Select Committee on Environmental Audit Minutes of Evidence

Memorandum from the Confederation of British Industry (CBI)

  1.  CBI's response to Customs and Excise's consultation on the Climate Change Levy in May set out our key concerns about the principles and details of the proposals. These fundamental concerns remain and have been made in several meetings with Government Ministers and officials, and to the Trade and Industry Select Committee, amongst others. Discussions with CBI members and Government since May have enabled us to develop our thinking on certain issues. This paper draws on our initial response and discussions since then to set out the key changes to the levy proposals we recommend should be reflected in the 1999 Pre-Budget report.


  2.  The CBI is committed to ensuring that business plays its part alongside others (nationally and internationally) in meeting our Kyoto commitments on climate change, but these commitments must be met at least cost to the economy. We do not believe the details of the proposed levy in their current form will allow this to happen.

  3.  We are particularly concerned that the thrust behind the proposals appears to be shaped less by environmental goals than by a wish (desirable though that may be of itself) to reduce employers' labour costs. That impression is strengthened by the:

    —  Government decision to commit itself to a levy on business energy use in advance of finalising its overall climate change programme (which could yet identify more cost-effective ways of delivering our current and potential future international targets);

    —  decision to let business alone, rather than the domestic sector as well, shoulder the entire burden of this tax on energy use (unlike other EU states);

    —  lack of focus in the proposals on how to tackle carbon emissions (eg, by providing adequate incentives for renewables and CHP) and promote changes in behaviour in non-energy intensive businesses (which account for 60 per cent of business emissions); and

    —  the absence of any provision in the current design of the levy for emissions trading, despite the importance placed on it in Lord Marshall's report.

  4.  Figures provided by our members—which we have shared with Ministers and officials—show clearly that a wide range of firms, large and small, will be significant losers under the levy as currently proposed. This remains the case despite the proposals for cutting employers' NICs and lower rates of levy for sectors which negotiate energy efficiency agreements. Together with the more favourable treatment generally allowed to businesses in other EU member states that have energy/CO2 taxes, this means that, unless significant changes are made to its details, the levy poses a major threat to the competitiveness of firms in different sectors, particularly—though not exclusively—energy-intensive ones.


  5.  In view of the above concerns, it is essential that the proposals be improved both to protect business competitiveness and meet environmental goals more cost-effectively. The Pre-Budget report must therefore address urgently the following six key issues:

    —  Flexibility over the level of revenue raised by the levy, and hence the level of NICs reduction, rather than rigid adherence to the need to generate £1.75 billion (in order to pay for the changes indicated below without increasing the basic levy);

    —  Extension of eligibility to negotiate energy efficiency/carbon reduction agreements to sites not covered by the Integrated Pollution Prevention Control (IPPC) Directive;

    —  Greater reduced rates for energy intensive users than Customs and Excise's illustrative 50 per cent—ie rising to 90 per cent-95 per cent, depending on the sector;

    —  Early upwards review of the amount of revenue being channelled into promoting energy efficiency and renewable energy, and into developing and applying low carbon technologies; and thorough consultation on how this money is best spent;

    —  Resolution of key technical issues, such as the exemption of renewables, positive incentives fortake-up of CHP and the need for greater clarity on exempt processes;

    —  Greater recognition of the role of emissions trading in reducing business emissions through provision in the Finance Bill to grant favourable treatment under the levy to all firms engaged in trading. In addition, the form of negotiated agreements adopted must also allow firms to trade.


Flexible approach to the level of NICs reduction

  6.  The levy is supposed to give business maximum incentive to improve environmental performance. It should not be used as a means to raise a specific amount of revenue for the Treasury (£1.75 billion) in order to deliver a fixed reduction in NICs (0.5 per cent).

  7.  Our proposals to extend eligibility for negotiated agreements, secure greater reductions in rates of levy for energy intensive users, and increase expenditure on promoting energy efficiency, low carbon technologies and emissions trading, are specifically designed to support the twin aims of UK competitiveness and environmental improvement. They will also leave less revenue than the indicative £1.75 billion to recycle through reduced NICs. We accept that the necessary consequence of this is a lower rate of NIC reduction, but we believe this flexibility is desirable and should be a guiding principle for design of the levy.

