Select Committee on Environmental Audit Minutes of Evidence

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 energy efficiency.

  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 efficient way;

    —  to ensure an acceptable impact on those paying the tax;

    —  to protect the competitiveness of business; and

    —  to achieve an acceptable distributional impact.

  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 are covered.


  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 build.

  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 intensive users.


  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 business.


  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 agenda.

  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.

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