Autumn Budget 2017: Key climate and energy announcements
Philip Hammond, the UK’s chancellor, has delivered his second budget this year in a speech to parliament high on post-Brexit optimism and green rhetoric.
Hammond said the UK “led the world on climate change agreements” and promised new money to support a shift to electric vehicles. He also said: “We cannot keep our promise to the next generation to build an economy fit for the future, unless we ensure our planet has a future.”
He touted the promise of a “Global Britain” and the legacy it would leave to its children – though this section did not mention climate change.
For energy and climate, however, the substance within the budget documents is more ambiguous. It quietly announces an effective moratorium on new support for low-carbon electricity. It promises to maintain a UK carbon price at current levels, until coal is phased out, but without explaining the details.
It freezes fuel duty yet again, adding to a cumulative cost to the exchequer of £46bn since 2010. And it offers further beneficial tax changes to the North Sea oil and gas sector.
The budget does not flesh out several crucial aspects of the UK’s Clean Growth Strategy on how to meet legally binding carbon budgets, including efforts to decarbonise heat and improve energy efficiency – even though the main home efficiency scheme was recently extended.
It also does not mention plans to develop a UK shale gas industry, long a favourite subject for previous chancellor George Osborne.
§ Low-carbon subsidy moratorium
Today’s budget leaves many questions hanging over the future of low-carbon subsidies, raising doubts over the UK’s ability to meet its legally binding carbon targets up to the early 2030s. The government has already admitted it is falling short of these goals and the Committee on Climate Change has said more subsidies will be needed to meet them.
Contracts for Difference: The new subsidy scheme to support investments in low-carbon electricity generation. Schemes are paid a fixed “strike price” for each unit of electricity they produce, giving investors the promise of steady returns. If wholesale electricity prices are below the strike price, contracted schemes receive the difference as a top-up payment. If prices rise above the strike price, they must pay back the difference.
The budget document says “there will be no new low carbon electricity levies until 2025”, beyond the money already committed.
This existing money includes up to £557m already set aside to support technologies – mainly offshore wind – through Contracts for Difference (CfDs) in the early 2020s. It also includes the cost of the Hinkley C new nuclear plant, due to come online after 2025 with support of around £1bn per year.
This means decisions over additional new nuclear schemes beyond Hinkley C, the Swansea Bay tidal lagoon and onshore wind or solar projects will all be on hold unless they can find a way to proceed without government support. (A small number of solar farms are already being built without subsidy).
Government has published detailed forecast of renewable capacity by type (I think for the first time at this level of detail) https://t.co/E8ypj3hlvE. Tidal Lagoon is conspicuous omission. Assumes no new subsidised onshore wind or solar PV beyond Pot1 CfDs already committed. pic.twitter.com/tnlq7m13wp
— Richard Howard (@UKenergywonk) November 22, 2017
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.
A separate seven-page document, on a replacement for the Levy Control Framework subsidy cap, says new levies will be considered once the total cost of support is falling.
It includes an updated forecast of levy spending, which shows the total starting to fall slightly by 2024-25, from £8.7 to £8.6bn (see chart, below). On this basis, the document says there would be no new levies before 2025.
Forecast spending on low-carbon electricity subsidies in 2011-12 prices. Source: Department for Business, Energy and Industrial Strategy.
Note, however, that this forecast excludes the up-to-£557m already committed and not yet allocated, which would raise spending. It is also based on current forecasts for the wholesale electricity price, of which an uncertain future carbon price is a part (see below).
Another twist is that the Treasury document says new levies could be considered if they would help to cut bills. This appears to leave the door open to so-called “subsidy-free” CfDs, where the price for low-carbon electricity is below the wholesale market price.
This looks very much like a green light for 'subsidy free' CfDs:
"New levies may still be considered where they have a net reduction effect on bills"https://t.co/O4FtE0J2gg pic.twitter.com/JeefQolo8U
— Simon Evans (@DrSimEvans) November 22, 2017
Analysts have already said that onshore wind or solar could be built for less than the expected future wholesale electricity price, meaning they would cut bills. As yet, however, there is no explicit indication that the government would consider supporting subsidy-free schemes.
It is not clear if the government could hold auctions for CfD projects that would start operating after 2025, even as its moratorium on new levies remains in place.
§ Carbon price uncertainty
The future of UK carbon pricing is discussed in a cryptic portion of the budget document. This says that the government will target a “total carbon price” at a similar level to today’s, until unabated coal is off the electricity system. The government has already set a 2025 deadline for a coal phaseout.
Resounding lack of detail on future carbon pricing in Treasury #Budget2017 document.
"Confident total carbon price…at right level…Will continue to target a similar total carbon price until unabated coal is no longer used"https://t.co/et022mtc7c pic.twitter.com/5sQ4J6hwMm
— Simon Evans (@DrSimEvans) November 22, 2017
The carbon price currently stands at roughly £24 per tonne of CO2, made up of £18/tCO2 from the UK’s carbon price floor and £6/tCO2 from the EU Emissions Trading System. The £18/tCO2 carbon price floor was extended by a year at Budget 2016, to April 2021.
Today’s budget fails to give any clarity or detail on how the government will hold this total carbon price steady. It does not explicitly extend the price floor to 2025 – though some commentators seem to assume that it does – nor does it commit to adjusting it if the EU ETS price changes.
