APPENDIX 2
Memorandum from British Energy Written
response to the HM Customs & Excise consultation on Climate
Change Levy
SUMMARY OF
KEY POINTS
1. Since carbon dioxide (CO2) is the principal
gas responsible for global warming Government should introduce
a package of measures focused on the reduction of CO2 emissions,
not energy use, to tackle climate change.
2. The current and future contribution of
carbon free generation such as nuclear and renewables in reducing
CO2 emissions should be recognised.
3. In focusing on energy use rather than
CO2 reduction the proposed tax will penalise electricity generated
from all hydro, nuclear and renewable generators that are part
of the solution to climate change.
4. British Energy recommends that the Government
re-examine the structure of the proposed tax, with a view to:
(a) Placing the tax upstream on the carbon
content of the input fuels, or downstream only on the energy
content of the input fuels that emit carbon dioxide.
(b) Recycling the revenues into energy efficiency
schemes and the support of renewable generation which can contribute
to the avoidance of carbon dioxide emissions.
(c) As recommended by Lord Marshall, implementing
a "package" of climate change measures that can achieve
guaranteed and cost-effective CO2 emissions reductions through
a more efficient and flexible means. A carbon trading system should
be introduced as soon as practicable.
5. The Government must ensure that any measures
introduced to address greenhouse gas emissions reductions are
complementary to other strategies under consideration, in particular
the Renewables Consultation Paper.
This response sets out the views of British
Energy plc on the government's plans to introduce a Climate Change
Levy on the business use of energy. Section A considers some of
the broad policy issues surrounding the proposed levy, and section
B details our comments on the specific questions outlined in the
Consultation Document issued in March 1999.
INTRODUCTION
British Energy supports the commitment made
by the UK government to reduce greenhouse gas (GHG) emissions
by 12½ per cent as a contribution to the EU target agreed
in the Kyoto Protocol to the UNFCCC. Given that carbon dioxide
is the principal gas responsible for global warming we also endorse
the additional national target of a 20 per cent CO2 emissions
reduction by 2010.
The proposed introduction of a climate change
levy in 2001 is a timely signal that measures must be introduced
soon if carbon emissions are to be reduced by the target period
of 2008-2012. However, we believe the tax as proposed is misplaced
in focusing on business energy use rather than carbon dioxide
emissions, and will penalise electricity generated from the nuclear
and renewable industries which are part of the solution. Neither
do we believe that the proposed tax will satisfy the Government's
own criteria for environmental taxation, and it will result in
a significant redistribution of resources from the manufacturing
to service sectors. If the government is serious about addressing
the issue of climate change then it must introduce measures that
are focused on reductions in CO2 emissions and not on raising
revenues.
SECTION A: POLICY
ISSUES
If the levy is introduced in its current form
it will penalise the nuclear industry, which in 1997 avoided the
emission of about 63 million tonnes of carbon dioxide. Since 1960
the emissions of about 1,300 million tonnes of carbon dioxide
have been avoided—equivalent to the UK's total CO2 emissions
for about two and a half years (see figure 1).
Without a change in Government policy, the current
generation of around 30 per cent of the UK's electricity from
nuclear power will decline to about 11 per cent by 2010. Although
an increase in generation from renewable sources is planned, emissions
from carbon-based generation that would be required to replace
nuclear will significantly offset any CO2 savings made to date
in the power sector.
Other policy measures could achieve the government's
environmental goal of reducing CO2 emissions. Poorly focussed
taxes, such as this one are costly to implement, and cannot guarantee
that the target saving of 1.5MtC pa will be met. There is ample
evidence that market-based approaches such as emissions trading
could achieve a greater reduction in CO2 emissions and at less
cost, and we are pleased that the Government is supporting a pilot
study into this area.
Figure 1.
If the government wishes to use taxation to
reduce CO2 emissions then any tax that is introduced must be "well
designed, meet objectives without undesirable side effects; keep
dead-weight compliance costs to a minimum; have an acceptable
distributional impact and consider the implications for international
competitiveness"[1].
