Further memorandum from Energy Intensive
Users Group (EIUG)|
The Energy Intensive Users Group (EIUG) represents
11 trade associations whose members consume very large amounts
of energy and for whom energy is a significant proportion of cost.
We have been extremely concerned by the design of the climate
change levy, the biggest tax change intensive energy users have
seen, and we hope that over time (particulary as more stringent
successors to the Kyoto Protocol are negotiated) the Government
will refine their proposals to create more effective ways to encourage
EIUG shares the Government's international commitments.
However, EIUG believes that the tax should be redesigned to achieve
the Government's stated aims for this environmental policy, namely:
to reduce CO2 emissions in an economically
to ensure an acceptable impact on
those paying the tax;
to protect the competitiveness of
to achieve an acceptable distributional
While EIUG welcomes the design changes announced
in the Pre-Budget statement on 9 November and the consequent reduction
in the potential risk to the competitiveness of its members. However,
we still do not believe the levy is the ideal means to meet the
policy aim and it could still be significantly improved. As climate
change is a long-term issue, the Government will wish to consider
longer-term proposals and there should be opportunities to refine
the climate change levy.
EIUG believes that taxation can be used to change
behaviour within the economy. However, the price inelasticity
of energy demand makes the wrong tax rate an excessive risk and
taxation is a very blunt instrument which can have undesirable
results. The Government, by reducing the CCL rates in the Pre-Budget
report has reduced the risk, but EIUG believes that there is a
need to keep the rates under review if damage is seen to be being
done to British industry. In particular, the review of electricity
trading arrangements is expected to reduce prices from autumn
2000, but if major reductions do not occur industrial electricity
customers in the UK will be left paying signifcantly more than
their European competitors by the time the levy is introduced
in April 2001.
Ultimately tax and input price disparities will
result in damage to UK competitiveness, not just compared to the
EU, but the rest of the world. It must also be remembered that
for some internationally traded goods, like steel, the imports
that could replace domestic production will probably come from
countries who have no Kyoto commitments. So damaging UK business
could well worsen, not improve the global environment, as well
as worsening the UK's balance of trade. The Government must monitor
macroeconomic developments and if necessary adjust the tax to
limit any potential damage to UK businesses.
While the Chancellor's potential 80 per cent
levy rebate for intensive users which sign agreements with Government
has gone some way towards achieving fiscal neutrality, some EIUG
members will be left with the residual tax rate to which they
cannot reasonably respond. All those signing negotiated agreements
will have already committed to introduce all cost effective energy
efficiency measures, which will in themselves divert funds from
other business priorities, and the residual tax liability is simply
an additional business cost. For those manufacturers who are not
classed as intensive, and will therefore pay the full levy, there
is a significant tax burden which will undoubtedly affect the
competitiveness of some sectors. These sectors should therefore
be offered the opportunity to sign agreements along the lines
of those already being negotiated.
EIUG hopes the Government will work with business
to define better those eligible to sign negotiated agreements.
The initial proposals to use the Integrated Pollution, Prevention
and Control Directive (IPPC) meant that some very intensive industries,
such as industrial gases, would not be eligible to sign agreements.
We believe the intention should be that all those who wish to
sign agreements should be eligible to do so. If, however, the
Government wants to use energy intensity as the criterion it needs
to ensure that all those companies under the sectors already negotiating
In the longer term EIUG believes that incentives
like the levy must be extended to the domestic sector if the UK
is to meet its Kyoto commitments. The UK has some of the cheapest
domestic energy in Europe, reflected in the lack for switching
of fuel suppliers in the domestic market. There is little incentive
to focus on improving efficiency at home. We know that the UK's
domestic sector holds enormous potential for cost-efficient energy
saving, as well as the encouragement of the longer-term uptake
of efficient technologies, such as new electrical appliances.
The UK must capture these potential savings. Exempting the domestic
sector from the Levy does not address the Government's concerns
about fuel poverty, which undoubtedly should be tackled.
EIUG appreciates fiscal neutrality is difficult
to achieve by company or individual, but as designed the levy
leaves an increased tax burden for numerous companies and fiscal
neutrality could be achieved if the Government were to break the
link with the reduction in National Insurance contributions (NICs).
Again we hope that policy reviews will examine alternative ways
to achieve fiscal neutrality, not only for intensive energy users
but also for other business sectors. EIUG believes that this is
also important if those in labour intensive sectors, such as banking
and the public sector, are encouraged to focus on energy efficiency.