It also omits to mention the future of carbon pricing after the coal phaseout is completed. The UK’s planned exit from the European Union – and potentially also the EU ETS – further complicates this picture.
If the total UK carbon price does remain fixed at current levels, there could be a resurgence of coal generation in the early 2020s, according to Aurora Energy Research.
#budget2017 document suggests that Total UK carbon price (CPS+ EUETS) will stay at its current level until coal phased out (eg 2025). On this basis, @AuroraER_Oxford analysis shows we could see resurgence in coal generation in the early 2020s: https://t.co/oofEG3HYOM pic.twitter.com/ZsLDFgO5MU
— Richard Howard (@UKenergywonk) November 22, 2017
§ North Sea support
In a move trailed in the Spring budget, companies buying up “late-life” North Sea oil and gas assets will inherit decommissioning tax relief on deals completed from November 2018 onwards. This means they will be able to claim back tax paid by the previous owner. Draft legislation will be published in spring 2018.
This is the latest beneficial tax change designed to help “maximise economic recovery” of remaining North Sea reserves. In his speech today, Hammond touted the “innovative tax policies” that would help tap “a basin that still contains 20bn barrels of oil”.
However, in April, Carbon Brief analysis revealed that the North Sea became a net drain on the public finances for the first time in 2016, costing the exchequer £396m. The size of this drain grew in the 2016-17 financial year, compared to the previous period, according to figures published by HM Revenue and Customs in June.
Here's a reminder of the plunging tax take for HMRC from North Sea oil & gas production. Look how it actually went negative over past two years #Budget2018 https://t.co/JIDGRlKhXC pic.twitter.com/VZPdI6ervF
— Leo Hickman (@LeoHickman) November 22, 2017
The cost of major decommissioning work is ramping up. However, the Office for Budget Responsibility (OBR), the Treasury’s official watchdog, has today published updated forecasts (table 2.8; “supplementary fiscal tables: receipts and other”) showing that it expects North Sea revenues to return to being a net gain for the Treasury during this current tax year (2017-18).
Oil prices have risen recently and this change from the OBR is due largely to its forecasted increase in offshore corporation tax being paid by the 200-odd companies operating in the North Sea. It does not see a return of income from the petroleum revenue tax, which it thinks will stay negative until at least 2022-23.
Overall, though, the OBR forecasts that the Treasury will receive £0.7bn in 2017/18, down from £0.9bn for the same period it forecast at the Spring budget in March. Looking further out, it forecasts receipts of £0.5bn in 2021-22, which, again, is a significant fall from March when it forecast £0.9bn for the same period.
§ Transport revolution?
The budget includes a freeze in fuel duty for the eighth year in a row.
Successive freezes since 2010 now cost the Treasury more than £6bn per year in foregone revenue, according to the Institute for Fiscal Studies. This figure is compared to revenue if planned increases had gone ahead as planned, as the chart below shows.
Repeated fuel duty freezes since 2010 are already costing the Treasury £5.4bn, according to the IFS #Budget2017https://t.co/IlyZSFHqad pic.twitter.com/Jblfi073NM
— Simon Evans (@DrSimEvans) November 22, 2017
Announcing the latest freeze today, Hammond said they were now saving the average driver £850 per year, at a cumulative cost to the exchequer of £46bn since 2010.
In the longer term, fuel duty revenues will be hit by the rise of electric vehicles. Analysis by Policy Exchange, a centre-right thinktank, published over the summer suggests revenue could be £9-23bn lower than expected in 2030. The OBR’s forecasts fail to take this loss of fuel duty into account, with future revenue expectations remaining unchanged over the past year, despite the increasingly optimistic outlook for electric vehicles.
Nevertheless, the government is keen to encourage the shift to electric vehicles. Hammond told parliament:
“There is perhaps no technology as symbolic of the revolution gathering pace around us as driverless vehicles…Our future vehicles will be driverless, but they’ll be electric first, and that’s a change that need to come as soon as possible for our planet.”
In order to support this shift, Hammond announced a new £400m “charging investment infrastructure fund”, which the budget document said would be made up of £200m in public money matched by private investment.
The government will also invest £40m in research and development for charging technologies, Hammond said. In addition, he set out an extra £100m investment to continue the plug-in car grant to 2020.
The budget document promised regulation to support the wider roll-out of charging infrastructure for electric vehicles (EVs), with the government electrifying 25% of its own car fleet by 2022.
Hammond also announced plans for “world-leading changes” to the regulatory framework for driverless cars, such as setting out how they can be tested without a human safety operator.
Facing pressure to tackle the health effects of air pollution, the government set out its air quality plan earlier this year, which is said would be funded through taxes on new diesel cars. The budget set out these taxes.
From April 2018, the first year of road tax for diesel cars that don’t meet the latest air quality standards will go up by one band, Hammond said. Charges will increase for diesel company cars also used for personal use as benefits-in-kind. Diesels currently have a 3% surcharge over petrol models with similar emissions and this will increase to 4%. Neither of these charges will apply to vans.
No mention was made in the budget of a diesel scrappage scheme, which some campaigners say is needed to help drivers who bought diesels in good faith switch to cleaner transport.