Third Standing Committee on Delegated Legislation
Tuesday 4 March 2003
[Mr. David Amess in the Chair]
Draft Climate Change Levy (Use as Fuel) (Amendment) Regulations 2003
8.55 am
The Economic Secretary to the Treasury (John Healey): I beg to move,
That the Committee has considered the draft Climate Change Levy (Use as Fuel) (Amendment) Regulations 2003.
This is the first occasion on which I will have the pleasure of serving under your chairmanship, Mr. Amess, and I look forward to it.
The issue is narrow: the regulations specify seven processes in which the taxable commodity used qualifies for an exemption under the climate change levy. Taxable commodities include electricity, natural gas, coal and petroleum coke, and supplies of those may be exempt from the climate change levy if they are not used as a fuel. Paragraph 18(2) of schedule 6 of the Finance Act 2000 gives the Treasury the power to specify, by regulations, uses of a taxable commodity which are to be taken as uses of the commodity other than as fuel.
Typically, a taxable commodity is not used as fuel if it is used as a raw material. In such processes, the energy used is not burned or is used to produce a chemical reaction that results in part of the energy being burned as fuel and part not—so-called dual use. An example of that is when coal, coke or natural gas is used as a chemical reductant for iron making in blast furnaces.
Due to the technical nature of the exemptions, Customs and Excise sought independent advice on all processes proposed for exemption. When the climate change levy was introduced in 2001, regulations specified 43 processes through which taxable commodities could be exempt. The draft regulations will add a further seven processes to the Climate Change Levy (Use as Fuel) Regulations 2001.
The commodities and processes are: coal, coke and natural gas used as chemical reductants in the blast furnace production of zinc and other non-ferrous metals; liquid propane used in the production of ethylene; coal and coke used in the recarburising of iron and steel; natural gas used purely as a feedstock in the production of carbon black; liquefied petroleum gas used as a feedstock in the cracking process to produce lower olefins; lower olefins used as a feedstock for conversation by chemical processes; and coke used in the manufacture of titanium dioxide by the chloride process.
The seven processes were notified to Customs and Excise prior to the introduction of the climate change levy. However, due to the complexity of the processes and the requirement for further information from the
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businesses that submitted the proposals for exemption, a decision on the eligibility of the processes was not available when the levy was introduced in 2001 or when the regulations to cover the other 43 processes were introduced.
To ensure that no business using such processes was disadvantaged, Customs and Excise introduced a concession that was granted to those processes pending advice and a decision from technical advisers. The concession was published in writing to those requesting the relief and was publicised by the relevant trade associations. We understand that businesses are claiming full relief pending amendment to the 2001 regulations and confirmation in law of the exemptions.
Regrettably, when the technical decisions on the seven processes were ready, the European Commission was undertaking a state aids investigation into the principle behind the dual use exemption. The Government therefore judged it prudent not to introduce further regulations granting exemptions to the seven processes at that time. However, following the successful conclusion of the Commission's inquiries, we now want to amend the regulations. The amended regulations for the seven processes will take effect in relation to supplies of taxable commodities made on or after the date on which the regulations come into force.
The Government are committed to ensuring that businesses operating the qualifying processes can benefit to the full extent of their entitlement. Amending the regulations to incorporate those processes ensures equity throughout the sector and puts the exemption on a proper legal footing.
9 am
Mr. Howard Flight (Arundel and South Downs): May I welcome you, Mr. Amess, to the Chair for our deliberations this morning?
We support the statutory instrument because it includes the seven areas to which the Minister referred in the exemption from the ill-conceived climate change tax. We are not surprised to learn that the delay in the introduction of the regulations was caused yet again by issues raised by the EU.
I have some questions for the Minister. Are there any more usages for which the Government are considering exemptions, or any outstanding requests for exemptions that have not yet been dealt with? Are any part fuel and part non-fuel areas still under consideration for exemption? Is the Minister satisfied that existing exemptions and those listed in the order cover all possibilities? Is the exemption territory finally put to bed by the statutory instrument?
I cannot help but detain the Committee for a short while to comment on the climate change tax that has now been operating for three years. I fear that it represented a severe burden on manufacturing in that period of serious recession and nearly half a million job losses. It is a flawed tax because it fails to reward efficient industries and it fails to protect the environment. The claimed offset in reducing employee national insurance contributions is, in retrospect, a
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deceit, because national insurance contributions for employees and employers increase by a full 1 per cent. this April. Labour-intensive industries benefit.