The current Levy design still leaves some sectors as net beneficiaries
and it seems unlikely that where energy bills remain a relatively
small proportion of costs, management time will be properly focused
on improving efficiency.
It has been disappointing that Government has
adopted a blanket energy tax rather than a carbon tax that would
focus on the policy aim, to reduce greenhouse gas emissions. We
welcome the exemption of renewable generation and CHP from the
levy, but believe in the long term a wider signal needs to go
to the major electricity producers. Renewable technologies are
still relatively expensive and CHP is not always the most efficient
form of generation for a given use. It is therefore important
that the major investors in generation see signals that indicate
the carbon contents of the fuels used in generation to encourage
the take up of cleaner power and the consideration of new nuclear
EIUG appreciate this is difficult to achieve
while the domestic sector remains exempt from the impacts of the
levy, thus making taxation at the point of consumption a necessary
design limitation. However, in the longer term, with the inclusion
of the domestic sector it may be possible to look to internalise
the externality of CO2 emissions at the point of production, rather
than consumption, by taxing fuel inputs at the generators' sites.
This should also encourage more efficient use of generation technology,
which may lower CO2 emissions in the shorter term.
EIUG believes that the Government must also
further consider the treatment of industrial on-site generation
(see Annex 1). CHP is an extremely efficient technology for those
who have a use for steam load, but it is not always the most efficient
way of providing on-site power for industrial users. If it is
only CHP that remains exempt, rather than industrial generation,
the Government could encourage inefficient uptake of this technology.
As those with industrial generation will be signing negotiated
agreements with the Government, EIUG believes that it is possible
to include all industrial generation within those agreements to
ensure that all "good quality" industrial generation
receives equitable treatment.
As discussed above, EIUG believes that intensive
users should not face any residual tax burden from the levy. Energy
efficiency remains a boardroom issue for intensive users as it
has a bottom line benefit and directly affects effectiveness.
Electricity prices to intensive users in the
UK are some 30-40 per cent higher than those paid by our EU competitors
and 60-70 per cent higher than competitors in the USA. While the
redesigned tax leaves us with a lower tax residual we would welcome
a commitment from the Chancellor that he will aim to improve the
fiscal neutrality to all sectors in the longer term.
As intensive users operate in global markets
and are unable to pass costs through to their customers, their
is a need to ensure that the tax burden does not creep up over
time. As these sectors will be signatories to tough agreements
to improve energy efficiency the Government can monitor that they
are achieving reductions to the benefit of UK plc. In return for
meeting these commitments, we hope the Government will continually
aim to achieve fiscal neutrality to ensure that the UK remains
a place in which intensive users can operate. If the Chancellor
were to increase the tax burden to intensive users over the coming
years, this will undoubtedly affect the competitiveness of intensive
users and could force relocation or closures. In the long term
this will not reduce the UK's demand for the products that energy
intensive sectors produce, but will increase imports which will
impact on the UK economy.
EIUG believes that the Government's statement
on the intent of enviornmental taxation is still not met by the
redesigned levy. While intensive and large energy users will be
reducing CO2 emissions, the levy seems unlikely to encourage such
savings in the service and public sectors. While the residual
tax burden has been significantly reduced for the energy intensive
users with agreements, there is still a large cross-subsidy from
industry to the service and public sectors which we believe has
a negative "distribution impact". We remain concerned
about the impact of the levy on the international competitiveness
of non-intensive UK manufacturers, many of whom are our customers.
EIUG members also remain concerned that in the
longer term without a better mechanism for improving fiscal neutrality
the Government is sending a message that the UK economy does not
welcome manufacturing. The UK should be aiming to encourage manufacturing
to locate within its borders, but with the cross-subsidy to the
public sector in particular there is a strong signal that the
UK is moving towards further focus on the service sector. Again
we feel there is the opportunity to better design the levy and
this is one area in particular where we believe attention must
focus over the coming years.
EIUG members welcomed the Government's announcement
that it would exempt all fuels being used for feedstock and dual
use processes, such as electricity in electrolytic processes.
EIUG believes that all industries where energy supplies form part
of the chemistry of the process should have the related energy
inputs exempt from the tax. For example, glass production is an
endothermic chemical reaction and should be exempt in line with
other similar chemical processes. Also industries like air separation
where energy drives the actual process should be exempt.
EIUG members await clear definition of these
exemptions and we believe that the Government must keep under
consideration whether there are other processes that may have
been missed initially where such exemptions should be considered.
