Budget 2018: Key climate and energy announcements

§ Carbon pricing

The budget maintains the UK’s top-up carbon tax at £18 per tonne of CO2 until April 2021, scotching fears Hammond might move to reduce it. This Carbon Price Support (CPS) applies to the power sector in Great Britain (excluding Northern Ireland) and has been a key factor in driving coal off the UK grid.

However, the red book says the government will seek to reduce the CPS “from 2021-22 if the total carbon price remains high”. It does not say what would count as “high”. Government estimates suggest a high and rising carbon price is needed to limit warming to 2C, reaching close to £80/tCO2 by 2030.

A seven-page technical note published alongside the budget also fleshes out plans to replace the EU’s Emissions Trading System (EU ETS) with a UK carbon tax, in the event of a no-deal Brexit in March next year. It would start at £16/tCO2 – roughly the same as the current EU ETS price – effectively maintaining the level of carbon pricing across the UK economy at similar levels.

The tax would apply to the industrial installations and power plants currently covered by the EU ETS, but not to mobile sources, such as aviation. For the power sector, it would apply in addition to the CPS, which would continue. (The technical note says: “In a ‘no deal’ exit from the EU the CPS would remain in place.”)

The details of the scheme would have to be ironed out after the tax had started – possibly not until 2020 – following consultation during 2019.

Even if the UK secures a deal on exiting the EU and agrees a future relationship with the bloc, its future participation in the EU ETS remains unclear. Ministers have said they want the UK to remain “highly aligned” with the scheme, even if the UK can no longer be a full member.

The technical note says:

“If the UK secures an implementation period [that would apply from March 2019], it would remain a member of the EU Emissions Trading System (EU ETS) during the implementation period. The government is continuing to develop options for long term carbon pricing, including remaining in the EU ETS; establishing a UK ETS (linked to the EU ETS or standalone) or a carbon tax.”

The Office for Budget Responsibility (OBR), which officially provides “independent and authoritative analysis of the UK’s public finances”, has significantly increased its forecasts (pdf) since March for EU ETS receipts – “by £0.8bn a year on average from 2019-20”. It says this is “largely due to the recent rise in expected carbon prices”.

OBR has more than doubled its EU ETS receipts forecast for 2019-20…

“we have not assumed any change to the UK’s membership of the EU ETS”#Budget2018https://t.co/HGsc4QyWoC pic.twitter.com/NllmlzEc8x

— Leo Hickman (@LeoHickman) October 29, 2018

Hammond’s decision to maintain the UK’s top-up CPS at £18/tCO2 follows last year’s budget, which had cryptically said the government viewed the then-current – and much lower – total carbon price as being at “the right level”. This total carbon price is currently made up of the CPS and prices on the EU ETS, which as the OBR notes, have increase significantly over the past year.

Last year’s budget had said that it would aim to maintain the total price at a similar level – though it never explained how – until unabated coal was off the system. Now, the government is effectively pledging to maintain a much higher rate until at least 2021.

At the time of last year’s budget, the total price was around £24 per tonne of CO2, made up of £18/tCO2 from the CPS plus around £6/tCO2 from the EU ETS. Following recently agreed reforms to the scheme, the EU ETS price now stands at around £18/tCO2 – meaning the total is £36/tCO2.

Before this week’s budget, separate coalitions of energy firms and green groups had written to the chancellor urging him to maintain the current CPS. The letters warned that market conditions already favoured greater use of coal power – up a quarter year-on-year in September – and that a reduction in the £18/tCO2 levy would have risked increasing UK CO2 emissions still further.

“Maintaining a higher carbon price is critical to decarbonising the UK’s electricity sector,” wrote Will Gardiner, chief executive of Drax – formerly Europe’s largest coal plant – in a piece published on Monday in City AM. He pointed to Aurora Energy Research analysis, which found a cut to the CPS would see coal stay on the system for longer and risk the UK’s legally binding carbon budgets.

Similar analysis from the NGO Sandbag had suggested a return to the £24/tCO2 total carbon price seen at the time of last year’s budget could have meant coal burn increasing by a third this winter and nearly tripling in winter 2021, compared to maintaining the CPS at its current level.

The OBR says that receipts from the CPS are “little changed, with the rise in electricity generation from renewables and natural gas at the expense of coal continuing to reduce the tax base”.

Note that budget 2016 had already announced the CPS would be frozen at £18/tCO2 until 2020-21. It had originally been due to increase each year after its introduction in 2013, reaching £30/tCO2 by 2020. The detailed budget documents show the continuing freeze at £18/tCO2 will cost the Treasury £15m in 2020-21. This is because the CPS had been due to rise with inflation.