British Energy is therefore disappointed that
whilst aiming to achieve a reduction of 1.5MtC per annum, the
tax is based on the energy content of fuels and also taxes non-carbon
emitting energy generation such as hydro, nuclear and renewables.
It is not an effective climate change levy. As CO2 is the largest
contributor to GHG emissions, a tax that specifically targeted
the production of CO2 would be more effective in meeting the emissions
reductions target than the energy tax proposed.
Our European partners are embarking on a more
focused climate change programme. For example, the Danish Parliament
is currently debating a proposal for a new Electricity Supply
Act that tackles CO2 directly through both emissions trading and
a carbon tax. A ceiling is to be set for CO2 emission from the
electricity sector that is reduced year on year. If the quota
is exceeded then the companies must pay a tax per tonne of CO2
emitted. This ensures that a cost-effective reduction of CO2 is
achieved, and allows a flexible approach for companies to meet
their target. It is also a step towards the evolution of a permit
system.
For any tax to be effective in reducing demand,
the burden of the tax should be upon a commodity that has an elastic
response ie a small change in price should exert a large influence
on demand. There is scant evidence that the majority of electricity
demand has such an elastic response.
The Climate Change Levy should lead to a reduction
in CO2 emissions by placing the tax burden on the business use
of energy ie coal, gas and electricity. Long-term forecasts for
electricity to 2010 (excluding domestic use that is exempt from
the Climate Change Levy) suggest an inelastic response to changes
in price. A tax on electricity use will therefore not have a major
influence on reducing demand unless it is set at a very high level.
Price increases sufficiently large to achieve the necessary reduction
in demand would also be unacceptable to the end-user[2].
The revenues generated from the tax should be
recycled. For example, they could be recycled into upstream measures
that contribute to a reduction in the use of the commodity (in
this case carbon dioxide emissions), or as a subsidy to those
sectors that do not use it but have to pay the tax (ie generators
that do not emit carbon dioxide). The application of a tax in
this way would encourage non-CO2 emitting generation and also
encourage fuel switching to less carbon intensive fuels. The proposed
tax does neither.
As an energy tax, the "cost" per tonne
of carbon saved is £1166[3];
Studies suggest that this is approximately 200 times the anticipated
commercial cost of carbon abatement, and a carbon based tax could
achieve the same emissions saving at a cost of only £24/tC[4].
In proposing an energy tax as opposed to a carbon tax, the government
is not providing any incentives for fuel switching to less carbon
intensive fuels, and also penalises non-carbon emitting generation
such as large scale hydro, nuclear and renewables which make significant
contributions to avoiding CO2 emissions[5].
The Government has announced an increase in
funding for new and renewable technologies and efficiency measures
of £50 million in order to stimulate the market and gain
additional savings by avoiding CO2 emissions. However, the funding
amounts to just 2.8 per cent of the £1.75 billion that the
proposed tax will generate as revenue.
Under the Non Fossil Fuel Obligations (NFFO)
scheme, there have been five Orders in England and Wales (at a
cost to date of £600 million of government support), three
Scottish Renewables Orders (SRO's) and obligations in Northern
Ireland (NI-NFFO) both of which received additional government
support. The result of these obligations/orders is that "new"
renewable technologies currently provide an installed capacity
of about 2.8% in the UK[6].
Assuming a modest growth in electricity demand, new renewable
technologies will have to achieve well above about 20GW of installed
capacity by 2010 in order to meet the 10 per cent target announced
by the UK Government. Without a considerable increase in financial
support and a change in public attitude, it will become harder
to achieve the target as the easy gains have already been made.
Additionally, contracting "gross" capacity does not
ensure availability and it may take a considerable length of time
for projects to come on-line.
We believe that the Climate Change Levy in the
form proposed is the least effective of the potential mechanisms
for reducing CO2 emissions (see figure 2).
