Select Committee on Environmental Audit Minutes of Evidence

NFU's response to the Consultation Paper on Climate Change Levy by HM Customs & Excise


  1.  The National Farmers Union welcomes the opportunity to submit views to government on its proposal to introduce a Climate Change Levy. We represent some 70,000 farmers and growers across England and Wales and most of them would be affected by the proposed levy. Indeed a levy of the kind proposed in the recent consultation could put many of them out of business. Our interest in this proposal therefore needs little amplification.


  2.  The proposal raises a number of matters of both principle and detail which we wish to address in this response. Before setting out our detailed response we wish to raise some general concerns.

  3.  As we perceive it, the purpose of the proposed Climate Change Levy is to influence the behaviour of energy users so as to enable the UK to meets its Kyoto target of a 12.5 per cent reduction in greenhouse gas emissions by 2000-12.

  However, the government provides no evidence to demonstrate that the proposed levy is the most cost-effective option for achieving that target. UK businesses in general and agriculture and horticultural businesses in particular have already done much to reduce emissions since 1990 and those efforts are continuing. For that reason, we believe that the necessary reduction in emissions can be achieved through current and planned measures across the whole economy without the need for expensive options such as the proposed Climate Change Levy.

  4.  The Government considers the proposed levy to be revenue neutral as far as the national economy is concerned. This is justified on the grounds that the estimated £1.75 billion raised in its first financial year (2001-02) will be recycled through a 0.5 per cent reduction in employers' National Insurance Contributions (NICs). This raises two immediate concerns.

    (i)  Agriculture as a whole is no longer a labour intensive industry although individual businesses within it can still support a paid labour force of considerable size. In general, however, there will be a major discrepancy between the costs of a levy for individual farmers and growers and the benefits received in terms of their reduced NICs.

    (ii)  It remains unclear whether or not the entire levy will be recycled back into the economy. We note that the Government intend to use £50 million from the funds for promoting energy saving amongst smaller firms and research into low carbon technology. We also note however, the work undertaken by Environmental Data Services which calculates that the sum of £1.75 billion is £0.5 billion more than would be needed to reduce NICs by 0.5 per cent.


  5.  The agricultural industry is considered by the Government to be an energy intensive industry. However, in contrast with other industrial sectors considered to be high energy users eg steel, chemicals, cement, glass, ceramics, aluminium, foundries, paper, food and drink industries, agriculture comprises many smaller businesses which will be more vulnerable to the adverse enconomic impacts of the Climate Change Levy.

  6.  Based on the data given in the consultation document, we estimate that the whole of the agricultural sector may have to pay a levy of £26 million. In return, and at best, it is estimated that farmers NICs will be reduced by £9 million, a ratio of disbenefit to benefit of 2.9:1.

  7.  In order to inform our response to this consultation, the NFU undertook a wide ranging survey of our membership on the likely impacts of the proposed levy. That survey confirms that the majority of farmers and growers would be disadvantaged by the imposition of a levy. Indeed for some businesses the ratio of costs to benefits is far in excess of the aggregate ratio for industry as a whole.

  8.  For a dairy farmer in the North West of England, the levy would cost £487, whilst the NIC benefit would be £17—a disbenefit ratio of approximately 29:1. For a farm in the South West which comprises a number of enterprises, the cost will be £1,073 and the value reduced NICs will be £155 a disbenefit ratio of nearly 7:1.

  9.  The horticultural sector will be hit especially hard by the levy. Costs range from a figure of £1,000 for one business to hundreds of thousands in others. Within the sector, except for two businesses, the disbenefit ratios range from 7:1 to 35:1, mostly well in excess of 10:1. In all these cases, profits will be severely hit and in many cases they will disappear completely. With regard to the two exceptions, one is a business which uses little energy and employs a considerable number of staff, and the other is a business which will be very badly affected by the levy and its disbenefit ratio is very high.

  10.  Some growers fear for their businesses whilst in some companies the proposed levy has already set in train valuations of the benefits of relocating abroad. As many of these businesses are important sources of employment in rural areas, the knock-on effects of the levy will be very considerable.

