Select Committee on Environmental Audit Minutes of Evidence

Annex 1


  This Annex gives EIUG's comments on HM Customs & Excise's consultation and tries to answer the specific questions raised. As discussed in the main paper, EIUG believes that the proposals need significant re-working in order to make the tax meet the Government's objectives. As currently structured these proposals will significantly damage the competitiveness of British business.


  The Customs' consultation document quotes the Government's statement on the intent of environmental taxation. This proposal does not meet that intent. It will not meet the objective of lowering greenhouse gas emissions except by reducing production of energy intensive products through a shift to production overseas. For those with small energy bills and high employment rates there is no incentive to respond at all, as they are net gainers. There will be "undesirable effects" on the competitiveness of intensive energy users. The "distribution impact" will be a major cross-subsidy from industry to the service sectors and the public sector. We would also expect there to be a regional effect, with service companies in the south subsidised by manufacturing in the north. The implication for international competitiveness of UK manufacturing is potentially devastating for intensive users and will be significant for other large customers.

  EIUG members thought that the Government favoured having an economy where manufacturing adds to wealth and employment across the country. These proposals risk significant damage to manufacturing. The cross-subsidy to the public sector in particular, from manufacturing draws into question the Government's claims of being business focussed.



  Apart from the concerns outlined above about a tax link to carbon content, there must also be concerns about relative tax rates (4.2 and 4.3). Many industrial gas customers have interruptible contracts and use fuel oil as a back up. Gas is "cleaner" than fuel oil, both to use and transport and the relative prices should not encourage greater use of fuel oil if the aim is to lower CO2 emissions from energy use.

  Currently gas prices are relatively low (annual gas is trading below 12 p/therm) and the proposed tax rates of 6.15p would raise the price to large customers by 50 per cent. Such a price rise will not only clearly affect competitveness, putting gas prices above our competitors, but will also encourage the use of fuel oil.


  Customers believe fiscal neutrality is vital in protecting business interests and in encouraging the correct response from each sector. The attached table (Annex 2) clearly shows the net burden on EIUG members would be large. The Government must address this problem, perhaps adopting a rebate policy similar to that used in Germany. The benefits of achieving neutrality would far outweigh the costs of a more complicated tax to administer.


  EIUG believes all fuels used for feedstock, such as methane for ammonia products and coal for metallurgical coke must be exempt (4.4). Again, an assessment of exemptions in other EU Member States, and proposed under the draft Energy Products directive, would help identify other areas, such as electricity for electrolytic processes and inputs into blast furnaces, that must also be exempted. EIUG welcomes the proposals for some exemptions, but we believe the exemption of all those with negotiated agreements must also be considered.


  The document says renewable energy will be exempt. However, with a flat tax on customers' energy bills renewable supplies will appear to be taxed (6). Under the new electricity trading arrangements it will be possible to identify where each customer's supplies come from as a supply contract gives a generator a right to run their plant.This not only allows for different tax rates for different generation, but would allow zero rating for renewables and nuclear generation. By lowering the relative costs of "clean" energy the demand for renewables will rise, helping to fulfil the Government's aims on investment in renewables. Again, more work on the impact of the review of electricity trading arrangements and the opportunities for encouraging investment in green energy is needed.


  As already mentioned, the review of electricity trading arrangements would allow a far more focused tax structure be levied on electricity supplies. It would be a missed opportunity not to use the new trading structure to deliver a more economically efficient tax.

  EIUG does not believe that a flat rate tax will help deliver any greater diversity in generation (6.2). We also believe it is inconsistent for the Government to try and promote renewables for environmental reasons and protect coal. It is not just customers using energy more efficiently that will help the global environment in the long-term; energy production itself must become more efficient and cleaner.


  EIUG has seen no analysis of the price elasticity of demand and thus the potential impact of the proposed tax rates. For intensive users the rate on electricity is equivalent to a 20 per cent price rise; even a halving of the rate still gives intensive users an enormous increase in their costs. For gas there would be around a 50 per cent price rise, pushing prices above those in Europe. Likewise the rate of tax on coal will make coal prices around 60 per cent higher than world coal prices. Our members would welcome some clarification on how the tax rate for coke will be calculated.

  It seems probable that the rates will not only damage large energy users, but smaller energy consumers, such as banks and the public sector will not alter their energy use. Assuming intensive users respond by reducing output, lowering energy demand, we would also expect coal fired generation, as the oldest and most expensive plant to close. While with one hand the flat rate of tax on electricity aims to protect coal, the effect on electricity demand will probably result in the demise of the UK coal industry.

  EIUG would prefer to see a tiered tax rate, with customers facing lower rates, as they consume more. These rates should be devised following an evaluation of price elasticity. The tax could still be levied only on business customers, but even a crude attempt as a progressive tax would be far more economically efficient than the existing proposal.

  The tax should also be levied on a specific basis (7.6) and shown clearly on energy bills.


