Further Memorandum by Energy Intensive
Users Group (CC42B)
INTRODUCTION
EIUG represents 10 trade associations, and associated
companies, whose members consume large amounts of energy and for
whom energy is a significant proportion of total cost. We welcome
this opportunity to comment further on the Government's proposals
for a climate change levy.
EIUG initially submitted written evidence to
the Committee in February of this year, and gave oral evidence
in March. EIUG does not wish to repeat, but asks the Committee
to recall the points made then, and would like to make some further
suggestions about improving the design of the levy and ensuring
that it meets the Government's objectives. We would also wish
to register our continued concern that the levy remains an unnecessary
tax burden when applied to intensive using sectors who will make
binding commitments, unlike other sectors.
All EIUG members are currently negotiating legally
binding agreements with the Government which will deliver all
cost-effective energy savings as agreed by the sectors, ETSU and
DETR. The remaining levy liability will do nothing to further
improve the CO2 reductions that these sectors will
achieve under these agreements, and is therefore an increase in
business costs, which risks damage to competitiveness in the longer-term.
SUGGESTED MODIFICATIONS
TO THE
METHODOLOGY
Fiscal Neutrality
EIUG continues to believe that to maintain the
competitiveness of British business and improve the effectiveness
of the levy's economic signals it must be redesigned to achieve
fiscal neutrality. Present proposals are not fiscally neutral
at the sector or company level. The marginal tax liability faced
by energy intensive users does not act as an incentive to improve
efficiency, they can only do their best (as they are currently
incentivised by international competition) within the laws of
physics and chemistry. However, the tax will add to business costs
and in the long-term damage competitiveness.
For those in manufacturing sectors unable to
sign agreements there will be a more significant tax liability
and potentially greater damage to the competitiveness of some
sectors. For the service and public sectors there remains a significant
benefit from the tax structure that makes it unlikely that they
will be persuaded to improve energy efficiency. For these sectors
energy is very price inelastic. It is therefore important that
the Government commits to improving fiscal neutrality for all
sectors over time and to ensuring that the affect of the tax is
as they expected.
For those signing negotiated agreements, EIUG
still believes that fiscal neutrality is the only way to fully
protect business competitiveness and ensure that in the longer
term all economic energy savings are made without increasing imports
into the UK.
Energy vs CO2
EIUG still believes that the Government should
adopt a CO2 tax rather than the current energy tax.
While we welcome the exemption of renewable generation and CHP
from the levy, wider economic signals need to be given to the
electricity producers via a CO2 tax. As the UK looks
to replace its current nuclear plant, as well as some of its older
coal fired stations, it is important that those decisions are
made with consideration of the externalities associated with different
forms of generation, including the potentially polluting transportation
costs of fuel.
Including all Sectors
While we await the publication of the Government's
fuller climate change programme, EIUG believes that the domestic
sector should be included in the energy tax as soon as possible.
As discussed in our previous submission, the exclusion of the
domestic sector is hindering the development of a truly environmentally
focussed policy and has done nothing to tackle the issue of fuel
poverty. There is obviously significant scope for energy efficiency
improvements in the domestic sector; an energy tax could possibly
play a significant role in raising awareness of energy use.
Negotiated Agreements
EIUG has some concerns about a number of points
on the negotiated agreements. Firstly, the Government proposes
that those companies or sectors failing to meet their agreements
will have their levy reduction removed. This seems to fail to
distinguish between gross and marginal failure and should be reconsidered.
EIUG would like to see penalties proportionate to failure being
considered by the Government. We do not believe that the Government
wishes those that have tried hard and only marginally failed,
perhaps due to factors beyond their control, to face possible
plant closure due to the tax structure.
EIUG also remains concerned about the continued
exclusion of companies not covered by the Integrated Pollution
and Prevention Control Directive (IPPC). If we are to have "negotiated
taxation" anyone should be allowed to join in. EIUG would
rather see agreements open to all those sectors who wish to sign,
some of whom will be high-tech sectors with whom bureaucracy has
not caught up and other are very intensive energy users not covered
by virtue of their business process.
These agreements offer the only important commitment
to reducing emissions that the Government is getting; no other
sectors are asked to do this and we see no good reason to limit
the take-up of such agreements when companies wish to make them.
Bureaucratic reservations about policing, however understandable,
cannot sustain themselves against natural justice. EIUG also believes
that the IPPC definition may result in claims of undue discrimination
and unfair competition. Such legal challenges would be unhelpful
and it would therefore seem better to widen the coverage of the
agreements now rather than waiting for lawyers to rectify the
manifest injustice.
EIUG also remains concerned by the treatment
of integrated industrial generation. While the Government has
excluded CHP from the levy, a move we welcome, CHP is not always
the most efficient solution for industry using on-site generation,
for example some use up by products and avoid "flames of
shame" by flaring. It would therefore seem sensible to consider
how other industrial generation can be encouraged where it is
the most economic and efficient solution for a given industry.
EIUG hopes that Government will further clarify
the exemptions it has offered to certain processes using fuel
as a feedstock. Again definitions will have to be carefully drawn
up to ensure that there is no undue discrimination between similar
processes in different sectors.
The levy also needs to be integrated with other
environmental objectives and in particular with the IPPC legislation.
Where extra energy is used for the purposes of environmental improvement,
either in production or during the product lifetime, for example
energy retaining glass or low weight high strength automobile
body sheet, consideration should be given to exempting such energy
usage. Companies and sectors signing negotiated agreements should
also be allowed to use their agreements to satisfy the energy
efficiency obligations placed on them under IPPC legislation.
It is important that the UK has an integrated approach to environmental
policies that may have conflicting objectives.
Monitoring and Fine Tuning
EIUG would like to see the Government publish
a study on 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 merely as a revenue raising
mechanism by the Treasury. As discussed above, a commitment to
improve the fiscal neutrality of the tax would be a welcome step
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. It is extremely important that UK continually monitors
its progress towards its environmental targets and fine-tunes
policies where necessary to ensure that we achieve maximum improvement
to the environment, as least cost, without damaging the competitiveness
of British business.
CONCLUSIONS
EIUG welcomes the improvements made to the design
of the climate change levy following consultation with business.
However, this remains a superficially considered tax, with those
sectors capable of achieving the lowest cost improvements, the
public and service sectors, facing no incentive to do so. The
tax also remains focused on energy rather than CO2
and sends a false signal to sectors with agreements. It therefore
seems that there is significant scope for improving the design
of the tax to make it more effective in meeting the Government's
objectives. There is still a year before the tax is implemented
when some of these design issues can hopefully be addressed, but
at the very least it would be reassuring if the Government were
to commit to improving (not simply increasing) the tax over the
coming years.
19 November 1999
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