Memorandum by the Institute for Public
Policy Research (CC76)
INTRODUCTION
The Institute for Public Policy Research (IPPR)
is Britain's leading centre-left think tank. Its purpose is to
contribute to a greater public understanding of social, economic
and political questions through research, discussion and publication.
In 1998, IPPR published a Blue print for a Business Energy Tax
and current research is concentrating on the development of emissions
trading for the UK.
After the budget in March 1999, the Government's
plans to introduce the Climate Change Levy on the business use
of energy received a great deal of unwarranted criticism from
some industry trade associations. IPPR welcomes the announcements
in the Pre-budget Report as a demonstration that the Government
has not over reacted to that pressure. The proposals are largely
in line with what was originally announced in March, with a some
concessions for genuine competitiveness concerns, as well as some
improvements to the environmental effectiveness of the Levy.
SPECIFIC COMMENTS
ON THE
REVISED LEVY
PROPOSALS
The revised Levy is not an extra tax on the
private sector. All the money from the Levy will go to fund a
cut in the tax on jobs (employer's National Insurance contributions),
and support for energy efficiency. The majority of business, including
manufacturing industry, will gain from the overall package. In
particular, the welcome extra money for energy efficiency investments
leaves companies with all the incentive they should need to reduce
their emissions.
New employment opportunities will result from
the tax. Cambridge Econometrics had estimated the original Levy
proposal would create 14,000 jobs. So far no calculations have
been made on the revised proposals, but the exemption for renewable
energy and CHP will be a major boost to those technologies and
related employment creation. These exemptions will also improve
the environmental effectiveness of the Levy and help the UK meet
its welcome commitment to reduce CO2 by 20 per cent
by 2010.
NEGOTIATED AGREEMENTS
It is important no business energy users have
been completely exempted from the Levy. However, the focus must
now move to these sectors which will receive the 80 per cent rebate
for signing negotiated agreements. It is vital that these agreements
deliver genuinely ambitious targets for emissions reductions.
Sufficient information regarding the agreements must be put into
the public domain so the public have confidence that each sector
is `doing their bit' for climate change.
EMISSIONS TRADING
IPPR has a specific interest in the emerging
ideas for a domestic emissions trading scheme. The CBI/ACBE Emissions
Trading Group (ETG) report adds a new dimensions to the Climate
Change Levy debate. Its implications have important ramifications
for the final decision over the structure of the CCL.
Environmentally, an emissions trading scheme
with an absolute cap on carbon emissions (provided the cap is
set at an ambitious level, not simply business as usual) has to
be preferable to a set of negotiated agreements based on targets
for energy efficiency per unit of output. Trading offers certainty
of emission levels, transparency of abatement costs and access
to international emissions trading markets. The negotiated agreements,
as framed, will allow an overall increase in CO2 emissions
if output grows, contain inherent information asymmetry on abatement
costs and restrict flexibility to within sectors and the UK. Ideally
they should only be used as a stepping stone towards an emissions
trading scheme for large energy users.
The ETG report shows that there are companies
prepared to sign up to absolute limits on their carbon emissions
in return for the ability to participate early in a trading scheme.
If the Government were to accept the suggestion that emissions
trading is more desirable than negotiated agreements, then a clear
distinction needs to be made between the two options and incentives
set accordingly.
If Government allowed the boundary between negotiated
agreements and emissions trading to be blurred, it may end up
conceding too much to the companies signing negotiated agreements
and therefore lose some environmental benefit of the policy. Below
are a few suggestions for how to avoid this outcome:
— Flexibility to `trade' energy efficiency
obligations in the negotiated agreements should be restricted
as far as possible, It should be clear that to benefit from the
flexibility of emissions trading, companies have to accept absolute
limits on total carbon emissions.
— The sectors still seeking negotiated
agreements should be encouraged to opt for absolute emissions
targets rather than energy efficiency per unit of output
— Companies with an absolute cap on
emissions could receive a larger CCL rebate than those only prepared
to offer a `per unit of output' target.
— The method for allocation of permits
and setting the cap should ensure that the participating companies
are given on genuine incentive to innovate, rather than reflecting
business as usual. The UK commitment to reduce CO2
emissions by 20 per cent could be a benchmark for making these
judgements.
November 1999
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