me the £730m for renewable #energy support is “completely new money” to be spent from 2021-22 and beyond
— Damian Carrington (@dpcarrington) March 16, 2016

The LCF has been a source of controversy recently, as the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, had forecast that the money spent on renewables would exceed the cap. According to Richard Howard, head of environment and energy at Policy Exchange, its latest forecasts now show that spending on renewables subsidies has been brought back to within this cap.

Latest @OBR_UK forecasts show @DECCgovuk has brought renewable subsidy spend within LCF cap (inc headroom) pic.twitter.com/KwkdYztJUU
— Richard Howard (@RichardHowardPX) March 16, 2016

OBR downgrades its enviro levies forecast for 2020/21 by £0.9bn! Worth reading in full… https://t.co/TWyV8mhpgK pic.twitter.com/iAB6IZjMzH
— Leo Hickman (@LeoHickman) March 16, 2016

For more information about the prevailing question marks hanging over the LCF, please read Carbon Brief’s recent article.

There was also silence on another topic that was rumoured to be appearing in the budget — an increase in VAT rates on domestic solar systems. This has caused a sigh of relief in the solar industry, for the moment at least.

§ Fuel duty

Despite the plunge in the price of oil over the past 20 months, the chancellor has frozen fuel duty for the sixth year in a row. According to the budget document, this means the typical motorist is now spending £450 less on motor fuel now than they did in 2011, when the freeze began.

§ Oil and gas

The budget contains an ample package of support for the oil and gas industry, which has faltered under the plunging oil price over the past 20 months.

Among the most significant announcements are the halving of the “supplementary charge”, a top-up tax on the North Sea industry, from 20% to 10%, backdated to 1 January 2016.

It has also announced £20m in funding for a second round of seismic surveys in 2016-17, in order to encourage exploration for new sources of oil in areas that have been neglected so far.

The budget also effectively abolishes the 35% tax collected from the profits of oil and gas production in the UK and on the UK continental shelf, by reducing the rate to 0%. This is also backdated to 1 January 2016.

§ Flood defences

In his speech to Parliament, Osborne fell short of mentioning climate change specifically, but he did reference “increasing extreme weather events” in the UK.

With this in mind, the budget allocates an additional £700m to flood defences, spread out broadly evenly to 2020-21. The government has said it will increase maintenance expenditure in England by £40m, and invest over £150m in Leeds, York, Calder Valley, Carlisle and wider Cumbria.

These changes will be funded by an increase in the standard rate of Insurance Premium Tax by 0.5 percentage points, the budget says.

§ Context

The chancellor will have been subjected to competing forces while writing his budget.

On one hand, the OBR has downgraded its forecasts for UK economic growth to 2.2% in 2016, compared to a projection of 2.4% made last November.

On the other hand, international momentum on tackling climate change has received a boost, thanks to the UN deal agreed in Paris at the end of 2015.

Through this, the UK acquiesced to play its part in hitting a number of global targets, including reducing emissions to net zero in the second half of the century.

However, MPs have criticised the government for going backwards on their climate and energy policies, causing investor confidence to drop.

Prior to the Paris conference, the government unveiled a series of policy initiatives that appeared to contradict its verbal commitments to tackling climate change — and, indeed, its legal commitments, as enshrined in the Climate Change Act.

The act sets out a series of carbon reduction targets, covering successive five year periods. The government is currently in the process of setting its fifth carbon budget for the period 2028 to 2032.

The Committee on Climate Change suggests it should cut emissions by 61% below 1990 levels — and has warned that current policies do not put the UK on track to achieve the targets under the fourth carbon budget.

Meanwhile, real world events continue to frame the UK’s domestic position on climate change. Today, the International Energy Agency reported global emissions had stalled for the second year in a row, the Financial Times said.

§ Legislating for Paris

The UK’s budget comes on the tail of another significant government announcement on climate change.

Speaking in Parliament on Monday, energy minister Andrea Leadsom said that the government was committed to enshrining the net zero emissions goal agreed in Paris last year into UK law. She told MPs:

“The government believes that we will need to take the step of enshrining the Paris goal for net zero emissions in UK law. The question is not whether but how we do it. There is an important set of questions to be answered before we do. The Committee on Climate Change is looking at the implications of the commitments in Paris and has said it will report in the Autumn. We will want to consider carefully the recommendations of the Committee.”

The UK already has a target to reduce its emissions by 80% by 2050. But the Paris agreement goes further than this, aiming to reduce emissions to net zero in the second half of the century.

Former Labour leader Ed Miliband has been campaigning to get this target incorporated into UK law.

The Committee on Climate Change is currently working on further assessing the implications of the Paris agreement for UK climate policy, in particular for emissions targets beyond 2050 and on plans for meeting carbon budgets, which are currently being developed.

Its recommendations will be informed by new evidence including a hoped-for report from the Intergovernmental Panel on Climate Change on the possibility of keeping temperature rise below 1.5C.

§ Net-zero reaction

Carbon Brief gathered some reaction to the announcement.

Nick Molho, executive director at the Aldersgate Group, an alliance of businesses supporting climate action, said:

“It’s a positive commitment that will help contribute to the positive momentum coming out of the Paris climate change deal and remind policy makers in the future that the 80% emission cuts that the UK needs to deliver by 2050 are not an end-goal, but an important step towards greater cuts beyond then. However, for such a long-term goal to mean something, the government also has to crack on with the immediate job of developing a strategy to meet the fourth and fifth carbon budgets out to 2032.

“This will require making a big push on improving the energy efficiency of the UK’s building stock, providing sufficient clarity through the levy control framework to deploy offshore wind technology at scale and accelerate its reduction in cost, remove barriers to the development of more mature forms of renewables such as onshore wind and solar and have a strategy to support the demonstration of CCS in the UK. Having a set of policies to support investment in all these infrastructure areas is critical to our ability to meet our emission reduction targets on time, on budget and in a way that can deliver further supply chain benefits in the UK’s low-carbon sector.”

Emma Pinchbeck, head of climate and energy at WWF-UK, said:

“The announcement by Andrea Leadsom that the government would look to legislate a zero carbon target is a recognition that the UK can be at the forefront of a brave new low-carbon world.

“We look forward to this promise being followed up with ambitious action – there is a great opportunity for further climate change leadership on the horizon as the Government must put in place the fifth carbon budget, including our targets for 2030, by June of this year. We will be campaigning to ensure this is consistent with this week’s forward-looking commitment to a zero carbon future.”

Alastair Harper, head of politics at Green Alliance, a climate and energy think-tank, said:

“The government has signalled it remain serious about the low carbon destination for this country. It’s great they’re clear on where they want to get to, but they need to start walking today. That means a strong Levy Control Framework that reassures investors and leads to an ambitious plan in the autumn on how we’ll make a low carbon transport and building infrastructure that is fit for the future.”

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