  8.  Over time, the levy revenue is likely to vary. To ensure that the Government maintains its welcome commitment to revenue neutrality over time as well, variations in the NICs rebate should also be considered in future.

  9.  The CBI acknowledges that this could mean that some sectors who are net gainers under the current proposals may gain less than under current assumptions or might even become net losers. However, if the CBI's other proposed reforms are implemented, they would be able to mitigate this position either by entering into negotiated agreements or by taking advantage of the range of energy efficiency improvement measures and low carbon technologies which could be funded from the levy.

Negotiated agreements

  10.  The CBI believes that negotiated agreements should be made available to as wide a spectrum of the business sector as is feasible, rather than being limited to those sites covered by IPPC. In return, participating sectors should receive relief from the levy on a banded sliding scale related to factors such as their initial exposure to it. There are several reasons for this:

    —  Widening the scope of agreements to non-IPPC sites and linking them to a sliding scale of rebates will increase businesses' capital availability and so enhance their incentive and opportunity to invest in measures which reduce emissions;

    —  Agreements accompanied by rebates are an essential tool in reducing the costs imposed on business and protecting its competitive position, whilst at the same time stimulating further emissions reductions beyond what would be delivered by the levy alone. It is therefore inefficient that such agreements are restricted to those sectors covered by legislation which is primarily designed to tackle local air pollution problems. The Government should be maximising the incentive for all of business to change its behaviour cost-effectively, not just a part of it;

    —  Linking agreements to IPPC coverage does not necessarily mean that all energy intensive processes within the relevant sectors will be covered by agreements. Certain energy intensive processes within sectors predominantly covered by IPPC are not actually subject to IPPC themselves. In the glass industry, for example, glass melting and glass bending are both energy intensive processes, but only one of them is subject to IPPC and therefore eligible to be part of an agreement and receive a levy rebate;

    —  Using IPPC as the criterion by which agreements can be negotiated can cause competitive distortions within the relevant sectors between those firms which are eligible to negotiate and those which are not. Wire manufacturers, for example, have two alternative methods of delivering one of their processes, one of which is covered by IPPC, and one which is not. Those manufacturers using the non-IPPC process are therefore placed at a competitive disadvantage. Similarly, there are instances where some companies for historical reasons have non-IPPC processes alongside IPPC processes on a single site, and might be able to include the whole site's processes in an agreement, while other firms have the same processes on separate sites, and so would not benefit to the same extent;

    —  Using IPPC as the criterion for agreements may in some cases have environmentally perverse effects. For example, the scrap metal industry is not covered by IPPC and is therefore not currently eligible to negotiate an agreement. Using ferrous scrap metal to make steel is less energy intensive as a process than using virgin materials (iron ore). If the scrap metal recycling industry is unable to negotiate an agreement and therefore has to pay the full rate of levy, the cost advantage of using scrap metal instead of virgin ore will be reduced, and substitution may take place.

  11.  There are a number of ways in which agreements and rebates could be organised:

    —  They could be arranged by SIC codes and linked to indicators such as either energy intensity, net exposure to the levy or degree of exposure to global competition. However, such indicators may not be easy to define, and there is also a question as to how far groupings by SIC code would need to be disaggregated into sub-sectors;

    —  Alternatively, the Government could instigate a voluntary approach to agreements. It could be the case that any group of industries with an aggregate energy consumption above a certain threshold, offering a certain aggregate reduction in emissions beyond "business as usual", would be eligible to negotiate an agreement. Rebates could be banded according to one or a combination of the indicators mentioned above.

  12.  Either of these approaches could throw up their own boundary issues, but the CBI believes that these can be resolved. Government needs to make a positive commitment to find an approach which allows the greatest scope for interested players to negotiate agreements and so minimise their exposure to the levy while increasing their emissions reductions.

Scale of reduced rates for intensive users

  13.  The cut in rates for the most energy intensive users must be significantly greater than the illustrative 50 per cent (ie up to 90 per cent-95 per cent in some sectors) to avoid extremely damaging consequences for important parts of the UK's manufacturing base in terms of investment, plant closures and loss of jobs. In Germany, for example, all production industries pay only 20 per cent of the full rate of energy tax, and there is a cap on the amount individual businesses have to pay. Furthermore, in Germany the burden of energy taxes falls on the domestic sector as well as business.

