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Last week, Nick Clegg derided claims that environmental legislation was holding back industrial recovery as 'utterly wrong'. But a new Civitas report reveals that, in fact, the UK's draconian energy policy is causing the collapse of a successful British industry. 'The closure of the Lynemouth aluminium smelter' examines the influence of short-sighted Government policy on decisions to move aluminium production elsewhere, to the detriment of the environment.

In 2008, production of aluminium was an industry with an annual turnover of £3 billion and a 20,000-strong workforce. Today, it is a shadow of its former self. David Merlin-Jones, author of the report, charts the steady erosion of the British primary aluminium business as UK energy prices have risen unilaterally and two of the three British smelters have closed.

Clegg argues: 'It is simply not true that you have to give up on the green economy if you want to grow.' However, Merlin-Jones shows that current policies have neither green nor growth benefits.

Lynemouth closure - the end of British aluminium?

The latest casualty of Government neglect has been the Lynemouth smelter in Northumberland. The plant contributed £60 million to the local economy and employed 515 workers. Owner, Rio Tinto Alcan, will be shutting the plant down for good within weeks, at a cost of at least 323 jobs. A further 3,500 jobs in the supply chain are also likely to be lost.

Rio Tinto Alcan explained that spiralling energy costs and a 'thorough strategic review' were the cause of its demise. A buyer for the plant could not be found.

Energy uncertainty spooks global firms

The most damaging of all additional energy costs are those that are imposed unilaterally. These are the costs that British energy-intensive industries pay that their rivals in other countries do not. With the addition of the most recent of these, the carbon price floor, total UK electricity costs in 2013 will be raised by 24 per cent for energy-intensive sectors. By contrast, German energy-intensive businesses will only be paying 16 per cent extra through government-added costs in the same period.

Costs will rise sharply from next year, with an increase of over £13 million in energy bills for an average energy-intensive user expected in just eight years. This explains why finding a buyer for the Lynemouth plant was impossible: no company could afford to absorb the future costs that Rio Tinto Alcan was unprepared to pay.

In addition, the government has failed to provide a credible long-term energy policy, leaving companies unwilling to commit to UK production. In Iceland, Rio Tinto Alcan secured a 26 year electricity contract for its facility, and will consequently invest US$ 350 million to modernise the plant and increase output by 20 per cent. This guarantee gives a level of forward security that is virtually impossible to establish in the UK.

Perversely punished for being greener than the rest

The Lynemouth closure is also a blow to environmentally friendly industry. British aluminium production is noted worldwide for its efficiency and low emissions relative to other countries. Since 1990, Lynemouth had reduced its emissions by 65 per cent, significantly above the UK's goal of a 34 per cent reduction on 1990 levels by 2020 and the wider EU's 20 per cent reduction by 2020. It is painfully ironic that a plant that has done its utmost to reduce its environmental impact is now shutting down due to environmental regulation.

Aluminium production is an energy-intensive process. There is no way to avoid using large quantities of electricity in the production process so inflating the cost of electricity in the hope that this will act as a 'signal' and result in less power usage is reckless. Ultimately, aluminium production is moving overseas to plants with a more damaging environmental impact, causing carbon leakage and resulting in a net global increase in carbon emissions.

For more information contact:

David Merlin-Jones, Director of the Wealth of Nations Project, 07949 811 032 and david.merlin-jones@civitas.org.uk

Civitas 020 7799 6677

Notes for Editors

i. David Merlin-Jones is Director of the Wealth of Nations Project at Civitas and a Research Fellow in economics, energy and industrial policy.

ii. The closure of the Lynemouth aluminium smelter: an analysis can be downloaded here.

iii. Nick Clegg's speech, The myth: green versus growth, is available here.

iv. Civitas is an independent social policy think tank. It has no links to any political party and its research programme receives no state funding.