§ Fuel duty freeze

Hammond’s budget also confirms another freeze in fuel duty, with planned increases having been scrapped in each of the nine years since 2010-11. The OBR describes the latest one-year freeze as “traditional”, listing it among this year’s budget “giveaways”.

In a piece for the Sun on Sunday, Hammond says it will “sav[e] people around £800m this year alone”. It was first announced by prime minister Theresa May at last month’s Conservative Party conference.

The freeze means another cut in real terms, notes Paul Johnson, director of the Institute for Fiscal Studies thinktank, with the annual cost to the treasury now £9bn.

Fuel duty will be frozen for the ninth year in a row, the Prime Minister will announce today.

We’ve found that keeping fuel duty essentially unchanged since 2010-11 now costs the Treasury around £9bn per year. pic.twitter.com/dGVvkPZkCH

— IFS (@TheIFS) October 3, 2018

This financial year, the government is expected to collect £28bn in fuel duty, according to motoring publication Autocar. This means the freezes will have cut fuel duty revenue by a quarter, compared to the level they would have reached. In the longer term, this income will be undermined by the rise of electric vehicles, prompting government interest in road-pricing schemes, Autocar reports.

Fuel duty freezes since 2010 have increased road traffic by 4%, decreased public transport use and added 4.5m tonnes to annual UK CO2 emissions (roughly 4%), according to analysis published in June by campaign group Greener Journeys.

Indeed, transport emissions have been rising in recent years and are essentially unchanged since 1990, meaning the sector is now the largest contributor to UK CO2 output.

The OBR says fuel duty receipts will reach £32bn by 2023-24. However, this is premised on a resumption of the planned year-on-year increases that have been cancelled every year since 2010. Its forecast also includes a dampening on demand due to rising oil prices.

§ Road spending

Meanwhile, Hammond announced £30bn of new investment in UK transport, largely centred on increased road spending.

Of this, £28.8bn will go into a new “National Roads Fund” which ring-fences Vehicle Excise Duty (VED) raised in England for spending on roads, Hammond wrote in the Sun on Sunday. The programme is set to run over five years from 2020 to 2025 and marks a 40% increase on the previous five-year investment cycle’s £17.6bn, according to Autocar.

The red book says:

“The fund will provide long-term certainty for roads investment, including the new major roads network and large local major roads schemes, such as the North Devon link road.”

Another £420m will go to local councils in 2018-19 for fixing potholes and repairing damaged roads, as well as keeping bridges open. A further £150m will be used to improve local junctions, Hammond wrote, allowing better access to workplaces, high streets and other community facilities.

Hammond added in his Sun on Sunday article that he is “committed to honouring [the] legacy” of Margaret Thatcher’s involvement with the building of the M25. “The funding will help make journeys quicker and easier, while boosting productivity and improving access,” he wrote.

Labour shadow transport secretary Andy McDonald criticised the move, arguing that increasing spending on major roads is the “wrong decision” when public transport is in decline. He added:

“It simply isn’t sustainable to repeatedly ramp-up major road spending, especially at a time when air pollution causes 40,000 premature deaths each year and climate change is threatening a global crisis.”

Meanwhile, the Transforming Cities Fund, which allocates funding to cities for new buses, trams and cycling routes, will be extended by £680m, the Independent reports.

Hammond wrote he will also “look to the future by investing in next-generation methods of transport”, potentially including self-driving shuttle services. This will include the creation of new “future mobility zones”, such as in the West Midlands, the red book says.

The new systems could potentially also include electric bikes and extending digital payments to cover more methods of travel across more cities. Hammond added in the Sun on Sunday:

“Not only could this revolutionise our transport network, it will also help us become a global leader developing future technologies.”

Earlier this month, the government ended grants for plug-in hybrid electric cars, which previously sat at £2,500. It also reduced the maximum grant for cars with a zero-emission range of over 70 miles from £4,500 to £3,500. The budget did not contain new measures to support EVs.

§ Tree planting

The budget sets out a new £60m of investment in tree planting in England, separated into two pots.

Up to £50m will be used to buy carbon credits from landowners who plant “qualifying woodland”, the Treasury says, providing for an estimated 10m new trees over the next 30 years.

The remaining £10m will be used for new street and urban trees, with local authorities and community groups expected to match funding contributions.

In its 25 Year Environment Plan, released in January 2018, the government promised it would both increase tree planting and better protect existing trees and forests. It has committed to planting 11m trees in England during this parliament. (Environment is a devolved matter).

Around 1.6m trees were planted between April 2017 and April 2018 through government support, largely via the Rural Development Programme for England. The Forestry Commission has said this, along with current plans and agreements, “gives confidence” the end-of-parliament target will be met. An earlier promise set out in the 2015 Conservative manifesto to plant 11m trees by 2020 is expected to be missed.

