Select Committee on Environmental Audit Minutes of Evidence


Memorandum from Energy Intensive Users Group (EIUG)

EIUG's RESPONSE TO HM CUSTOMS & EXCISE CONSULTATION ON CLIMATE CHANGE LEVY

EXECUTIVE SUMMARY

  EIUG are extremely concerned by this levy proposal and the principles underlying it.

  The tax must be redesigned to achieve a reduction in CO2 emissions, an acceptable impact on business and greater fiscal neutrality.

  The "wrong" tax structure is an excessive risk for UK plc.

  Intensive users should see no increase in their tax liability to protect their competitiveness and thus jobs.

  Analysis of the affects on employment, competitiveness and CO2 emissions as a result of the tax should be published.

  A tax on CO2 rather than energy would be more efficient.

  Exemption of the domestic sector creates administrative problems for an efficient tax and fails to offer an economic solution to fuel poverty.

  Tax rates must be part of negotiated agreements, which must cover all intensive energy users.

  The review of electricity trading arrangements must be considered in designing a tax.

INTRODUCTION

  The EIUG represents 10 trade associations whose members consume very large amounts of energy and for whom energy is a significant proportion of costs. We are extremely concerned by this levy proposal and the principles underlying it. This will be the biggest tax change intensive energy users have ever experienced and we hope that Government will reconsider these proposals. To focus our reponse, this paper outlines our broad policy concerns and propsoses changes to structure of the tax to achieve the Government's aims. The attached annex answers the questions raised in the Customs' consultation.

  This tax must be redesigned to achieve the Government's aims for this environmental tax, namely:

    —  To reduce CO2 emissions in an economicaly efficient way;

    —  Ensure an acceptable impact on those paying the tax;

    —  The competitiveness of business;

    —  Achieve fiscal neutrality for companies, or at least sectors.

  EIUG hopes new proposals will be brought forward to allow further consultation to ensure these aims are met. The potential cost of getting this tax wrong would be enormous to the economy as a whole.

 BROAD PRINCIPLESTAXATION

  EIUG members will have a limited ability to respond to any energy taxes without reducing output. This is because high-energy intensity has already provided an incentive to improve energy efficiency in their manufacturing process. We believe that the "wrong" tax rate is an excessive risk for UK plc. Both the price elasticity of energy and technology differences make the outcome of the Government's proposals very uncertain. EIUG has seen no work to suggest the design of this tax has tried to reduce the risk associated with its implementation or ensured its aims are met.

TAXES AND INTENSIVE USERS

  EIUG believes that in order to protect their competitiveness intensive energy users should see no increase in their net tax liability from the proposed energy tax. Energy efficiency is a boardroom issue for intensive users as it has a bottom line benefit and directly affects competitiveness. As electricity prices to intensive users are some 30-40 per cent higher than those paid by their EU competitors, further price rises will lead to a loss of competitiveness, which we believe will result in job losses and impact on the balance of payments and the wealth of UK plc.

  These companies operate in global markets and would be unable to pass these costs through to their customers. Many do not have the profit margins to absorb this vast increase in business costs, and rather than increasing energy efficiency investment the tax will force them out of business. This will not reduce UK demand for their products, which will have to be met by imports probably for less energy efficient industries elsewhere thus increasing global emissions. This long-term impact on the UK economy must not be ignored.

EMPLOYMENT

  The Government's proposals aim to shift taxation from employment to energy use. This should encourage employment in the longer-term. However, intensive energy users are major employers in some of the regions with high unemployment rates. EIUG believes that the proposed tax structure would result in job losses in manufacturing which seems unlikely to offset by job creation in the service sector. Some analysis on employment effects, particularly likely regional effects, needs to be carried out.

FISCAL NEUTRALITY

  While we appreciate fiscal neutrality is difficult to achieve by company, there has been no proposals so far to achieve even broad fiscal neutrality by sector (see Annex 2). We are extremely concerned that the structure of the tax is driven primarily by the proposed 0.5 per cent reduction in National Insurance contributions (NICs). The level of the NICs reduction also appears rather arbitrary, with no analysis of the potential impact on jobs, and whether increased employment would offset those jobs we risk losing by damaging manufacturing. This tax looks far from economic or fiscally neutral and it will damage the competitiveness of British business as currently proposed.

  It is worth highlighting that the public sector would be a net gainer to the tune of some £150 million per year. This cross subsidy to the Government from industry is not justifiable. We assume this money will not result in an increase in public sector employment, which serves to highlight the need to look at the actual effects of this tax on each sector. The purpose of the levy is to alter long-term behaviour and should not be focused on raising a set revenue for HM Treasury (HMT).

ENERGY VS CO2 TAX

  EIUG is disappointed that the Government has adopted a blanket energy tax rather than a carbon tax that would focus on the policy aim, to reduce greenhouse gas emissions. This is a major flaw, as applying an energy tax on customers means electricity producers face no incentive to invest in non-fossil fuels, such as renewables and nuclear. The tax therefore fails to internalise the environmental externalities of electricity generation. The aim of economic instruments is to influence the actions of economic agents. By leaving generators unaffected by the tax the agents who supply electricity will not be incentivised to improve efficiency of production or invest in non-fossil fuel based production. In these circumstances an unreasonable burden is placed on business users.

