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The heaviest energy users are being asked to shape a proposed £250m compensation package designed to help reduce the impact of energy and climate change policies on the cost of their electricity.

The new consultation, which sets out the design of the scheme, follows on from the Government's call for evidence on the issue in March, and guidance on compensation for the indirect costs of the EU's Emissions Trading Scheme (ETS) published in the Official Journal in June.

Energy and climate change policies could add up to 28 per cent to the average electricity prices paid by large intensive energy users by 2020, according to Government estimates.

"Many energy intensive businesses are located in areas that have been hit hard by the economic downturn, which is why it's important that we get this right and present the best support package available," Business Secretary Vince Cable said.

He added that the proposed final scheme for compensation would be announced in the spring, following "detailed consideration" of the responses to the consultation. Any proposed scheme must also be approved by the EU under laws preventing national governments granting anti-competitive 'state aid' to particular companies.

The consultation identifies certain sectors as most exposed to a significant risk of 'carbon leakage', which occurs when a company relocates to another territory where climate policies are less strict. As well as impacting on the UK economy by having investment occur overseas when it could otherwise have been made in the UK, leakage can lead to an overall increase in global emissions.

In order to be considered for the proposed scheme, a company must operate in one of the sectors listed in the consultation, which include aluminium production, chemical and fertiliser mineral mining and others. It must also be able to demonstrate that its carbon cost under the various emissions trading schemes will amount to 5 per cent of its gross value added (GVA) profit measure in 2020.

Energy law expert Eluned Watson of Pinsent Masons, the law firm behind Out-Law.com, said that companies in sectors such as aluminium, steel and cement would welcome the opportunity to further shape the compensation package.

"We have already seen the closure of aluminium smelters and job losses in the UK steel industry where the level of investment required to improve inefficient plants combined with ever-increasing energy prices have already had their impact," she said. "Subject to state aid clearance, the Government's intention is that the compensation package will start to be implemented in 2013 and if energy intensive companies are to remain internationally competitive, the sooner the package is agreed the better."

For the compensation package to be effective, she said, eligibility thresholds and criteria for compensation should be set so as to target financial assistance to those industries most at risk of carbon leakage. It should also help offset the indirect costs of the carbon price floor and EU ETS, she said, without removing the incentive for companies to become more energy efficient in the future.

"It is hoped that the compensation package, rather than removing the incentive for companies to become more energy efficient in the future, will instead incentivise them to adopt lower carbon emissions of production where possible," she said.

Energy Secretary Ed Davey said that the proposals would help the UK economy by "retaining vital jobs and preserving our manufacturing base", while still enabling industries to grow and become more energy efficient.

"It is important we ensure that as we move to a low-carbon economy, those industries that are more energy-intensive are not forced to relocate to other countries," he said. "This would not only have a negative impact on our economy, but could also result in us exporting emissions to countries that are not as strongly committed to cutting carbon emissions."

Copyright © 2012, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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