  14.  In the UK, with the proposed 50 per cent reduction, most intensive sectors would receive less than20 per cent of the amount they paid out via the levy back in the form of reduced NICs: for some, the figure would be substantially lower still. Such a ratio would leave them competitively exposed and their operations could prove unsustainable in some areas.

Revenue channelled into energy efficiency, renewables and low carbon technologies

  15.  The proposals currently plan to recycle £50 million of the levy revenue—just 2.8 per cent of the total—into promoting energy efficiency and other initiatives. The CBI believes that this is a missed opportunity. It also compares poorly with the proportion of revenue recycled into such measures by several of our European counterparts: we understand that the Dutch, for example, recycle at least 15 per cent of their energy tax revenues in this way.

  16.  Further consultation is necessary to establish the scale of funding and range of measures required. Initial soundings with CBI members suggest that energy audits and advice schemes have a role to play, but need to be accompanied by positive incentives such as tax breaks for investment in energy efficiency measures (eg in both process and building use) and to encourage product and process development. Figures from1978-80, when tax breaks for energy efficiency were last available to business, show that investment rose by 31 per cent. When the arrangements were revoked, investment fell by 20 per cent in the first year, even though energy prices were still relatively high due to the second oil price shock.

  17.  Serious consideration should be given to providing adequate incentives for low carbon technologies and initiatives (such as carbon trusts). Options might include tax breaks for investment in new technologies or recycling some of the levy revenue to provide income for carbon trusts to promote appropriate initiatives. However, it is essential that both carbon trusts and provision of energy advice be backed up by private sector leadership and experience to ensure effective use of funds. It may make sense to "ramp up" over time the funds made available to match the market capacity to support such initiatives.

Key technical implementation issues

  18.  The CBI believes that renewable sources of energy, which do not contribute to carbon emissions, should be exempt from the levy and that the levy structure should provide positive incentives for the take-up of CHP. Otherwise, the levy will not be consistent with the Government's other policies in these areas, and will run counter to its environmental objectives. The benefits of nuclear and large scale hydro should also be taken into consideration.

  19.  The amount chargeable to the levy should be shown separately on invoices. Customers, particularly those for whom energy constitutes a small proportion of their overall costs, need a clear signal that their energy prices have gone up to account for environmental impact, otherwise there will be little explicit incentive for them to change their behaviour, particularly if prices are still lower than they were, for example, five years ago.

  20.  The burden of collecting the levy will inevitably fall on the energy supply industry. It is essential that Customs and Excise keeps its proposals as simple as possible, to minimise the cost of implementation and the ongoing operational costs for the industry. The Government should also give the industry sufficient time to design and test the necessary billing system changes, and make adequate provision for bad debt relief.

  21.  In the CBI's original response to Customs and Excise, we highlighted that greater clarity was needed on the treatment of certain processes under the levy. For example, unless the use of electricity for the chlor-alkali industry and the electrolysis of alumina were made exempt, there would be serious consequences for certain sectors. Confirmation about how these and other technical issues will be treated should feature in the Pre-Budget statement.

Recognition of the role of emissions trading in reducing business emissions

  22.  The levy framework must take full account of the potential for emissions trading. Trading is a flexible and cost-effective instrument which is likely to be a key component in Kyoto signatories meeting their international climate change obligations. The CBI and ACBE have set up an industry-led group which is making good progress in outlining the possible design of a domestic emissions trading scheme. Government ministers gave early impetus to this work and officials have been kept fully informed of its development.

  23.  The Pre-Budget Report should include a commitment to provide favourable treatment under the levy to those firms and bodies participating in an effective emissions trading scheme and who are not already eligible for a reduced rate as part of a sectoral agreement. Such commitment would ensure that the UK can take an early lead in implementing a trading scheme. It is also essential, during the course of the current discussions on negotiated agreements, that greater effort is devoted to allowing full integration between such agreements and emissions trading.


  24.  The proposed details of the climate change levy, in their current form, simultaneously pose a real threat to the competitiveness of many UK firms and risk falling well short of achieving its environmental goals at least cost. Addressing the issues we have identified effectively through redesign must be a priority for a Government committed to the concept of sustainable development and "joined-up" thinking.

  25.  We believe our six proposed changes would go a long way towards improving its design. We commend these changes to the Government and urge that they be reflected in this autumn's Pre-Budget Report.

October 1999

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