11-08-2025
The hidden net zero tax crushing British industry
When Britain's last coal plant shut down in 2024, climate activists hailed it as a triumph for green energy.
'Just over a decade ago, coal made up nearly two fifths of UK electricity generation, but the rapid advance of renewables has made it obsolete,' declared Greenpeace.
But what really killed King Coal wasn't renewables – it was taxes.
In 2015, the Government doubled the carbon tax levied on fossil fuel power stations, effectively crippling the business model of coal-fired plants. This was in an attempt to slash emissions – and by that measure it has been hugely successful.
But now these same taxes are pushing up electricity prices for households and squeezing the life out of British industry, experts and businesses say.
Sir Jim Ratcliffe, the billionaire tycoon behind petrochemicals empire Ineos, has warned that carbon pricing is 'killing manufacturing' and increasing the UK's dependence on imports from countries with less stringent standards, such as China.
'The reason we get frustrated, and the reason that we criticise carbon costs, is because the Government can do something about this at the slash of a pen, if it wishes,' says Stuart Collings, the boss of Ineos's chemical plant in Grangemouth, Scotland.
Collings says carbon taxes are costing the Ineos plant 'tens of millions of pounds' per year and severely denting its competitiveness when compared to rival factories in the US and Asia.
With Sir Jim's wider business having subsidised the Grangemouth plant to the tune of hundreds of millions of pounds in recent years, patience is beginning to wear thin.
'We're already facing energy costs which are much higher than other countries, so we're inherently uncompetitive because of that, and then this carbon tax is put on top,' says Collings.
'Frankly, it's bonkers.'
The aim of carbon taxes is to incentivise businesses to cut emissions of CO2, which is blamed for causing global warming. In the UK, this is essentially done in two ways: through an emissions 'trading' scheme and another system known as carbon price support.
An emissions trading scheme was first introduced in 2005, when Britain was still a member of the European Union. Under the system, heavy emitters such as factories, airlines and power stations are assigned carbon credit 'allowances' covering a set limit of emissions.
When they exceed this limit, companies must buy extra credits from others that have a surplus. Credits are traded on an open market with a floating carbon price.
However, when the financial crisis led to an industrial slump that crashed the European carbon price, the Government introduced the supplementary 'carbon price support' in 2013 to deter emissions.
Initially set at £4.94 per tonne of CO2, this was charged to power stations burning coal, gas, biomass or oil and was later increased to £9.55 in 2014 and then £18 in 2015, amid fears that a global coal supply glut risked a resurgence in its use because of plunging prices.
Because burning a tonne of coal produces about 47pc more carbon dioxide than burning natural gas, the 2015 increase played a major role in the demise of coal power stations.
However, the carbon price support still remains in place 10 years later – even after the demise of coal – and is now weighing on the price of power bills paid by millions of households and businesses.
In July, the average cost of power generated by gas-fired plants was £79.24 per megawatt hour. Of this, £25.64 or 32pc was carbon taxes, according to figures published by the think tank Ember.
This is important as most of the time, gas power plants set prices for the rest of the electricity market – meaning the cost of carbon taxes is inflating everyone's bills.
Ed Hezlet, head of energy at the think tank Centre for British Progress, calculates that the levies accounted for about 7.5pc or £70 per year of a typical household's power bill.
'These carbon prices are a policy choice that increases the cost of electricity to consumers,' he explains. 'I think they were rational whilst coal was still on the grid, but they need to be re-examined given the demise of coal in the UK.'
Meanwhile, carbon pricing has also been squeezing industrial businesses, who complain that their overseas rivals do not face the same steep costs.
This is because the UK enforces a strict 'cap and floor' emissions trading system that forces them to account for their carbon emissions and pay for anything above a set ceiling.
Not all countries enforce such taxes, and many do not set the same limits as the UK.
The emissions trading system is designed to reduce the available number of credits each year, putting pressure on companies to slash their emissions.
Since 2021, the cap on emissions allowed has fallen from 156m tonnes of CO2 to 86.7m tonnes. By 2030, it will be cut further to 50m tonnes. In line with this, the allowances of free credits handed out to companies is also shrinking every year.
A hypothetical steel company could be given 100,000 credits, representing 100,000 tonnes of CO2, to start with, for example. But it might then only receive 90,000 credits the next year.
If it still generates 100,000 tonnes worth of CO2, it must go to the market to buy an extra 10,000 credits.
However, the shrinking supply of credits each year puts upward pressure on prices and ramps up pressure on businesses to cut their emissions.
On Friday, the UK carbon price was about £70 per tonne, according to Bloomberg.
This can create something of a 'catch-22 situation' for cash-strapped companies, which face ever-larger tax bills unless they can find the money to invest in greener equipment, says Dr Hasan Muslemani, of the Oxford Institute for Energy Studies.
For the hypothetical steel maker, this might include switching to an electric arc furnace or using hydrogen-based direct reduction.
Tata Steel, which runs the UK's largest steel mill in Port Talbot, Wales, shut down its blast furnaces last year and is switching to an electric arc furnace partly for this reason.
It is understood that the company, which laid off 2,500 workers last year, would have faced a carbon tax bill of £400m a year by the 2030s otherwise. The electric arc furnace that it is acquiring will partly be financed by a £500m grant from the Government.
Meanwhile, British Glass, an industry association, complains that glassmakers who want to transition to electrically powered furnaces that will cut their emissions are routinely told it will take years to secure grid connections – meaning they risk being forced to pay the higher taxes through no fault of their own.
Carbon taxes have also been cited as a major factor in chemical factory closures across the UK.
'UK manufacturers face a higher operational cost than their overseas competitors, whilst at the same time their ability to reduce their emissions is limited by the availability of low carbon fuels like electricity and hydrogen,' the Chemical Industries Association says.
'These two factors together diminish the competitiveness of UK industry and put at risk the loss of domestic manufacturing capacity in favour of overseas production.'
Plans to link the UK carbon trading scheme with the EU's could drive prices higher. However, supporters say this will also ensure the two jurisdictions can share a 'carbon border' where goods imported from outside will pay carbon taxes, ensuring more of a level playing field.
That depends, however, on other countries accurately measuring them, says Dr Muslemani.
Back in Grangemouth, this is one of the factors now threatening the viability of the Ineos plant.
'In terms of what the Government can influence, I think it's a lot easier for them to do something about carbon costs than it is about the price of gas, frankly,' says Collings.
A government spokesman said: 'Accelerating to net zero is the economic opportunity of the 21st century and at the heart of the government's mission to boost growth, create jobs and tackle the climate crisis.
'A strong UK Emissions Trading Scheme will play a key role driving green investment as part of a broader industrial strategy, creating jobs and growing the UK's economy.
'Our Modern Industrial Strategy will also unlock the potential of British industry by slashing industrial electricity prices in key sectors.'
Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.
