Further Memorandum by the Association
for the Conservation of Energy (CC28A)
1. The Association for the Conservation
of Energy thanks the Select Committee for the Environment, Trade
& the Regions for seeking our views regarding the practical
workings of the Climate Change Levy. We represent the major companies
involved with the manufacture, distribution and installation of
energy saving measures. We have previously made more extensive
submissions on this issue to the Select Committee for Trade &
Industry, as well as to Customs & Excise, in response to their
earlier consultation exercises. As obviously copies of these are
on the public record, it is not our intention to repeat the contents
of either in this submission.
2. This submission has been prepared following
the pre-budget statement of 9 November 1999. This in our view
correctly introduced the concept of providing accelerated tax
relief for investments in energy efficiency measures by companies.
When such tax breaks existed previously (1978-80), they led to
a 31 percent increase in investment levels by the business sector
in our members' goods and services. Conversely when removed they
led to a reduction in investment by 20 per cent, despite coinciding
with generally rising fuel prices. It should be noted that different
circumstances now prevail, both regarding interest and corporation
tax levels, as well as fuel prices, which could well lead to a
rather more muted response twenty years later.
3. We note that the indicated levy cost
per kWh has been reduced from the figures made available at the
time of the 1999 Budget. It is our understanding that, for the
average business, they imply around a 6 per cent increase in electricity
and 14 per cent increase in gas prices. As during this decade
average real electricity prices for electricity and gas for businesses
have fallen by 22 per cent and 44 per cent respectively, it will
be observed that the levy will now succeed in clawing back less
than one-third of the reductions already enjoyed. For non-energy
intensive businesses (nonetheless responsible for sixty per cent
of commercial energy consumption) to respond to the levy in the
positive way the Government is seeking—specifically by increasing
investment in energy efficiency measures—it is of vital
importance that every opportunity is found to increase awareness.
Energy costs for the vast majority of businesses are a tiny proportion
of their overheads, and seldom claim much management attention
at present.
4. It is our view that the amount raised
under the levy should be shown clearly on each fuel invoice despatched
to a business consumer. Officially Treasury Ministers are still
considering whether to identify the levy specifically on fuel
bills (c.f. Hansard Col 1074, July 20 1999). However on the same
day our director received a letter from the (then) Minister for
Energy Efficiency, Alan Meale, saying: "I do not think it
is likely that the climate change levy will be required to be
identified separately."
5. Were this not to be required, we understand
that the energy supply companies are concerned at the potentially
difficult consequences that non-identification of the levy would
have for them, both administratively and in terms of public opprobrium
at rising prices. They envisage particular billing programme difficulties
where energy intensive companies have negotiated lower percentage
levy rates, and with smaller businesses with mixed domestic and
non-residential use. There is also concern about the complications
arising from meshing in the levy with the timing of any VAT calculations.
It is felt that the failure to insist upon separate identification
within the billing system would increase billing costs.
6. However our concern is precisely as was
expressed by the Environmental Audit Committee in its seventh
Report in the 1998/9 session: "It seems perverse to do otherwise,
given that the tax is designed to change behaviour and put energy
efficiency more firmly on the agenda of businesses." We do
not accept that it is a good enough reason to reject such separate
identification on the grounds of altering conventional taxation
practice; nor are concerns that ill-informed businesses might
seek to "reclaim" the levy as they do VAT: indeed, receiving
the necessary rejection from Customs & Excise would certainly
increase awareness of the new levy.
7. There is one other practical issue pertaining
to the levy's operation, to which we would draw the Committee's
attention. We greatly applaud the flexibility the Government is
now showing regarding the introduction of lower levy rates, for
those parts of energy intensive industry which offer substantial
additional energy savings as part of their negotiated agreements.
8. However, the sums forgone by the Treasury
in consequence will amount to approaching £1 billion each
year. To ensure public confidence in the efficacy of such agreements
in practice, it is important that a detailed auditing system be
introduced whereby the claimed energy reductions are vetted pro
bono publico. This is solely in order to avoid subsequent public
suspicion regarding the actual impact in subsequent years of these
agreements. This has certainly proved to be the preferred modus
operandi in Germany, where similar agreements have been in operation
for several years. The other alternative, of requiring substantial
quantities of relevant consumption figures to be placed on the
public record, would almost certainly—and understandably—fall
foul of concerns regarding commercial confidentiality. Public
acceptance of such agreements, both initially and when in operation,
is more likely to be forthcoming under such a rigorous independent
audit system.
November 1999
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