APPENDIX 6
Memorandum from the Electricity Association
INTRODUCTION
1. The Electricity Association is the trade
association which represents the major electricity supply, distribution,
transmission and generation companies in the UK. The Electricity
Association welcomes the opportunity of submitting evidence on
the aggregates tax and the climate change levy to the House of
Commons, Environmental Audit Committee for their inquiry into
the Pre-Budget Report, 1999.
2. The Electricity Association considers
that any environmental taxation, such as the Aggregates Tax and
the proposed climate change levy, must be equitably applied, should
be fiscally neutral, should not impair industrial competitiveness
and should avoid multiple accounting.
3. The Electricity Association endorses
the EU target agreed in the Kyoto Protocol to the UN Framework
Convention on Climate Change and the 12.5 per cent emissions reduction
target agreed by the UK Government at the June 1998 Environment
Council, for the basket of six greenhouse gases. The electricity
industry itself has made significant progress in respect of climate
change, reducing its CO2 emissions by 25 per cent since 1990.
The Electricity Association considers that climate change is a
societal issue and that government should share the burden of
climate change abatement equitably across all economic sectors.
It should not demand an unduly large contribution from industry
and commerce simply because these sectors are seen as easier to
target than transport or households.
AGGREGATES TAX
General Principles
4. The Electricity Association considers
that any aggregates tax should be well designed to meet its objectives,
ie the improvement of the environment. However, there are some
uses of aggregates that are consistent with this principle and
should therefore be exempt from the tax.
Exemptions
5. Limestone used as a chemical feedstock
for plant designed to reduce power station sulphur emissions in
flue gas desulphurisation (FGD) systems should be exempt from
any such tax. Otherwise the tax would become a tax on environmental
protection.
6. Coal fired power stations produce ash
in two forms. One of these is known as furnace bottom ash (FBA)
and the other as pulverised fuel ash (PFA). Both of these materials
are successfully sold for re-use as aggregates. These secondary
materials should also be exempt from any Aggregates Tax otherwise
their competitive position in the market would be adversely affected
and less would be sold for re-use and more sent for disposal to
landfill.
7. The electricity industry is responsible
for streetworks for the laying and repairing of electric cables.
Reinstatement of these streetworks is subject to statutory codes
of practice, currently requiring the use of primary aggregates.
Any tax on these aggregates would, therefore, only increase costs
to the electricity consumer, without reducing aggregate demand
for this purpose. Aggregates for this purpose should be exempt
from any tax until the codes of practise have been revised to
allow the use of recycled and re-used aggregates.
CLIMATE CHANGE
LEVY
General Principles
8. The driver for the proposed climate change
levy is unclear, whether it is genuinely to reduce carbon dioxide
emissions or whether it is to finance the 0.5 per cent reduction
in National Insurance Contributions. If the objective is to reduce
greenhouse gas emissions, the Electricity Association considers
that an energy tax or levy, in itself, is a very blunt instrument
given the low price elasticity of energy demand and that there
are far more effective mechanisms of achieving the reductions,
for example, by market based approaches such as emissions trading.
9. The Electricity Association considers
that for an energy tax or levy to be effective in reducing greenhouse
gas emissions, it is essential that the revenue, or a major part
of it, is recycled into climate change abatement measures. The
proposed climate change levy revenue of £1.75 billion per
annum and the anticipated carbon dioxide reductions of 2 per cent
within the business sector is a clear indication of the limited
effectiveness, in climate change terms, of the current proposal.
Impact of the Levy on Business
10. Maintaining the competitiveness of UK
industry helps to provide the investment for improving environmental
standards. The proposed climate change levy, however, could result
in larger manufacturing industries experiencing energy cost increases
of over 40 per cent with very little being returned through their
National Insurance Contributions (NIC), thus limiting the resource
to pay for capital investment in energy efficiency. We would propose
that, depending upon the details of Negotiated Agreements industry
may enter into with Government, the potential maximum reduction
in the levy for those energy users, should be substantially more
than the suggested 50 per cent.
11. Intensive users of energy, having a
ratio of energy costs to the annual wage bill of around 18 per
cent, will be paying typically 15 times more in levy than they
will receive as a reduction in NIC. The proportions will, of course,
decrease depending upon the details of negotiated agreements between
Government and trade associations representing major energy users,
however, the significant impact of the levy will largely remain,
consequently the international competitiveness of the major UK
industries is clearly at risk with the resultant effect on job
losses.
12. The Marshall report on Economic Instruments
and the Business Use of Energy proposed the introduction of energy
taxes as a means of addressing the difficulty of encouraging SMEs
to invest in energy efficiency, particularly in the service sector.
However, with the proposed climate change levy, companies in the
service sector will receive on average a reduction in NIC five
times more than the levy on their use of energy. The fact that
many service companies will benefit significantly from the recycling
of the revenues into NIC could further lower the incentive for
these businesses to improve energy efficiency, although these
are the very businesses (non-energy intensive) which Lord Marshall
sought to influence through an energy tax.
More Effective Use of Revenues
13. The Electricity Association considers
that if the levy is to be imposed, the revenues could be applied
in a much more positive way if they were recycled into climate
change abatement measures. The benefits of this approach are explained
in detail in the attachment, but in summary it would help achieve
several Government policy objectives in an efficient and co-ordinated
way, for example it would:
— deliver a much higher level of CO2
reduction from the business sector;
— achieve greater equity in the business
sector as energy efficiency measures will generally deliver the
highest benefits to the higher energy users; recycling through
National Insurance rewards the service companies more than the
manufacturing/process companies;
— maintain UK industries' competitiveness,
since, in due course, lower energy consumption through energy
efficiency measures offsets the effect of the tax to give a similar
energy bill;
— stimulate business and employment
opportunities in areas such as energy efficiency services, renewable
technologies, CHP and non-fossil generation.
14. By way of compromise between the Chancellor's
proposals and recycling all of the revenues into climate change
abatement measures, if NICs were to be reduced by, for example,
0.3 per cent rather than the 0.5 per cent as proposed, with the
levy rates remaining the same, it would provide Government with
increased flexibility in developing negotiated agreements with
major energy users and also make significant funds available for
investment in climate change abatement measures in the business
sector. The reduction of 0.3 per cent in NIC would equate to around
£1 billion per annum being recycled into NIC with the remainder
being recycled into carbon abatement measures.
Impact of the Levy on the Electricity Industry
15. Under the proposals for implementing
the levy the costs of incorporating the necessary changes into
energy suppliers' billing systems to accommodate the climate change
levy will amount to between £30 and £45 million. Also,
depending upon the mechanics that HM Customs & Excise adopts
towards levy rebates, extensive time could be required to undertake
the work. There would also be additional ongoing costs, depending
upon the mechanisms adopted by HM Customs & Excise, for dealing
with the effects of Negotiated Agreements upon individual company
levy rates and the degree to which energy companies will be expected
to be responsible for ensuring the appropriate levy is collected.
We would expect the Energy Regulator to take these additional
costs into consideration in any supply price restraint mechanism.
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