  While we agree with the proposals on public transport (8), EIUG would urge the Government to consider the role of both transport and the domestic sector in meeting the UK's climate change commitments.


  Recognising the Government's desire to protect domestic customers, EIUG is still concerned that power producers, particularly electricity generators, will not be incentivised to improve efficiency (9.1). It is also unclear whether only energy used by pump storage plants are exempt, or if all generators' on-site power will be exempt.

  EIUG supports the exemption for pump storage to avoid double taxation as some concession to recognising greener energy. However, it would still be preferable to totally review the treatment of the electricity market, its fuels, producers and customers.


  EIUG fully supports the introduction of exemption of fuels for non-energy use (10). Many of our members will be making representations on issues for their sectors on non-energy use and we would urge Customs and Excise to give full consideration to those representations and review each industrial process that has a case. Such exemptions are also consistent with draft Directive on taxation of energy products, which covers electricity as well as coal and gas. We also believe dual use energy should be exempt.

  This is a major competitiveness issue and if the Government wishes to discuss individual industries' concerns the sectors would be happy to do this. We do not believe that taxing non-energy use will improve efficiency of fuel use in individual processes.


  EIUG hopes that HM C&E will invite HMT to join the discussions on negotiated agreements with DETR as without discussion on concessionary tax rate customers are being asked to negotiate with one hand tied behind their backs. The agreements are also then blank cheques from the customers' perspective and on that basis are less likely to succeed.

  To protect competitiveness and make the tax similar to arrangements in other EU states, those with negotiated agreements should have no net increases in tax. This is consistent with the Government's desire to leave some marginal incentive, but most importantly it generally achieves fiscal neutrality. In the long-term this will be the only way to secure energy intensive users existence in the UK.


  In order to minimise the impact on cash flow, any relief arrangements would be best administered by not charging the customer in the first place. Refunds can be costly to administer and do cause a cash flow problem that could pose a significant and unnecessary cost to business. To this end EIUG supports option 1, where the customer certifies the tax should not be charged like normal duty payments.


  EIUG supports the exemptions outlined (14).


  EIUG believes that demand for renewable electricity could be enhanced with the correct structure of tax on electricity production. There is also the potential to allow renewable energy use as a tool for meeting the commitments from negotiated agreements. It would be a missed opportunity not to use the structure of the tax to signal to energy customers the benefits of renewable and other non-fossil fuel, energy.

  Customers believe both nuclear and hydro should also be excluded from the tax. Under the new market arrangements it will be easy to track generation that is dispatched for specific customers via their contracts. The new electricity market should be in place by October 2000, giving at least a year to work through the detail of electricity taxation. It would seem a simple matter to audit generation through to supply, however, such a procedure should not place a burden on customers by way of excessive administration.


  The Customs proposals do not appear to fully reflect the environmental benefit from CHP. Similar to the treatment of nuclear and renewables, EIUG believes there is a good case for preferential treatment for on-site generation, which should be consistent with the Government's stated aim of increasing the take up of CHP. Many auto-generation and CHP schemes are built, owned and operated by a third party on behalf of one or more customers. However, the right incentives could further encourage CHP and must be considered in light of the Government's stated policy. In Germany and Italy CHP is exempt if it is 70 per cent efficient.

  EIUG would agree that it would be sensible to treat CHP host organisations as the final users of the primary energy products, allowing refunds for exported electricity. However, given the various uses and ownership there may be a case for a tax on outputs as the easiest administrative way to implement the tax. Such an arrangement must not preclude the use of a lower rate on CHP as opposed to other fossil fuel fired generation to recognise the efficiency of production and use at these sites. Tax relief will then be needed on the input energy used to produce the electricity sold to other customers.


  EIUG agrees with the proposed treatment for imports and exports.


  Customs & Excise proposals for administering this tax seems relatively sensible and easy from the taxman's perspective. However, as discussed above, EIUG believes that there are significant efficiency arguments to justify making the tax more complicated in order to ensure it actually meets its objectives. Both the RETA proposals and the existing billing of different sized customers would accommodate a more flexible approach to tax rates that better reflects both the CO2 emissions from different fuels and relative tax rates to encourage energy efficiency at the different sized energy customers across the UK. EIUG would be happy to discuss any of the issues raised in this paper with Customs and Excise, HMT and other Government officials if that would be helpful.


  EIUG believes that the tax must be shown on invoices. This allows customers to check they have been correctly taxed and stops suppliers using the tax as a means to hide price increases. It also highlights to customers the need to improve energy use.


  EIUG very much hopes that new proposals will be brought forward to allow further consultation to ensure that the tax aims are met without damage to the competitiveness of British industry. We believe that these tax proposals need reconsidering and reworking in light of the comments on this consultation. There are many technical and policy principles that need some considerable rethinking. It is vital to the future of UK plc that we get this policy right as the potential costs of a badly designed tax are enormous.

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