Memorandum by Calor Gas Ltd (CC57)
The Committee has requested further evidence
on the Levy with an emphasis on constructive suggestions. Calor
Gas is pleased to respond. Calor is the UK's leading supplier
of liquefied petroleum gas (LPG), used for various applications
in the commercial, industrial, domestic and transport sectors.
It has some 27,000 large commercial customers and over 4 million
domestic consumers. Calor also has an interest in an environmentally
benign HC refrigerant, Calor "CARE"—and new and
growing use of pure forms of LPG.
1. REQUEST FOR
EXEMPTING LPG FROM
THE CCL
"The Economic Secretary . . . said that
. . . a tax has to pass the test for a good tax, that is that
it is not going to have perverse incentives nor impose costs that
are disproportionate to the benefits," (Environmental Audit
Committee, Pre-Budget Report, 16.2.99, para 20).
The CCL will damage Calor's business, already
hotly challenged by hydrocarbon oils in its market heartlands.
It will worsen UK environmental conditions by encouraging switching
from LPG to more polluting and less efficient fuels. The CCL would
thus shift the tax burden perversely from "bads" to
"goods".
Calor supplies gas in rural and peripheral areas
not served by natural gas pipelines. Effectively, customers in
these areas have a choice between relatively environmentally friendly
LPG, and hydrocarbon oils, or to a lesser extend the distinctly
environmentally unfriendly option of coal. LPG is a clean niche
fuel that sells in an extremely price sensitive market against
more polluting fuels.
Typical commercial uses for LPG include: agriculture
where LPG is widely used by farms to heat livestock rearing premises,
provide chemical-free crop desiccation, dry grain etc.; industry
where usage includes space heating, powering forklift trucks,
glassblowing, water heating and industrial processing; and tourism
where many hotels and restaurants use LPG for heating/catering—most
holiday parks use LPG in mobile homes and amenity buildings.
The CCL will levy an extra £15 million
a year for the privilege of using this clean fuel. The price of
LPG will be forced to rise by 10-15 per cent. The CCL will not
affect the price of Calor's main competitor products, hydrocarbon
oils. The reason given for exempting oils is that they are already
subject to excise duty, whereas LPG is not. Exempting hydrocarbon
oils from the CCL is illogical. The fact that they are already
subject to another tax, devised for totally different reasons,
does not justify causing a major distortion in market conditions.
Lord Marshall specifically warned of this danger in his report:
"These [price] signals could be undermined if, as a result
of a new tax on energy products which excluded mineral oils, oil
became relatively cheaper. This would point to retaining the existing
differentials" (para.131). There will also be a distortion
further in favour of kerosene, again a more polluting fuel than
LPG, which is exempt from the CCL but which also benefits from
a peculiar anomaly of being a hydrocarbon product without excise
duty! This illogical discrimination will widen the price differential
in a negative direction between hydrocarbon oils and LPG. We have
received no Government guarantee that this price differential
will not be widened.
So, the CCL will distort the marketplace with
LPG suffering a 10-15 per cent price penalty compared with its
less environmentally friendly competitor, hydrocarbon oils. If
the CCL encourages a switch to hydrocarbon oils there will be
less money raised by the CCL and more environmental damage caused
by the switch to more polluting fuels. We believe the potential
for such switching could be substantial, leading to a vicious
circle of our having to raise prices further. The contrast in
the treatment of LPG as an industrial fuel and LPG as a road fuel
shows the CCL as being perverse and not integrated within wider
Government policy. Excise duty reductions on LPG as a road fuel
in successive Budgets have recognised its significant environmental
advantages over the hydrocarbon oil products, petrol and diesel
(road fuel uses are, of course, exempt from the CCL). LPG emits:
— Less CO2 than hydrocarbon
oils—CO2, of course, being the putative target
of the CCL.
— Far less benzene and 1,3 butadiene
than petrol or diesel; there is no known safe dose of these dangerous
carcinogens emitted in thousands of tonnes by burning hydrocarbon
oils.
— Far less particulate matter and NOx
than diesel—encouraging NOx emission runs counter to the
EU Acidification Strategy, proposed EU Directives to control ozone,
and the Government's Air Quality Strategy (AQS).
— Far less SO2 than petrol or diesel:
encouraging emissions of SO2 also runs counter to the EU Acidification
Strategy and the AQS.
For every thousand tonnes of LPG displaced by
alternative fuels, CO2 emissions will rise by: 296t
if kerosene or gas oil if the replacement fuel; 593t if coal is
the replacement; 938t if anthracite is the replacement; and 3,606
tonnes if electricity is the replacement fuel.
Customers who retain LPG as a fuel will face
increased costs, averaging 10-15 per cent. This will impact severely
on heavy users found, for example, in horticulture and poultry
farming causing upward pressure on farming and food costs. This
is in the context of farm incomes having fallen dramatically by
75 per cent over the past two years. The NFU estimate the CCL
will cost a typical horticultural enterprise hundreds of thousands
of pounds a year, and up to £25,000 a year for a poultry/egg
producer. They warn: "There is a danger, therefore, that
many of the smaller businesses will be at risk of failure and
the larger ones will wish to move to climates and locations more
amenable to growing greenhouse crops". The last thing that
UK agriculture needs is new taxes.
