Annex 1
INTRODUCTION
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.
OBJECTIVES
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.
DESIGN OF
THE LEVY
RELATIVE PRICES
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.
FISCAL NEUTRALITY
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.
EXEMPTIONS
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.
ELECTRICITY
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.
CALCULATION BASIS
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.
TAX RATES
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.
TRANSPORT
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.
ENERGY PRODUCT
TAXATION AND
OWN FUEL
USE
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.
NON-ENERGY
USE OF
FUEL
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.
INTENSIVE USERS
(11)
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.
RELIEF (12)
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.
LOSSES, FLARING
AND VENTING
EIUG supports the exemptions outlined (14).
RENEWABLES (15)
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.
AUTO-GENERATION
AND CHP (16)
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.
IMPORTS/EXPORTS
OF ENERGY
(18)
EIUG agrees with the proposed treatment for
imports and exports.
ADMINISTRATION (19)
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.
CONTRACT AND
INVOICES
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.
SUMMARY
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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