In our member surveys, the following themes are repeatedly mentioned as concerns:

Transcription

1 The Rt Hon George Osborne MP Chancellor of the Exchequer HM Treasury 1 Horse Guards Road London SW1A 2HQ 22 November 2013 Growth and Britain's Number One Manufacturing Exporter From the Chief Executive Direct phone: Direct fax: ElliottS@cia.org.uk Dear George Ahead of your Autumn Statement to Parliament I am writing to set out the priorities of the members of the Chemical Industries Association (CIA) which we have been discussing across Government. Chemical and pharmaceutical businesses are optimistic in terms of sales and investment. However, while ongoing reductions to corporation tax are welcome, margins are not expected to improve. It is no coincidence that, when asked about the UK business environment, respondents continue to cite strong concerns about energy costs followed by the regulatory climate. In our member surveys, the following themes are repeatedly mentioned as concerns: Energy costs Security of energy supply Employers additional social costs (on top of wages) Regulatory climate Logistics (including for exports) Attitude of regulators Planning regimes Strength of the local market Government in the UK and the European Union needs to look carefully at the design of industrial policy to ensure the concerns of business leaders who are making investment decisions are considered. Without urgent action on energy costs and the regulatory framework including a completely ill judged Industrial Emissions Directive which provides zero improvement to the environment, I fear the general optimistic outlook of our members will fade.

2 There were three positive factors workforce skills, support services (such as distribution, engineering support, financial etc) and taxation for which your Government should take credit. We believe addressing the concerns raised by our members will contribute to establishing a thriving manufacturing sector in the UK. Background Chemical and pharmaceutical businesses in the UK represented by the Association contribute 80 million of Added Value every single working day 20 billion a year to our country s Gross Domestic Product. Our trade balance is a positive 25 million every day, whilst the rest of manufacturing has a daily deficit of around 300 million. We are the nation s number one manufacturing exporter. CIA has worked with Government and a range of stakeholders to complete a UK chemicals growth strategy for This initiative will be implemented through a Chemistry Growth Partnership to be jointly chaired by Michael Fallon and Johnson Matthey Chief Executive Neil Carson. The growth will be based on the three critical themes of energy, innovation and strengthening of supply chains. We very much welcome the Government s engagement on this long term work but there remain a number of key immediate constraints on business competitiveness and growth that need addressing in the short term to enable longer term prosperity. These are: Key proposals 1. Secure and competitive energy and feedstocks Secure and competitive energy is a prerequisite for growth in the energy intensive and trade exposed chemical sector. We therefore welcome the progress that Government is making to: Implement the Energy Intensive Industry (EII) Package including the rebates aimed at partially relieving the growing cumulative impact of climate policies on EIIs electricity costs; Progress the Electricity Market Reforms (EMR) and gas generation strategy to ensure that future power supplies are secure; Supporting the safe development of UK sources of unconventional gas, including shale gas, as this could be a key contributor to secure supplies of feedstock (raw materials) as well as energy. This includes the UK s opposition to an unnecessary EU fracking framework (through the EU Red Tape Task Force). However, the impact of climate policies on EIIs electricity costs is projected to rise to 70% by 2020 and the measures so far only partially address competitiveness concerns. We therefore call on the Government to broaden and deepen planned rebate measures to ensure that UK chemical businesses can compete with production locations in Germany, where the level of rebates for climate policy costs is higher, and further close the gap with operators in the US who, due to shale gas, enjoy gas prices which are a third of those in the UK. In particular:

3 Provide long term certainty about Carbon Price Floor compensation to EIIs and broaden its scope We ask for greater certainty that compensation payments to EIIs for Carbon Price Floor s (CPF s) impact on power prices will continue into the 2020s. Currently the budget has been confirmed until 2015/2016 but our members need greater certainty to plan their businesses. Future budgets should also be increased to enable a broader range of exposed businesses to qualify for compensation from Carbon Price Support, the UK only element of CPF, whose cost is not faced by European competitors. Set a broad scope and maximum exemption from Contracts for Difference for EIIs qualification for this exemption should be assessed against the full cost of cumulative climate policy impacts. A consultation was conducted this summer with a decision due before the yearend. Extend the EII package to the Renewable Obligation (RO) and small scale Feed in Tariff the Government should use the expected changes in the revised guidelines for state aid for energy and environmental protection to exempt EIIs from the Renewables Obligation (RO) and small scale Feed in Tariff (FiT) costs. Currently these subsides add 11/MWh to wholesale electricity prices. We also ask that the following amendments be made to the application and setting of Carbon Price Support rates. Combined heat and power (CHP) exemption from Carbon Price Support on fuel inputs to electricity generated by CHP. As of 1 April 2013 the Treasury removed the Levy Exemption Certificate incentive for good quality CHP and introduced CPS on fuel inputs to electricity generated by CHP. This meant that the very companies that had invested in this energy efficient technology to improve their competitiveness were then faced with an increase in costs from what was effectively a double tax hike. We ask the Government to apply a full exemption from CPS on fuel inputs to electricity from CHP to both reduce industry costs and meet environmental goals. Review Carbon Price Support Rates the practice of setting Carbon Price Support rates three years ahead according to the forward price of EU Emissions Allowances risks producing an overshoot of the target for the Carbon Price Floor and adding to EIIs costs unnecessarily. This will be heightened if interventions by the EU Commission such as backloading to increase the price of EU allowances are pursued. We ask that, if these circumstances arise, the level of Carbon Price Support should be reviewed to eliminate overshoots of the Carbon price Floor target from political intervention. 2. Hold down other taxes We welcome signs of recovering business confidence and economic output leading to increased Government tax receipts. These cyclical factors are helping to reduce the annual budget deficit, but the structural deficit will only be closed by reducing spending or increasing tax rates. To increase taxes now would risk imposing an enormous drag on the UK s economic vitality. So it is vital that the UK maintains its stringent controls on spending and continues to work to strengthen growth in manufacturing in the UK. In this regard we support calls for Government to cap the business rates increase at the inflation target of 2%, until the next revaluation.

4 3. Innovation Recent R&D tax credits and Patent Box provisions have provided a welcome support to innovation by UK chemical companies. However, in the next financial year it will also be important to ensure that Government budgets for science and research, including the Technology Strategy Board, at least see increases with inflation. That will help to ensure that collaborative research and innovation through to commercialisation is maintained if not accelerated. 4. Regulation On the topic of regulation, CIA would like to offer some specific pointers to better regulation: A move away from the traditional one size fits all (permit inspect enforce) pattern to a risk based, proportionate approach underpinned by earned recognition for good performance. Understand how regulatory costs impact UK companies compared with those in mainland Europe and seek to level the playing field Operate the inspection regime so that businesses find working with regulatory authorities a positive experience which encourages them to reach for even higher standards Regulators should understand the business context and speed in which business decisions are made Regulators should be pragmatic, keeping in mind the spirit and objectives of the regulation Guidance should be issued in a timely fashion after appropriate consultation Data collection should be co ordinated and rationalised; no data should be collected if it is not used Full transparency and proportionality on regulatory costs to business The need to secure export licences from three different Government Departments each operating in a different manner is effectively a tax on growth. This is also a good example of business needing one point of contact rather than different regimes being implemented across Whitehall. Last year you committed to improve transparency on regulators fees and charges. All we have really had issued since then is a regulators code which makes passing comment. We want the plans announced last year to be implemented. The Government has made unprecedented progress on transparency across a range of issues but this is one area where significant further action should be taken. Environmental regulation, especially the Industrial Emissions Directive (IED), is a matter of concern. Whilst we recognise that IED is not a Treasury matter, it should be known that UK chemical businesses alone could potentially need to make investments of approaching 1 billion to satisfy a best techniques criteria which will have no meaningful benefit on the environment. The dangers of unchecked compliance requirements for IED is one reason why we have been enthusiastic supporters of the Prime Minister s Task Force on EU Red Tape this approach has to change and we look to the UK Government to play its part, alongside like minded EU governments to ensure that key manufacturing sectors such as chemicals are not regulated out of business.

5 I hope you and your officials find these proposals of interest and value and we would be very happy to discuss them further if it would be of help. In the meantime, may I wish you good luck with your Statement as we all seek to emerge from these very challenging times. Yours sincerely Steve Elliott Chief Executive cc: The Rt Hon Dr Vince Cable MP, Secretary of State, Business, Innovation and Skills The Rt Hon Ed Davey MP, Secretary of State, Energy and Climate Change The Rt Hon Owen Paterson MP, Secretary of State, Department for Environment, Food and Rural Affairs The Rt Hon Danny Alexander MP, Chief Secretary to The Treasury The Rt Hon Iain Duncan Smith MP, Secretary of State, Work and Pensions The Rt Hon Oliver Letwin MP, Minister of State, Cabinet Office The Rt Hon Michael Fallon MP, Business and Energy Minister Ian Swales MP, Chair Chemical Industry All Party Parliamentary Group