  11.  Intensive livestock businesses are equally vulnerable to the proposed levy. For one poultry/egg producer, the estimated cost of the levy will be £25,000 with a corresponding reduction in NICs being of the order of £500—a disbenefit ratio of 50:1. For a sector that is already experiencing severe economic pressure, the levy will be an especially onerous additional burden.

  12.  The impact of the proposed Climate Change Levy extends well beyond the disproportionate nature of costs and benefits. The levy will greatly increase energy costs to holdings by 12 per cent to 40 per cent. Increases of 25 per cent are anticipated across a wide range of horticultural businesses.

  13.  Because of fiercely competitive markets, both within the UK and the European Union, it will often not be possible to pass on the extra costs imposed by the levy on the horticultural and intensive livestock sectors. In many instances, it will be difficult to absorb them. There is a danger, therefore, that many of the smaller businesses will be at risk of failure and that the larger ones will wish to move to climates and localities more amenable to growing greenhouse crops. In either of these instances, the impact on the local rural economy would be serious. And in neither case will there be an environmental benefit for these crops will be grown elsewhere with the concomitant release of global warming gases. Indeed, there may be environmental disbenefits, eg the greater importation of horticultural produce will result in greater fossil fuel usage as vehicles and aeroplanes travel Europe and the globe, thereby exacerbating the "food miles" problem.

  14.  Whilst light and heat are increasingly essential inputs to meet the exacting specifications of the market place, energy is also vital in the temperature control regimes for livestock that are housed indoors. In that context, energy is an important component in animal welfare.

  15.  The extremely competitive economic climate within which these businesses operate means that they are already highly efficient in their use of energy. We cannot see how energy consumption can be reduced easily without impairing the quality of produce or the welfare standards in livestock production.

  16.  The severe economic problems which a Climate Change Levy would impose on agricultural and horticultural businesses in the UK will be exacerbated if comparable measures are not introduced throughout the European Union and to a timescale similar to that proposed in the consultation. In that respect, the potential impact of a Climate Change Levy on the competitiveness of UK producers is profound.


  17.  The NFU considers there is a strong case for the exemption of agriculture from the Climate Change Levy for the following reasons:

    (i)  The likely severe economic impacts on many farmers and growers.

    (ii)  The unfairness of the levy, for though most farmers will suffer from its imposition, some producers especially in the horticultural and intensive livestock sectors, will suffer disproportionately.

    (iii)  The possible impacts on the rural and national economies.

    (iv)  The difficulty of maintaining crop quality and animal welfare if energy-usage levels are not maintained.

    (v)  The additional environmental costs as food not produced here in the UK will be produced elsewhere with probably little saving in energy usage or in greenhouse gas emissions.

    (vi)  There is a danger that to remain competitive, those growers who are able may switch to using mineral oil energy sources, which although cheaper would exacerbate global warming.

  18.  On these grounds, the NFU considers that there is a strong case for the exemption of agriculture from the Climate Change Levy.


  19.  If the Government decides it does not wish to exempt agriculture from the levy, it could consider reducing it. Nine industries deemed to be energy intensive users (see paragraph 4 above) are likely to be charged the Climate Change Levy at a 50 per cent rate if they agree to a programme of energy reduction. From the information available, the ratios of the cost of the levy to the reduction in costs of NICs are not dissimilar to those for agriculture. On these grounds alone there is a strong case for a reduction in the levy on agriculture.

  20.  Unlike other energy intensive industries, agriculture not only emits carbon dioxide, which is the most important global warming gas, but is a major absorber of the gas because crops require it to photosynthesise and grow. Indeed, combined heat and power plants form a part of some horticultural installations because the carbon dioxide given off in energy production is used to grow greenhouse crops, especially tomatoes. The Department of the Environment, Transport and the Regions 1998 consultation paper "UK Climate Change Programme" noted in the chapter on Agriculture, Forestry and Land Use that the "crop cycle itself is assumed to be neutral (with regard to greenhouse gas emissions); emissions mainly result from digestive processes in animals, animal wastes and fertiliser use." The Climate Change Levy hardly addresses these emitters. For all these reasons, therefore, we consider there is a good case for a reduction of the Climate Change Levy to the agriculture sector.


  21.  If the Government is minded not to exempt or alleviate the detrimental effects of the levy to the agricultural industry, we would argue that because of its severe adverse economic impacts, the levy should be recycled back to the industry and especially to those sectors and businesses most affected.

