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Changes to the compensation for ETS and CPS mechanism and what this means for the UK aluminium industry

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With recent changes to how the Emissions Trading Scheme (ETS) and Carbon Price Support (CPS) compensation is calculated, this could have huge ramifications for UK aluminium. To help inform our members, we’ve put together a quick guide to the scheme, its recent changes, and what aluminium producers should do to take full advantage of the compensation available.

What is the compensation scheme, and who is eligible?

In 2021, the Department for Business and Trade (DBT) began offering manufacturing sectors with high electricity use financial compensation to offset the indirect costs attributed to the enactment of low-carbon schemes ETS and CPS.

The government recognised that carbon pricing through these mechanisms would have knock-on effects on the wholesale electricity price. This, in turn, would increase the risk of carbon leakage for the UK’s most electricity-intensive businesses, particularly those which operate in internationally competitive markets and are unable to pass these indirect emission costs through to consumers.

The government, therefore, began compensating electricity-intensive industries, which were considered to be exposed to a significant risk of carbon leakage from the indirect emission costs of the UK ETS and CPS.

Aluminium production is one such sector that is eligible for compensation, so long as applicants meet the “5% filter test”, which, in a nutshell, only includes companies whose indirect carbon costs amount to 5% or more of their gross value added (GVA).

How has it changed?

It is important to note from the outset that the eligibility criteria for the scheme have not been affected (those who were previously eligible still are). However, the method by which the amount of compensation is calculated has been updated. This could result in significant cuts to the available payment for certain members of the aluminium industry.

More specifically, the change affects the compensation available to producers of unwrought aluminium alloys. Previously, these producers were eligible for a higher rate of relief, which is now only available for primary aluminium. This means that previous recipients from the unwrought sector could now be losing out on millions of pounds from 1st April 2024 onwards.

The DBT has now released full details of how compensation is determined for unwrought aluminium producers, so current compensation recipients in this sector should prioritise calculating the new rate, which takes effect in April, while those who have not yet applied can pre-calculate the compensation they will receive.

How can UK aluminium producers take full advantage of the compensation available?

As a niche energy-based compensation scheme that received very little fanfare, we’ve found from discussions with Aluminium Federation members that many companies within ALFED and from the wider UK aluminium industry were not even aware of the scheme.

Companies from across the sector, and indeed from other eligible industries like copper, leather and paper, should, as a priority, apply to the DBT for compensation. Even companies working with unwrought aluminium who were not previously receiving payments should apply – after all, even at a lower rate, these companies will still be eligible for something, albeit less than before.

At the outset, the key steps for applying for compensation seem relatively simple. Primarily ensuring that your company sits in one of the eligible sectors, then confirming you meet the 5% benchmark, which requires businesses to (i) meet the 5% test on a mean average basis over the past five years and (ii) be above the 5% line for at least three of those five years.

There are, however, multiple steps that a company can take if they do not reach the above criteria, and a more nuanced approach is recommended to take full advantage of the compensation available. The lengthy supporting document comes to around 8,000 words, and there are, in fact, a variety of scenarios where claims have been made for organisations that do not meet those conditions.

Companies looking to claim compensation should seek advice from industry consultants like Leyton, who can provide guidance on navigating this complex set of criteria.

For more information on how compensation is calculated, visit the government’s Compensation Scheme webpage.

Our work at ALFED

With the recent announcement of £4.5 billion for advanced manufacturing sectors, yet with cuts to available compensation and limited support from the government on international trade issues, there is some confusion on exactly how much the UK government is willing to support the UK aluminium industry.
At ALFED, we’re continuing to lobby for increased support to boost the sector’s international competitiveness, and providing our members with the most up-to-date information to help the UK aluminium sector adapt to a rapidly fluctuating economic and policy environment.

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