British Energy welcomes the fact the Government
is pursing other mechanisms for reducing CO2 emissions, including
tradeable permits. In the meantime, with regard to an energy tax
we would propose the following improvements:
A change in the way the tax is calculated for
electricity supplied. It should be designed to take account of
the energy content of the fuels used in the generation of electricity
and preferably to take account of the carbon content of the fuel;
A change in the way revenues from the tax are
recycled;
Account should be taken of the high charges
that would be borne by electricity intensive users, and the option
of using a more cost-effective market based method to reduce their
emissions should be examined.
Recalculation of the rate for electricity.
The rate of the levy for coal and gas (0.21p/kWh) is applied as
a specific rate per nominal unit of energy for each fuel. This
rate is then multiplied by a conversion efficiency factor for
electricity calculated from the energy content of all the
input fuels for electricity generation (901TWh), divided by their
end use (317TWh). A value of 2.84. Multiplying by the base rate
of 0.21 produces a levy on electricity of 0.6p/kWh.
| Fuel | P/kWh
|
| Coal | 0.21 |
| Gas | 0.21 |
| Electricity | 0.60 |
| |
If large scale hydro, nuclear and renewables are exempt from
the Climate Change Levy, then British Energy suggest that the
rate of levy for electricity should be based on the energy content
of the fuels that give rise to carbon dioxide emissions. By performing
the same calculation as above, the multiplying ratio is reduced
from 2.84 to 1.88. Keeping the same overall rate of levy, this
results in the table below:
| Fuel | P/kWh |
| Coal | 0.21 |
| Gas | 0.21 |
| Electricity | 0.39 |
| |
If the government intends to achieve the same overall revenue,
and using a ratio of 1.88, this could be achieved by increasing
the rates for coal and gas to 0.27, and reducing electricity to
0.51:
| Fuel | P/kWh |
| Coal | 0.27 |
| Gas | 0.27 |
| Electricity | 0.51 |
| |
Recycling of revenues. The proposed route of recycling,
through a reduction in Employers' National Insurance Contributions
is discriminatory, of unproven benefit, and does not address the
primary aim of reducing GHG emissions. As well as being applied
to the source of the problem (reduction in GHG's), an effective
tax would recycle a large proportion of the revenues raised into
measures which also focus on the objective, namely reductions
in emissions.
Alternative options for recycling revenues:
A subsidy to technologies that could reduce carbon based
emissions eg wind power, CHP. This would stimulate the new and
renewable technologies market and generate new employment opportunities,
whilst increasing reductions in CO2 emissions through avoidance.
Provide a tax credit for selected energy efficiency and renewable
energy measures. Experience in Holland and Denmark suggests this
could increase the level of carbon saving by a factor of two to
three compared with a straight energy tax.
Both these forms of revenue recycling would not create distributional
impacts across other sectors. They would have a positive influence
on employment, and would result in a low net cost to consumers.
Although the levy would still be paid on energy use, this would
be balanced by a fall in customer demand due to efficiency improvements.
The net change in a bill would be negligible.
Large users. Although the overall outcome of the proposed
energy tax would be revenue neutral, there will be many large-scale
losers to the tax. From its design, energy intensive companies
will have a considerable additional cost to bear for energy use,
whilst not benefiting with an equal repayment from recycled NI
contributions. Instead, the redistribution of the revenue to reductions
in National Insurance Contributions will amount to a fiscal transfer
to the service sector that has small energy demands but is labour
intensive.
Ideally, large energy users should face the same marginal
incentives as other users, after taking into account any compensating
or ameliorating provisions to reduce the average incidence of
the tax. This might be achieved by, for example, exempting from
tax energy consumption below "best practice" levels,
or by exempting the sector from the tax where it can demonstrate
achievement of a CO2 quota for emissions trading.
An emissions trading scheme could achieve a guaranteed reduction
in CO2 emissions. The target emissions level can be set by the
number of permits that are issued, and the sum of those permits
would therefore not exceed a maximum level of emissions. The market
can then be used to determine the cost of the permit through trading.