  22.  How these funds might be recycled would require imaginative and innovative thinking and a willingness to look beyond the immediate policy agenda set by the Climate Change Levy. Whilst the Government proposal for a reduced levy to be set against an agreed programme of energy reduction is interesting, we can see potential for the levy to be used in a number of innovative ways. For example, it could be used to encourage further the production of energy from biomass or poultry litter especially if used in combined heat and power plants. We also see considerable merit in using funds from the levy to encourage the better use of other environmental resources in the future, e.g. for winter water storage reservoirs. This could be especially useful to glasshouse growers in the south and east of England where water is becoming a scarce resource.

  23.  Money from the levy could be used to grow bio-energy crops on land adjacent to glasshouses, as well as near electricity generating plants and local combined heat and power plants. In its response to the House of Lords Science Committee Enquiry into Non-Food Crops, the NFU called for the introduction of a stand-alone policy framework for non-food crops to reduce the dependency on policies such as set-aside and the Farm Woodland Grant Scheme as the main policy vehicles for delivering non-food crop objectives. In that response, we argued that such a scheme should be introduced under the Common Agricultural Policy. However, money recycled from the Climate Change Levy could be an alternative source of funding to encourage the growth of non-food crops, especially those, which reduce the use of fossil fuels.

  Money from the levy could also be used to encourage the planting of shrubs and trees reared in nurseries. Such plantings would help soak up carbon dioxide.


  24.  Farmers and growers are not in general averse to a VAT approach to collecting the Climate Change Levy. However, they can see difficulties in apportioning the levy when energy production by coal, gas or electricity is used on a site for both domestic and business purposes. Also, where combined heat and power plants are located in horticultural establishments there may be dangers of double payment whereby the levy is charged on the production of energy on-site and then the grower is also charged a higher price for the energy supplied by the company in order to cover their levy. Such problems may be alleviated by contractual agreements made between the grower and the energy company, but this may not always be the case. We are not convinced that the complexities of collecting the proposed levy have been fully thought through. Farmers and growers are wary of an increase in record keeping, bureaucracy and hence in costs of collection of the levy.

  25.  In section 6 of the consultation paper, it notes that all of the energy intensive sectors covered by the Integrated Pollution Prevention and Control (IPPC) Directive will pay half the full rate if they agree targets for improving energy efficiency that meet the Government's criteria. Some sections of the intensive livestock industry, the larger producers, will come under the proposed IPPC regulations, but are not presently included within the group of nine industries considered to be energy intensive. We need clarification of this point.


  26.  The NFU is not against the principle that industry should use energy more efficiently and hence reduce greenhouse gas emissions—not least because farmers and growers themselves will be affected by future climate change induced by such emissions. In our response to the 1998 DETR consultation paper "UK Climate Change Programme" we note that "it is in all our interests therefore to try to alleviate climate change by reducing the emissions of global warming gases. Farmers and growers can play their part in doing this". However, as the DETR paper notes, the scope for major reductions in the emissions of greenhouse gases from present day agriculture is restricted. Over the short term, the levy will not help improve energy efficiency in agriculture, but it may well seriously jeopardise many businesses, especially those in the horticulture and intensive livestock sectors. The NFU cannot support the imposition of a levy, which would have seriously adverse impacts on the agricultural industry in general and on certain sectors in particular.

  27.  At a time when the general economic health of the industry is poor and especially acute in some sectors, the proposal to impose a Climate Change Levy is particularly inappropriate.

  28.  The NFU believes therefore that there are strong grounds for exempting the agricultural industry from the Climate Change Levy. Whilst a reduction in the levy and a recycling of the funds to benefit those affected by it are advanced in this response, we regard these measures as palliatives rather than effective or satisfactory alternatives to an exemption. Anything less will have dire economic consequences across all sectors of the industry, many of which are already in a parlous state.

  29.  We want to engage the Government in dialogue about how agriculture can play its full role in reducing the use of fossil fuel energy and the corresponding emissions of global warming gases. We believe that there must be better ways to encourage agriculture to adopt more sustainable patterns of energy use than by imposing a levy, which has the potential to put many farmers and growers out of business.

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