Further Memorandum by Friends of the Earth
(CCO7A)
THE CLIMATE CHANGE LEVY
INTRODUCTION
1. The Climate Change Levy will make a significant
contribution to securing the Government's ambitious manifesto
commitment of a 20 per cent cut in UK carbon dioxide (CO2)
emissions by 2010. We are concerned, however, that under the current
design proposals for the Levy the Government will struggle to
achieve the projected savings of 2 million tonnes of carbon per
year by 2010. If the Levy rates for fossil fuels reflected their
carbon content and the framework for negotiated agreements with
more energy intensive firms was tightened we believe that at least
this level of carbon savings would be achieved.
2. Crucially, the Levy will also install
an economic incentive for the commercial and industrial sector
to reduce CO2 emissions beyond 2010. Responding to
this incentive for increasing energy productivity through innovation,
investment and better management will allow firms to cut their
costs as well as their CO2 emissions. It is vital that
the negotiated agreements also include such an incentive to ensure
these firms do not lock into business as usual options for improvement.
3. Friends of the Earth has for several
years argued for an industrial energy tax and welcomed the Climate
Change Levy announcement at Budget 99 [1]. Since then we have
put forward strong arguments for improvements in the design of
the Levy and the recycling of the revenues back to business [2].
Several of those improvements were announced in the Pre-Budget
Report. Further improvements in the design of the Levy can and
should be made before it is introduced at Budget 2000 in order
to improve its environmental effectiveness.
IMPROVEMENTS ANNOUNCED
AT THE
PRE-BUDGET
REPORT
Exemption for renewable energy
4. As the reduction of carbon dioxide emissions
is the primary purpose of the levy, it was essential for the credibility
of the instrument that renewable energy was exempted as far as
practically possible. The announcement that the Government intends
to exempt electricity generated from renewable sources of energy
(other than large scale hydro plant) from the levy is therefore
very welcome. We have commented on the legal and practical considerations
mentioned in the Pre-Budget Report as potential barriers to this
improvement in design in our response to the consultation on the
Levy conducted by HM Customs and Excise (a copy of the relevant
paragraphs from this response are enclosed).
Exemption for combined heat and power
5. The exemption of electricity generated
by "good quality" combined heat and power (CHP) plant
is also welcome. Investment in CHP will be a cost-effective and
readily available option for many firms in response to the levy's
incentive to increase energy efficiency. This exemption will tip
the balance for a large number of schemes and boost the market
for a technology that is central to achieving Britain's obligations
under the Kyoto Protocol.
Exemption for rail-freight traction electricity
6. Rail-freight has an important role to
play in developing an integrated and sustainable transport system
in the UK. We therefore welcome the exemption of traction electricity
used by rail-freight locomotives from the Levy.
Greater assistance and incentives for firms to
invest in energy efficiency
7. Since the Levy was announced we have
argued that a greater proportion of the revenues should be reinvested
in schemes to help firms invest in energy efficiency and renewable
energy. We recommended that the amount reinvested through direct
support for energy efficiency was increased from £50 million
to £100 million and that a further £100 million was
invested in targeted capital allowances [2]. We therefore welcome
the increase in direct support for energy efficiency and the introduction
of a capital allowance scheme. The proportion of revenues reinvested
in this way is likely to need to be increased further following
an appraisal of the demand for such support in the first year
the levy is in operation.
FURTHER IMPROVEMENTS
IN THE
DESIGN OF
THE CLIMATE
CHANGE LEVY
FOR BUDGET
2000
Carbon-tune the Levy
8. The rates of the Levy need to better
reflect the carbon content of fossil fuels. The existing framework
of differing rates for primary fuels, a single rate for electricity,
need not be altered to achieve this. Two reforms are required.
First, industrial oil must be brought within the Levy to avoid
creating a perverse growth in demand for oil. Second, the rates
of primary fuels need to be based upon carbon content of the fuels
and not energy content as currently proposed.
9. This design improvement would bring greater
cuts in CO2 emissions, allow firms to reduce their
tax bill by switching to lower carbon content fuels and make the
Levy compatible with future trading schemes that will be based
upon carbon.