Sectors where it is cheap to reduce emissions can make reductions
and sell those "spare" permits to sectors where any
emissions abatement is more costly. The scheme would need to be
correctly administered to ensure that there are no market barriers
to new entrants, and also allocation mechanism for the permits
would not be prohibitive to the development of the scheme. Experience
in the USA for SOx, and more recently NOx trading schemes has
shown this to be a very successful approach.
SECTION B: RESPONSE
TO SPECIFIC
QUESTIONS IN
THE CONSULTATION
Comment on whether the design of the levy achieves the appropriate
balance between environmental objectives and administrative simplicity
We welcome the government's objective of keeping the administration
as simple as possible. Using an existing model, VAT, where practicable
is welcomed.
However British Energy is disappointed that the proposed
climate change levy takes so little account of the levels of CO2
emissions generated by each source of energy. As the levy is intended
to reduce emissions of greenhouse gases (in this case CO2), those
generating sources which do not contribute to CO2 emissions should
not be penalised to the same extent as those which do. This could
be achieved, in part, by a different treatment of electricity
eg by only including carbon emitting generation in the calculation
of the relative tax levels (see above).
Views would be welcome on how often a revision should be undertaken
to reflect changes in the conversion factor
As the statistics on the fuel mix for the electricity sector
are available on an annual basis, this would be considered a reasonable
frequency for revision.
Do you agree that the VAT model for fuel and power is a suitable
method for distinguishing domestic use and non-business use by
charities from other use?
The principle is acceptable
What processes do you think should qualify as fuel used for
energy production? Do you envisage any difficulties in demonstrating
that energy is being used for the production of another energy
product? How might the quantity of energy used for production
of other energy product be determined? Could it be done on a business
sector basis? Are there any other alternatives?
The way in which data from the Digest of UK Energy Statistics
(DUKES) is used to calculate the conversion factor from fuel inputs
for electricity generation implicitly assumes that final end users
are accountable for the total levy due on fuels used for power
generation. These include gas, coal and electricity used in pumping
water in hydro-electric systems. It would therefore be inappropriate
to impose the levy on any of a generator's own-use of electricity
as this would effectively amount to double taxation.
If as suggested in section A, the rate of the levy altered
to take account of the carbon content of the input fuels this
would still hold true. It is also difficult to see how the energy
used for lighting and heating power station premises can be separately
identified without detailed clarification of areas that would
be exempted. It would have to be estimated on a site by site basis.
Sector basis estimates would be biased against efficient sites.
It should not in any case be applicable for nuclear power
stations as any energy products on-site are an operational safety
requirement, and must be exempt.
Arrangements for providing relief for particular uses—For
each of the four cases for special treatment or relief which option
is preferable (1) The customer certifies to the supplier that
the levy should not be charged on a proportion of use, or should
be charged at a lower rate or (2) The customer can claim a refund
of the levy from Customs & Excise
With the proposed changes to the structure of the wholesale
trading arrangements, and in line with the governments thrust
on electricity becoming traded as a true commodity, generators
and suppliers could not guarantee the status of an end user of
electricity supplied with respect to exemptions. The fairest method
in all cases is therefore Option two. The standard rate levy to
be applied to all consumers, and for it to be their responsibility
to register and claim any refunds from HM Customs & Excise.
Do you agree with the self-supply mechanism or is there an
alternative method that would ensure that the levy was properly
accounted for in these cases? How might the amount of self-supplied
energy be verified?
The levy will be applicable to the supply to final users
from electricity producers. There should be no further need to
account for self supplied energy, as it is already included in
the calculation of the levy factor. If imposed then there would
be double taxation on this element of supply.
Losses, flaring & venting—Are there any comparable
losses that would warrant such treatment?
The consultation paper states that flaring and venting should
be exempt from the levy because they occur before the point at
which the levy is applied. Losses in transmission and distribution
from electrical networks fall into a similar category, and if
a consistent approach is adopted they should be similarly exempt.
Are there any ways in which energy suppliers could demonstrate
that the electricity they supplied was from small-scale renewable
sources? Would they also apply to imported electricity?