The CCL will hit the competitiveness of energy
intensive manufacturing and production outside the EU and inside
(if there are not equivalent taxes imposed in other Member States).
The result could be higher consumer costs, job losses, plant closures,
reduced investment and increased imports of energy intensive goods.
Glassblowers, who are particularly located in parts of Scotland,
for instance, and who for technical reasons must rely on LPG will
be disadvantaged internationally. Other users in rural areas include
hotels and restaurants. These marginal and seasonal businesses
would be put under pressure by increased fuel costs.
Contrary to Government assurances, the impact
of the CCL will not be relieved by the NI concession. Worse, the
CCL will be collected on LPG and not on all other fuels. Yet the
NI concession will be distributed to those selling all fuels including
those not subject to the CCL. Not only will this force our prices
up, but our competitors selling less clean fuels will get a subsidy.
This cannot be what Government intends.
We are concerned that the CCL cannot incorporate
the final EU Energy Tax package which is yet to be agreed. Finalising
the UK legislation before the detail of any EU Directive is known
could result in prejudice to the UK and fiscal confusion.
Calor requests the Committee to consider the
impact of the CCL with a view to exempting LPG. Otherwise, the
CCL will have the perverse effect of favouring less-efficient,
more polluting fuels, and will confound its own purpose—to
reduce CO2 emissions. We do not believe that in relation
to LPG the CCL passes the Government's own test for a good tax,
nor does it integrate with the AQS or the EU Acidification Strategy
and ozone policy. Taxing LPG means encouraging climate change
for the worse.
2. SUGGESTIONS
FOR PRACTICAL
MITIGATION OF
THE CCL
The CCL causes significant anomalies besides
the perversity described above in relation to LPG.As proposed
it would effect very significant transfers of wealth from the
private sector to the public,from manufacturing industry to service
industry, and even from the UK to abroad if industry is forced
torelocate.
Energy intensive industry fears a particularly
severely impact and is negotiating rebates from the CCL with Government
in return for delivering energy efficiency improvements over time.
Lord Marshall in his original report saw the CCL "as part
of a package of measures" for reducing greenhouse gas (GHG)
emissions. We suggest two proposals below to mitigate the severity
of the CCL.
The 1987 Montreal Protocol led to a ban on the
ozone depleting chemicals, CFCs and HCFCs, in most developed countries.
Most users of refrigerants switched to HFCs for lack of other
alternatives—but HFCs are significant contributors to global
warming. On average, HFCs have 2,274 times the global warming
potential (GWP) of CO2. Since 1995, the UK Government
Panel on Sustainable Development has recommended phasing out HFCs.
Kyoto included HFCs amongst the emissions that must be reduced
to stop global warming.
Most of the damage from HFCs arises from system
leakage. 75 per cent of HFC consumption consists of topping up
leaking systems. By 2010, HFCs will represent about 4 per cent
of the UK's GHG emissions. Thus, phasing out HFCs would help the
UK achieve over a third of its legally binding target reductions
of 12.5 per cent of GHGs.
Encouraging the refrigeration industry to invest
in environmentally benign alternatives to HFCs, where such practical
alternative exist, would relieve some of the pressure from the
CCL. Environmentally benign alternatives (sometimes called "NIKs"—Not
In Kind) now exist for all applications. Calor produce an environmentally-benign
NIK—HCs. HCs do not damage the ozone layer and have an almost
negligible effect on global warming—with a GWP approximately
1000 times lower than the HFC average.
One new economic instrument could be a tax based
on the GWP of refrigerants: a recent DETR report (UK Emissions
of HFCs, PFCs and SF6 and Potential Emission Reduction Options,
Jan. 1999) deemed using such instruments an effective means of
reducing HFC refrigerant emissions. Interestingly, the Danish
Government proposes to introduce a tax on HFC refrigerants based
on their respective GWP. The tax revenue thus raised could be
recycled back to business in the form of schemes to promote energy
efficiency and reduce GHG emissions, such as funding proper refrigerant
reclamation and disposal schemes administered by local authorities.
It could also fund a 100 per cent capital write-down in year one
of investment in the manufacture of environmentally benign refrigeration
technology:
Large retailers, such as Sainsburys and Tesco,
gave evidence to the Trade and Industry Select Committee recently
highlighting the very heavy burden that will fall on supermarkets
under the CCL because of the large amount of refrigeration which
they use: a typical store spends 48 per cent of its energy costs
on refrigeration. Iceland, however, have already taken the decision
on environmental grounds to refit their stores to take HC refrigeration.
A second instrument would be to allow into negotiation on potential
CCL rebates a recognition of reduction in GWP through the use
of NIK refrigerants. This new instrument would directly ease the
potential burden on supermarkets and food prices.
These complementary economic instruments might
afford scope for the Government to lessen the "pain"
caused by the CCL since phasing out HFCs would take the UK a third
of the way towards its Kyoto targets. The CCL would not need to
be levied at rates to burdensome on industry if our proposed instruments
deliver environmentally benign refrigeration.
November 1999
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