Environmental campaigners criticised the disparity between spending £60m on tree planting and £30bn – 500 times more – on roads. “Tree planting is important, but no substitute for tackling road emissions,” said Dustin Benton, policy director of environmental think tank Green Alliance.

§ North Sea

Hammond said rates for the oil and gas industries will stay at their current level. On this, the red book says:

“This will help the oil and gas industry continue its recovery from the 2014 oil price crash, protect jobs, and ensure the UK is attractive for new investment, whilst giving the nation a fair return for its natural resources.”

The chancellor also announced a call for evidence to help make Scotland a “global hub for decommissioning” oil rigs. The red book adds: “The government will also amend the Petroleum Revenue Tax rules on retained decommissioning costs to simplify the way older fields can be sold to new investors. This will provide further support for an industry that is a vital part of the economies of Scotland and the rest of the UK.”

Meanwhile, the OBR forecasts that revenues from oil and gas production in the UK will more than double from £1.2bn this year to £2.9bn in 2023-24.

Buried in #budget2018 UK govt sees revenues from oil and industry doubling between now and 2023/24, albeit low historically-speaking. What impact do growth of electric vehicles pose for the taxman? https://t.co/ISYqeBlPGk pic.twitter.com/oYBdPZHeT8

— Alex Pashley (@A_Pashley) October 29, 2018

This reflects the sudden change in fortunes for the North Sea sector, following the global rise in oil prices. In 2016 and 2017, the sector was actually a net drain on the exchequer, but this has now changed, according to HMRC.

HMRC published this chart back in June, but it’s worth looking at again on #Budget2018 day to see the rollercoaster that govt revenues from UK oil & gas production have been on historically – and continue to be on…https://t.co/3EJzll508P pic.twitter.com/SL4G9fw7wL

— Leo Hickman (@LeoHickman) October 29, 2018

However, the forecasted cost of decommissioning old North Sea rigs continues to rise, according to the OBR (spreadsheet, tab 2.14), which will, in turn, dampen otherwise rising tax receipts. In March, it said that decommissioning would likely total £1.9bn a year by 2022. Just six month on, it has revised this up to £2.2bn. Likewise, it now says that the sector’s capital expenditure (capex) will be £4.3bn by 2022 (up from its March forecast of £3.6bn).

§ Climate Change Levy

The Climate Change Levy will be cut for electricity during 2020-21 and 2021-22, with the lower rate for gas rising in the same period to reach 60% of the electricity rate. The budget documents do not list the new rates, however, the budget costings suggest the move will be revenue neutral.

The levy is a tax on business energy use and is currently charged at different rates, depending on whether the fuel is gas, coal or electricity. This year, for example, electricity use attracts an 8.5p per kilowatt hour (kWh) charge, whereas gas is subject to a rate of 3.4p/kWh.

The latest change was trailed in a 15 October Sun “exclusive”, which said – it now appears incorrectly – that the move would raise “up to half a billion” for the Treasury by equalising the rate of the levy between gas and electricity. According to the Sun article, the Treasury said in 2016 that it would equalise the rates by 2025.

Energy-intensive industrial firms can get a rebate of up to 90% of the cost if they enter into a “Climate Change Agreement” setting out investments to reduce energy use and CO2 emissions.

The levy had been increased in 2019-20 by an announcement at Budget 2016.

Regarding the Climate Change Levy, the OBR says: “Receipts in the near term are little changed since March, but they are boosted in 2023-24 when the current [Climate Change Agreement rebate] scheme comes to an end.”

§ Other announcements

There were some other climate- and energy-related announcements in the budget:

• £20m in support for UK nuclear fusion. Commentators noted that the UK is set to be cut off from world’s biggest fusion project in event of a no-deal Brexit.
• A “call for evidence” on a new business energy efficiency scheme focused on smaller businesses designed to reduce bills and emissions.
• A £315m Industrial Energy Transformation Fund “to support significant energy users to cut their energy bills and transition UK industry to a low carbon future”. This will be funded by ending “Enhanced Capital Allowances”, a scheme that allows energy efficiency investments to be set against taxable profits.
• A freeze in Air Passenger Duty for short-haul flights, with long-haul rates rising with inflation. This is despite a push from some quarters, particularly in Northern Ireland, to abolish the levy. Hammond made no mention of this in his speech.
• A new study on improving the resilience of UK infrastructure “in light of technological advances and future challenges such as climate change”, to be published in Spring 2020.
• £13m to tackle risks from floods and climate change. The red book says this will go to “pilot projects to ensure property owners have the best information on protecting their homes, and expanding the flood warning system to an additional 62,000 at-risk properties”.
• A study into a new “Great Thames Park” in the Thames Estuary, which the government says should “improve access to and use of the Thames for pedestrians and cyclists”.