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.
A FUNDAMENTALLY-FLAWED
APPROACH
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.
RECOMMENDATIONS FOR
THE PRE-BUDGET
REPORT
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.
SPECIFIC POINTS
ON REQUIRED
ALTERATIONS TO
THE LEVY
FRAMEWORK
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.
CONCLUSION
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
| 