Target the discounts on the rate of levy more
tightly upon genuinely energy-intensive installations
10. It is proposed that an 80 per cent discount
from the levy rates will be available to those energy sectors
which enter into legally-binding agreements to implement all energy
saving measures that are cost effective for companies themselves.
We are extremely concerned that this element of the climate change
levy, which has not been open to public consultation, will make
deals that overall are too generous, are difficult to enforce
and crucially will include no incentive for innovation or continuous
improvement.
11. Ensuring the environmental and fiscal
efficiency of the levy demands that any reduced rates of the levy
granted via the agreements approach should be very tightly targeted
at truly energy intensive processes. The Government has chosen
to use the EU's Integrated Pollution Prevention and Control (IPPC)
Directive as the basis for determining eligibility for special
consideration largely because it offers the necessary legal certainty.
12. There is, however, a wide range of energy
intensity amongst the thousands of installations that will be
covered by IPPC. To grant an 80 per cent discount to all is inefficient
both from an environmental and fiscal viewpoint. In manufacturing
industry energy on average makes up only 1.6 per cent of total
production costs compared to average business expenditure on energy
of 1 per cent of costs. Intensive energy users within manufacturing,
for whom energy represents more than 10 per cent of costs, account
for just 2.2 per cent of manufacturing businesses.
13. Modelling work conducted for Friends
of the Earth of an industrial energy tax indicates that some sectors
with installations that come under IPPC, such as pharmaceuticals
and general manufacturing are already likely to be net gainers
from the levy/NICs package. Moreover, these less energy-intensive
installations stand to benefit from the new options announced
in the Pre-Budget Report of switching electricity supply to renewable
energy sources and investing in combined heat and power. The Digest
of UK Energy Statistics identified many of the less energy intensive
sectors currently negotiating agreements with the Government as
having the greatest opportunity to make cost-effective savings
by investing in combined heat and power [3].
14. The Government does not have to abandon
the legal certainty of using IPPC as the initial criteria for
eligibility for a negotiated discount. The Pollution Prevention
and Control Act 1999 includes enabling powers to force companies
to disclose detailed information regarding their energy consumption.
These powers exist because of amendments tabled by the Government.
Ensuring that the discounts on the rates of the climate change
levy are targeted at those installations which require it would
be a proper use of such powers.
Sign negotiated agreements with the individual
firms
15. We believe it is essential that agreements
are signed by the individual firms concerned. This would provide
a clear and strong incentive for firms to comply with the agreement
and would allow the Government to move quickly to reinstall the
full rate of the levy where a firm fails to meet the conditions
of the agreement. The option of signing an agreement with the
relevant trade associations would weaken the incentive for individual
firms to comply and so make enforcement highly problematic. Under
this system if the sector target was not met and several free
rider companies were identified the only line of enforcement open
to the Government would be to pull the plug on the deal with the
trade association. This enforcement process is therefore likely
to become a game of chicken with the Government having to judge
how bad the situation needs to get before it dares act. This type
of agreement would also disadvantage progressive firms in comparison
to free-riders. The more heterogeneous the sector is the more
serious this problem is likely to be.
16. In order to ensure that firms are complying
and are seen to be complying, the agreements should require that
each company pays for an independent site-by-site audit of its
annual emissions that is submitted to the Government. Each company
should also be required to fund an independent energy audit of
its processes and premises to establish opportunities for energy
saving and the uptake of renewable energy sources. A progress
report on exploiting these opportunities should be required each
year and a new audit conducted every three years.
Ensure agreements are dynamic and not static
17. It is vital that the agreement signed
provides a dynamic incentive for the firms involved and is not
locked into investing in existing technologies with short payback
times alone. One of the key attributes of an economic instrument
like the Climate Change Levy is that it does provide an ongoing
dynamic incentive for firms to reduce emissions that stimulates
innovation. It would be ludicrous if the agreements made with
these sectors who are the most energy-hungry failed to do this
also. We are concerned that the current negotiations are locked
into business as usual options rather than providing an incentive
to innovate, go beyond compliance and change the pattern of investment.
