Memorandum by the Food & Drink Federation
(CC61)
The Food and Drink Federation (FDF) represents
the UK's largest manufacturing industry in terms of gross output
and third largest in energy consumption, and we therefore need
to scrutinise very closely any proposals for economic instruments
relating to energy that may impact upon the competitiveness of
our industry.
THE ORIGINAL
PROPOSALS
As originally proposed, the Climate Change Levy
would have resulted in a total cost to the food and drink manufacturing
industry of around £150 million after allowing for the rebate
in employers' NI contributions. FDF was invited to negotiate an
agreement on energy efficiency, but the savings that could be
achieved through this were unclear in that it seemed the discounts
from the Levy for participants in agreements might be limited
to 50 per cent and that the criteria for entry into such agreements
in any event appeared to exclude almost half of the industry.
The Federation made its views known to Ministers
through meetings and written submissions, both separately and
collectively with other associations representing major energy-using
industries; and submitted evidence to the HM Customs and Excise
consultation document and to the DTI Trade and Industry Committee
Inquiry on the impact of the Levy.
We argued that, particularly in an industry
which is subject to strong competition, as well as operating to
low profit margins, the costs could not be absorbed by our businesses
or passed on to customers. It would be strongly detrimental to
our position within overseas markets as well as in the UK, giving
rise to import penetration, with major implications for profitability
and employment.
We were further concerned at the distributional
impact. It was clear that our industry, which has made great strides
in improving energy efficiency over recent years, was to be heavily
penalised, whilst some service industries and the public sector,
using relatively little energy, stood to make "windfall"
gains through the reduction in NI contributions without having
to make any effort at all to reduce energy consumption.
We welcomed the opportunity to negotiate an
energy agreement with the DETR against which there would be a
discount from the Levy, but it was of concern that a full discount
had been ruled out. We argued that it was inequitable that a company
signing up to a negotiated agreement and therefore making a full
and agreed contribution to reducing greenhouse gas emissions should
nonetheless still be penalised by paying a levy aimed at encouraging
such reductions.
We also expresses the view that it was inequitable
and anti-competitive that a company should be able to participate
in such an agreement only if it was in a sector that would be
subject to the regulations implementing the EC Directive on Integrated
Pollution Prevention and Control (IPPC). It appeared that whilst
some sectors of the food and drink manufacturing industry would
include IPPC-regulated sites and would therefore be eligible to
join in a negotiated agreement, other sectors of our industry,
amounting to around 40 per cent of its production and therefore
representing very substantial energy usage, would not be able
to take part.
We urged Government to give consideration to
allowing of a 100 per cent discount from the Levy for all companies
taking agreed measures to reduce energy consumption, whether through
negotiated agreements or otherwise. This would, we suggested,
encourage achievement of the Government's overall objectives in
reducing greenhouse gas emissions and at the same time would not
affect the competitive position of the industry: it seemed, from
the information available, that measures of a similarly penal
nature were not being introduced by other countries.
THE REVISED
PROPOSALS
We are therefore very pleased indeed that Government
has recognised, through the Chancellor's pre-Budget statement,
the concerns we have expressed. Whilst logically we feel that
there should be a 100 per cent discount for participation in energy
saving agreements, against which the reduction of employers' NI
contributions would not be necessary, the proposals do signify
the possibility of revenue-neutrality for our industry if we can
agree the terms of an energy efficiency agreement in which the
whole of the industry can participate.
We specifically welcome:
— the proposed reduction in Levy rates;
— the proposed 80 per cent discount
for participants in energy agreements; and
— the exemption from the Levy for good
quality combined heat and power schemes and for renewable sources
of energy.
To take full advantage of these changes, and
to protect the competitive position of the UK industry, a negotiated
energy agreement remains of the greatest importance to us. In
the course of our negotiations with the DETR, some difficult aspects
have been resolved, in particular that access to an agreement
will be open to all sites engaged in food and drink manufacturing
and not limited to those sub-sectors where there are sites meeting
IPPC production thresholds.
Nonetheless, progress with negotiations for
our particular industry is hampered by considerations which do
not apply elsewhere. Lord Marshall, in his report to the Chancellor
("Economic Instruments and the Business Use of Energy",
November 1998) suggested that such agreements are only practicable
in a "cohesive sector with small numbers of large players".
Food and drink manufacture is an example of an extremely large
and diverse industry for whom Lord Marshall recognised the limits
of such an approach. Similar comment is made in the DETR consultation
Paper "UK Climate Change Programme".
In order to address these difficulties, we are
negotiating a framework agreement with an overall industry target,
built from probably ten separate sub-sectoral agreements, each
sub-sector comprising sites with some commonality in the way they
use energy. We believe that this is the only agreement of the
many being negotiated by the DETR which has the complexity of
a sub-sectoral structure. We do need a sensible time period within
which to do this so that our industry is not penalised simply
because of its structure and without regard to the potential in
the industry to bring about reductions in energy consumption and
greenhouse gases. The current deadline for Heads of Agreement
is virtually impracticable.
November 1999
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