Blow for struggling factories as Starmer ties Britain to EU carbon tax

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20-05-2025

Factories face higher taxes under Sir Keir Starmer's EU 'reset' deal amid warnings that heavy industry is already being crushed by sky-high energy costs.
The Prime Minister has agreed to work with Brussels to link the UK and EU markets for so-called carbon credits, a form of taxation where industrial businesses are charged for any CO2 emissions over an allowed limit.
The agreement commits the UK to imposing caps that are 'at least as ambitious' as those put in place by Brussels and paying towards the administrative costs of running the European scheme.
On Monday, the Government argued that the concession had won British companies protection from a separate so-called carbon border tax that the EU is set to impose on goods imported from outside the bloc, meaning they would pay less overall.
It was welcomed by industry body UK Steel, which said factories would otherwise have faced 'trade frictions' when exporting to continental Europe.
But critics warned the agreement could ultimately lead to higher taxes for factories, given that the EU's carbon prices are higher than the UK's. This may be particularly painful for businesses that do not primarily export to Europe.
Carbon credit prices, which are traded on the market, rose 6pc in Britain following Sir Keir's announcement, reflecting the expectation that the deal will bring them closer to the EU's level.
Andrew Bowie, the shadow energy secretary, warned: 'This agreement with the EU means we will no longer have any sovereignty over our own carbon prices at all.
'If the Government wanted to reduce the burden on industrial businesses in future by lowering our carbon price to a level below the EU's, for example, that will no longer be allowed – our hands will be tied.
'And the EU is going to be setting those prices based on what is best for the 27 member states, not what's best for Britain.
'We are seriously concerned that this is only going to increase the cost of energy for UK industry, which is the complete opposite of what ministers should be trying to do right now.'
However, a government spokesman said: 'This deal will save businesses millions and cut bills by avoiding businesses being hit by the EU's carbon tax due to come into force next year, which would have sent £800m directly to the EU's budget.
'Forty-four different business organisations, including the CBI, Make UK and UK Steel all backed our approach last month as crucial to preventing businesses relocating overseas and reducing costs for both UK and EU consumers.'
Meanwhile, separate figures revealed sky-high energy costs have forced Britain's steel-makers, paper mills, chemical factories and other heavy manufacturers to slash production by a third in just three years.
The output of energy-intensive industries fell by 33.6pc between the start of 2021 and the end of 2024, official figures showed. The manufacturing slump included huge drops in the production of metals and castings, glass, chemicals and paper products.
Output from heavy industry is now languishing at its lowest point since records began in 1990, the Office for National Statistics (ONS) added.
The slump was triggered by a surge in energy prices. Over the same period, the price of electricity soared 75pc and the price of gas more than doubled, prompted by the outbreak of the Ukraine war, as well as green energy levies.
The ONS blamed the steep costs faced by UK firms on the country's high dependence on gas. The average price that industrial firms paid for gas leapt from 2.5 pence to 5.5 pence per kilowatt hour (KWh) between the first quarter of 2021 and the end of 2024, it said.
Over the four-year period, the ONS said the average power price paid by industrial firms rose from 14.8 pence to 26 pence/KWh. It peaked at 28.4 pence/KWh in the final quarter of 2023, before coming down later.
These higher gas prices also led to higher power prices, as gas is used to generate around one-third of the UK's annual power requirements. The UK was more exposed to recent surges in gas prices than France and Germany, where there is a greater reliance on nuclear and coal-fired power.
Last year, it was revealed that British companies faced the highest industrial electricity prices of any developed country.
The ONS noted that other European countries offered more relief to industrial businesses from network costs and carbon taxes.
Since 2010, much of the 'policy costs' added to electricity and gas bills have been paid by businesses rather than domestic consumers, although in recent years energy-intensive businesses such as steel makers have been granted relief.
Sam Richards, chief executive of campaign group Britain Remade and a former Downing Street energy adviser, said the figures were an urgent 'wake-up call'.
He said: 'Sky-high energy costs have gutted Britain's industrial base, with output in sectors like steel and chemicals collapsing to record lows.
'If we're serious about protecting jobs and rebuilding our manufacturing strength, we need to cut industrial electricity costs and fast.'
Mr Richards called on ministers to boost British energy production, adding: 'That means unleashing a wave of investment in renewables and new nuclear, including small modular reactors, which offer a game-changing opportunity to power energy-intensive industries in Britain's industrial heartlands with clean, affordable electricity.'
Jonathan Reynolds, the Business Secretary, is next month expected to set out the Government's new industrial strategy, with ministers hinting that the package will include measures to lower the cost of energy.
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