The EIUG has still seen no analysis of the price
elasticity of demand and thus of potential impact of the proposed
tax rates. While the Pre-Budget Report reduced the tax rates from
those originally proposed, it would still be useful for the Government
to publish what it believes the impact of the tax rates will be.
This allows the monitoring of the tax so that the UK can measure
its success and adjust the rates where necessary, for example
if production falls rather than efficiency improve. The UK must
ensure that this policy achieves energy efficiency improvement
without damaging the competitiveness of British business and that
improvement is seen in all business sectors not just amongst energy
EIUG would like to see the Government publish
an outline of what it expects the Climate Change Levy to achieve,
not only in terms of CO2 reductions, but in terms of regional
impacts, employment and balance of trade. Without such targets
we cannot judge whether or not the policy is meeting its goals.
In particular, we wish to ensure that where the tax could cause
significant damage to the competitiveness of a given sector, or
is failing to achieve any savings from another sector, that the
Government would fine tune the design of the tax, so that this
policy achieves its objectives.
It is extremely important to business that in
the longer-term this tax is not used as a revenue raising mechanism
by the Treasury. A commitment to achieve fiscal neutrality of
the CCL would be welcomed, particularly as levy rates rise with
inflation, and one which we hope the Chancellor will make. EIUG
also hopes that analysis from the Treasury on the potential impact
of this tax will be made publicly available, as will the new energy
forecast for the UK. The UK must monitor its progress towards
its environmental targets and fine-tune policies where necessary
to ensure that we achieve maximum environmental improvement, at
least cost and without damaging the competitiveness of British
EIUG believes that the trading of CO2 permits,
and those for other greenhouse gases, could offer another option
for intensive users to meet their negotiated agreements and play
a role in implementing other environmental policies. The larger
the participation in such a market, the more economic the solution
to reducing the UK's CO2 emissions in those sectors covered could
be, but it will not be the answer for all sectors and is therefore
only a part of an integrated climate change policy. EIUG welcome
the work undertaken by CBI and ACBE to design a trading scheme,
but there is clearly still some way to go before a scheme is up
and running. We believe that participating in permit trading should
be voluntary and members would want to note the following points
at this time.
EIUG members currently have some concerns about
the compatibility of the proposed scheme with the structure of
some potential negotiated agreements. However, the Government
should still develop permit trading as a long-term policy to reduce
CO2 emissions, making it compatible with the levy or an alternative
penalties mechanism. While a liquid market may take some time
to develop, EIUG believes that the Government and business must
pursue this option as permit trading remains on the international
The use of permits needs to be made compatible
with other emissions legislation (IPPC). The Government must also
ensure that permits do not act as a cap on growth, particularly
for energy intensive sectors, by carefully analysing the potential
for economic efficiency improvements in the participating sectors.
There must also be effective regulation of any permit market to
ensure there is no hoarding, or other abuses of dominant positions.
EIUG also believes that any trading scheme must
be linked into an international scheme allowing JI and CDMs to
count as credits. This allows companies to look for emissions
reductions in other countries where the cost of achieving savings
may well be lower. Climate change remains a global problem and
global reduction should always be encouraged. While a practical
and efficient permit-trading scheme may take some time to develop
it is a long-term policy goal to which we believe the Government
must remain committed.
Given that the 1998 Competition Act becomes
effective in March 2000, we believe the Government must look very
closely at the design of the levy and its requirements of sectors
entering into energy efficiency agreements to ensure that these
are compatible with the requirements of the Competition Act. In
particular we are concerned about the eligibility criterion for
entry into an agreement (IPPC) and the legal commitments within
both Option 1 and 2 type heads of agreement.
EIUG believes that the design of the climate
change levy could be amended further to meet the Government's
objectives without the risk to some sectors of damaged competitiveness.
While we welcome the recent moves made to improve the tax design,
it should be possible in the longer term to create a tax that
sends clearer signals to those sectors where improvements in energy
efficiency are easiest and cheapest to achieve. Achieving real
fiscal neutrality should be a Government goal and the extension
of the negotiated agreements to less intensive sectors should
also be considered. The tax design should also be altered to send
longer-term investment signals to those building new generation,
while not discouraging efficient industrial generation.
EIUG very much hopes that the Government will
continue to work with business to improve the design of this tax
and will then monitor its effects to allow tuning if necessary.
This remains a siginificant tax change for business and it is
vital for the health of the UK economy that we get it right.