  EIUG believes that a carbon tax, levied on producers, would be a more economic, cost reflective tax, with a better chance of achieving the policy aim.

EXEMPTION OF DOMESTIC CUSTOMERS

  EIUG understands Government's concerns about fuel poverty and their thinking on domestic customer exemptions. However, it would be a better solution to aim to help fuel poor via the benefits system while accepting that many domestic customers see fuel prices (excluding petrol) as relatively cheap. Given a choice employees in UK manufacturing industry may prefer to pay a tax (assuming they are not prepared to try to improve their domestic energy efficiency) rather than be unemployed.

  Any social policy must be clearly defined and targeted to be effective, which a blanket exemption is not. Domestic customers, unlike industrial customers, have some of the lowest electricity prices in the EU and their exemption from the tax creates a number of problems. As discussed above, the need to exempt the domestic customers has resulted in energy producers being excluded from the tax loop. The exemption is not justifiable if Government policy is to reduce greenhouse gas emissions (energy will be reduced if companies cease to manufacture) in the UK. Finally, as a social policy the exemption is not efficient.

  EIUG does not believe there are any economic reasons to exclude the domestic sector from the energy tax, which could be made fiscally neutral to the fuel poor. Even better would be the recycling of some tax revenue to improve the energy efficiency of the country's housing stock. There are also significant efficiency advantages, for administration and delivering against the objective, of a carbon tax across all fuels.

COMPETITIVENESS

  EIUG believes that a full study into the impact of the tax proposal on the international competitiveness of the UK economy is required. As discussed above, for intensive energy users electricity prices in the UK are already some of the highest in Europe and the world. EIUG is aware that the DTI are looking at comparative prices and we hope that the study will be made public before tax rates are set. Other countries are alleviating the effect of their energy taxes on intensive users and a study of the comparability of the UK tax with other states' proposals is necessary to ensure a level playing field.

  As well as revised proposals for the tax from HMT, EIUG hopes to see a full competitiveness analysis from the DTI and HMT. As suggested above, a study on the employment and regional impacts is also required to get a full picture of the effects of the Government's proposals. A revision of ETSU's calculations on the potential for energy savings in sectors with negotiated agreements should also be produced, as the current analysis is based on some unrealistic assumptions. It is important that we establish exactly what economic contribution intensive users can make to achieve the UK's targets.

  This "joined up thinking" from Government is vital in getting the policy right. No one department has the necessary expertise to devise a tax and associated instruments which address the many concerns business has about this major policy.

NEGOTIATED AGREEMENTS

  EIUG members are willing to sign negotiated agreements with the Government to reduce specific energy consumption and we welcome proposals to take agreements forward. These should be based on best available technology not entailing excessive cost and subject to penalties for non-delivery. The agreements must also cover all intensive users not just those covered by IPPC, as all will face a significant impact on their competitiveness. For those who adhere to their agreement there will be no technical way for them to respond to an ongoing tax incentive, except by reducing output as technology options will already have been exhausted.

  These agreements will give the Government a realistic commitment for delivery and those with agreements will be the only sectors of the economy with any commitments. They would also allow technology in each sector to be selected by the companies and the monitoring and transaction costs should be relatively low. Most importantly they allow business to focus on the most economic measures for achieving energy efficiency improvements. EIUG wishes to point out that the various industrial associations should not be expected to agree energy efficiency targets without prior knowledge of the reduction in the levy rate that will apply. Sufficient business uncertainty exists today in highly competitive markets that to introduce Regulatory uncertainty is totally unreasonable.

ELECTRICITY

  The Government has ignored the current review of electricity trading arrangements in drawing up its proposals. The removal of Electricity Pool and a move towards "normal" markets should be a vital change in achieving an efficient and competitive electricity market. Customers will be able to choose and sign contracts directly with specific forms of generation, making it possible to use a carbon tax and to encourage fuel switching by customers. Exempting renewables and nuclear from the tax would increase demand for these fuels sending longer-term investment signals to power producers. We would need to design some easy route for managing such contract audits, but we believe that is possible.

  As part of a market based solution the Government must also remove the moratorium on new gas fired generation build once the new market is in place. In the longer-term we know the old nuclear plant will be closed and new build will be needed. This is an opportunity to send signals to generators now about the desire to see investment in non-fossil fuel generation in the future. Again, these signals will be enhanced if the tax is levied on producers rather than customers, but even a tax on customers could give long-term signals to producers.

COMPLIANCE COSTS

  There are trade-offs between administrative simplicity and a tax designed to meet its objectives in a cost-effective manner. EIUG believes the balance currently favours simplicity over achieving any of the objectives. We therefore believe that the proposals must be redesigned and another consultation issued as soon as possible. The correct design is vital and EIUG would rather see new "indicative tax rates" in the next Budget to give Customs and Excise and other departments time to do a more thorough design job.

CONCLUSIONS

  The arguments outlined above highlight many problems with the Government's proposals as they stand. EIUG believe that the tax structure and associated financial recycling must be reconsidered to recognise that a more complex structure is required to meet the aims of this policy. We very much hope a further consultation will be produced to ensure the UK gets this new tax right.


 
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