Suppliers could demonstrate that electricity supplies were
from renewable sources by the use of a "green" certificate
system. The generator certifies their electricity as generated
from a non-GHG emitting source and can sell that benefit to one
electricity supplier. Such certification can only be confirmed
after the electricity has been generated, using metered data.
Importers of electricity should not be allowed to claim exemption
unless there are reciprocal provisions in the exporting country,
and it can be shown that the imported electricity is contractually
linked to the exempt generating source.
Under the proposed revision of the electricity trading arrangements,
the majority of trading will take place under bilateral contracts
with generators. A certificate system as mentioned above could
be extended to cover the carbon content of all electricity supplied.
Supply companies could then determine the average carbon content
of all the electricity bought at a given point in time. By a simple
calculation suppliers could provide customers with the tonnage
of carbon released to the atmosphere as a result of their activities.
Figure 3 below shows that the costs (in terms of carbon avoidance)
of using nuclear power for electricity generation are broadly
similar to using the renewables hydro, wind and biomass and significantly
lower than some "new" renewables. Whilst exempting nuclear
and large-scale hydro from the levy would not encourage small-scale
renewable build, it would not hinder it either. It would reflect
the current state where much electricity generation comes from
non-GHG emitting technologies. Their large contribution should
be recognised.
Although, excluding electricity generated from nuclear and
large scale hydro-electric schemes would not help developing future
renewables, it can be justified in it's own right due the contributions
made to the avoidance of CO2 emissions. All non-GHG emitting generation
should therefore be treated the same.
Do you agree that autogenerators/CHP should be treated as final
consumers? At what level of exports of electricity might it be
appropriate to require autogenerators/CHP to be subject to the
same arrangements as other power generators? How might a refund
be calculated for heat exported to a domestic consumer?
Yes, autogenerators/CHP should be treated as final consumers
as this would support the development of CHP and help the government
meet its target. They should pay the levy on the energy input
rather than the electricity or heat output.
As the intention of setting a limit is to prevent distortion,
it may be better to limit the exports of electricity from CHP
to the network to a proportion of the capability or output of
the CHP plant, rather than setting a de-minimus limit. A power
level limit will only result in the sizing of the power plant
to fall just short of the limit. A combination of, say 20 per
cent of output or 5GWh of exported electricity is an alternative.
Should the amount of the levy be shown on invoices
Yes. If the government wishes to promote a reduction in energy
use, then it is of overwhelming importance to demonstrate the
cost of the levy to the consumer. Also, it will enable end users
eligible for a rebate to make an accurate claim.
Is there anyone else who might be required to register for
the levy? Should group and divisional registration be available
for energy suppliers
Registration for the levy (or exemption from it) should be
the responsibility of the last point in the supply chain and end-user.
Under the proposed new electricity Trading Arrangements electricity
will become a tradeable commodity. Where generators have direct
contracts, it would be possible to demonstrate the quantity of
electricity traded, and its generation source (ie wind, nuclear,
coal etc). Generators could not however, determine whom the final
customers are, and it would be administratively complex as well
as costly to develop a mechanism at this level to achieve this.
It would be administratively simpler for end-users' representatives,
ie. energy suppliers to act on behalf of their customers and to
register with HMC&E.
September 1999
1
Government Policy on Environmental Taxation, July 1997, annexe
A, HM Customs & Excise Consultation on a Climate Change Levy Back
2
Cambridge Econometrics, UK Energy and the Environment, January
1999 Back
3
Figures from Customs & Excise consultation document. £1.75
billion revenue divided by 1.5Million tonnes of Carbon avoided
equals £1166 per ton Back
4
ILEX, Press release "Is Brown really Green?", from
an assessment of the Chancellor's "Climate Change Levy"
from the perspective of Energy users, Suppliers and the Environment,
May 1999 Back
5
OXERA Workshop on "The Energy Levy", May 1999 Back
6
New & Renewable energy: Prospects in the UK for the 21st
Century. Supporting analysis. in line with the DTI energy demand
model Back
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