John Healey: We are ranging rather more widely than the regulations, but as the hon. Gentleman tempts me to intervene, will he confirm that his party is still committed to abolishing the climate change levy?
The Chairman: Order. May I remind the Committee that we should be debating the regulations? Hon. Members should confine their remarks to the order.
Mr. Flight: As I said, the order is welcome because it includes exemptions. However, we hope that the Government will reconsider the tax and seek other exemptions. The tax does not achieve its objective; it does not encourage or reward clean and efficient processes or help the clean nuclear industry. It is a damaging tax for the environment.
9.3 am
Dr. Vincent Cable (Twickenham): I wish to endorse the hon. Gentleman's comments. Our approach is rather like the Irish advice that it would have been better if we had started from somewhere else. Given that we have the climate change levy, and considering the way in which it operates, it is sensible to exempt categories that do not contribute to carbon dioxide emissions. I make that point in general; my hon. Friend the Member for Truro and St. Austell (Matthew Taylor) will make specific comments about his constituency.
The distinction made by the Minister at the outset is fundamentally clear: there is a difference between burning hydrocarbons, of which carbon dioxide is a by-product, and the use of petrochemical feedstocks, which does not have that effect and should be exempt if one is targeting carbon dioxide emissions. We also have these hybrid cases, which are difficult to identify and perhaps rather minor in the grand order of industry. They must also be included if the objective is specifically to exclude products that do not directly generate carbon dioxide. Given the logic of where the Government are starting from, it is sensible to make those exemptions.
I want, however, to make a general point that reflects what the hon. Member for Arundel and South Downs (Mr. Flight) has said. The climate change levy, with its numerous exemptions, has generated a lot of additional complexity in the tax system which could have been avoided if the Government had tried to tackle the climate change problem in a simpler way by taxing the primary energy products at source. I am referring to the concept of a carbon tax. If tax had been imposed on coal coming from the mine, on oil coming from the North sea pumps or the import terminals, or on gas at source, and that tax had simply been allowed to trickle through the system, many of these problems would have been avoided.
The Government have tried to tackle the matter by taxing individual production sources, so they have got caught up in the logic of having to deal with numerous exemptions. As that is where they are coming from, we
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will support the order. However, we also note that the operation of the levy is an inefficient way to deal with the problem of carbon dioxide emissions.
9.6 am
Matthew Taylor (Truro and St. Austell): I do not intend to detain the Committee for long.
As my hon. Friend said, the reason for the exemptions is related to the wider complications in the system. The system attempts to target individual producers in a way that addresses two fundamental issues. First, it asks whether producers are directly contributing to carbon dioxide emissions and, therefore, to climate change. Secondly, the Government acknowledged that the impact of the system could be particularly detrimental to businesses that are major energy users competing in a sector that is highly price competitive with overseas suppliers.
As the Minister knows, I represent companies in the kaolin industry, which is one of Britain's largest exporters. It is also Cornwall's largest industrial base and only major industrial employer. It is in a peculiar and harsh position. For Imerys, the largest kaolin company, energy accounts for 20 per cent. of production costs, and 80 per cent. of the product is exported into a highly price competitive sector. Kaolin is a bulk good, and there is relatively little differentiation—it is almost identical regardless of whether it is produced in, for example, Brazil, Cornwall or America. Imerys does not have an exemption, and almost none of its activities comes under the rebate scheme. The result has been 300 job losses over the past year because the company has ceased to produce engineered clays due to the cost differential. That is likely to be exacerbated as production increases in Brazil.
Why has the company not received that help, given that it appears to meet the Government's criteria? It is vital to Cornwall's economy; it is making a concerted effort to increase energy efficiency—it was one of the first companies in the country to introduce combined heat and power; it faces serious competition from abroad in a price-sensitive sector; energy accounts for 20 per cent. of its production costs; and it exports 80 per cent. of its production. The answer to the question is simple bureaucracy: because it is an open-air mining company, most of its activities do not come under the integrated pollution control regime, so it does not fall into the category that allows for any reduction.
Like my hon. Friend, I would have started from somewhere else. It is important not to tie up decisions in red tape, but to implement them fairly on the basis of the original intention. There is no doubt that the Government recognised the problems of companies and sectors such as this and that they sought to address them, but they chose a system that excluded one of the businesses in the country—there are several companies concerned—which would be most directly affected. I have made representations to Ministers, but I hope that they will agree to consider the matter again. I have written this year to ask for a meeting with industry
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representatives, and I hope that, rather than me detaining the Committee at length, the Minister will at least agree to meet me again to consider the issue.
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