NFU's response to the Consultation Paper
on Climate Change Levy by HM Customs & Excise
INTRODUCTION
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.
GENERAL PRINCIPLES
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.
IMPACTS OF
THE LEVY
ON THE
AGRICULTURAL SECTOR
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.
EXEMPTION OF
AGRICULTURE FROM
THE CLIMATE
CHANGE LEVY
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.
REDUCTION OF
THE CLIMATE
CHANGE LEVY
ON THE
AGRICULTURAL SECTOR
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.
RECYCLING OF
THE CLIMATE
CHANGE LEVY
BACK TO
THE AGRICULTURE
INDUSTRY
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.
OTHER POINTS
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.
CONCLUSIONS
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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