18. The Government can improve the agreements
approach in this regard by setting ambitious emission reduction
targets related to international benchmarks for what is economically
and technically possible. The Netherlands has adopted such an
approach in the recent Energy Efficiency Benchmarking agreement
which requires processes to be benchmarked against similar processes
around the world in terms of energy efficiency with the requirement
that firms achieve a top 5 rating within a certain period of time.
The aim should be to move these firms toward making more far-reaching
energy efficiency investments with a payback of 8 to 10 years
rather than just those with a 2 to 4 year payback which companies
are putting in place already as part of the normal business cycle.
Minimise trading provisions within negotiated
agreements
19. The Government has already announced
that it wants to allow some form of trading within the agreements.
This could create significant barriers to the development of wider
emissions trading schemes. There is a consensus that once the
practical difficulties surrounding trading systems are addressed
properly such systems will play an important role in reducing
CO2 emissions. The Government needs to ensure that
the design and extent of any trading provisions included in the
agreements do not create barriers to establishing such trading
systems. There are three particular problems.
20. First, all agreements are likely to
be based upon improving energy efficiency per unit output. Emissions
trading schemes will rely upon an overall ceiling or cap for emissions,
regardless of output. The trading scheme within the agreement
would be "cap-less" and as such directly incompatible
with any domestic emission trading scheme and lacking credibility
on the international stage. We understand that the Government
intends to offer firms the chance to convert from energy efficiency
based agreements to carbon-based agreements to allow firms within
the agreements to trade with firms in trading systems outside
the agreements. The effectiveness of such a system will depend
on both the targets set and the details of the conversion process.
21. Second, the negotiated agreements are
being agreed on the basis of what is cost-effective for firms
in that sector alone. They are likely to vary in how accurately
they reflect this given the process of negotiation involved and
the problems of the Government having to rely upon the firms themselves
for full and accurate information in order to set the target.
Emission trading systems operate on the basis that trading occurs
between sectors according to a common metric. There is a concern
that if the trading market within agreements is more attractive
to the firms involved they will not engage in wider emissions
trading systems when they are established.
22. Third, emissions trading systems have
to be transparent to operate properly. The negotiated agreements
have not been transparent to date.
Relevant paragraphs on renewable sources of energy
from Friends of the Earth's response to the HM Customs and Excise
consultation on the Climate Change Levy.
23. The Energy Saving Trust is currently
working on a scheme which will verify "renewables only"
electricity contracts, called Future Energy. Once this system
is up and running, which should be well before April 2001, there
is no technical reason why energy sold through these contracts
could not be exempted from the levy. The European Commission has
a strong policy in favour of encouraging renewable electricity.
There is a good case to argue that imported non-renewable electricity
should not be given the same rate of tax in the UK as this would
actively discourage the uptake of renewable energy. Renewable
sources are already recognised as meriting different treatment
in the Electricity Directive. However, assuming perfect transfer
of policy objectives between European institutions does carry
some risk so another approach may be worth considering.
24. The levy will be paid by electricity
suppliers, who also pay the fossil fuel levy (FFL). Renewable
energy is currently exempt from the FFL. The body which administrates
the FFL, the Non-Fossil Purchasing Agency, has sufficient information
on the content of electricity supplied which comes from renewable
sources for Customs and Excise to offer a quarterly rebate of
the CCL reflecting the amount of renewable electricity used in
that period. In this way, no special rate is required but all
renewables are effectively exempted from the levy. It would also
create an incentive for all electricity supply companies to increase
their uptake of renewables.
References
[1] Friends of the Earth, 1999. Britain's
First Green Budget. London, FOE.
[2] Friends of the Earth, 1999. More Carrots—Fewer
Sticks: Reinvesting Britain's Green Tax Revenues. London, FOE.
[3] DTI, 1998. Digest of UK Energy Statistics
1998. London, The Stationery Office.
18 November 1999
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