Select Committee on Environmental Audit Second Report



The Climate Change Levy package is the second biggest element in the UK Climate Change Programme, by estimated size of carbon savings. In design, it is a bold and innovative suite of policies. In practice, notwithstanding the difficulties in (and disagreements over) measuring its impacts, carbon savings appear to have been significant; but were strongly front-end loaded and have eased off since soon after its introduction.

According to the evaluation accepted by the Government, the Levy will reduce annual UK CO2 emissions by 12.8 million tonnes by 2010. But according to this work, these savings have come mainly from the effect its announcement had on raising awareness of the potential for energy savings; most of these savings were therefore the result of actions taken before the tax actually came into operation. The Levy itself (i.e., the amount of tax it imposes on energy use) has had relatively little effect on business emissions, especially in the case of SMEs and large but non-energy intensive organisations.

The Government believes that Climate Change Agreements (CCAs) will reduce annual CO2 emissions by an additional 7 million tonnes by 2010; although businesses covered by Agreements tend to argue that CCAs are more effective than the Levy. It is extremely difficult to evaluate the effectiveness of CCAs for a number of reasons; for instance, different economic sectors have been allowed to choose different baseline years from which to measure their progress. Anecdotal evidence suggests that the process of complying with CCAs has galvanised business interest in finding energy savings, and that key to this has been the incentive of the tax discount they offer. CCA targets have not been tightened since the first set of performance results (2004) revealed the extent of early overachivement; they should be made more stringent in the 2008 review period.

The Government says that it recycles all CCL revenues to business in the form of a 0.3% reduction in employers' National Insurance Contributions (NICs), dating from 2001, and through funding for the Carbon Trust and related programmes. This argument is complicated and controversial, not least because NICs were raised by 1% in 2003. In any case, funding for low carbon investment and advice to business should be significantly increased.

The exemptions on the Climate Change Levy for 'green electricity' and combined heat and power have had minimal effect on the construction of new renewables and CHP capacity, essentially because they are worth too little money.

The CCL package does not impose a damaging economic burden on UK business overall, and may in many cases be positive, through encouraging greater resource productivity and stimulating energy efficient industries.

Businesses face a complex tangle of different climate change policies. To an extent, however, this is a result of the efforts of Government to tailor its policies to the needs and drivers of different types of business, in the understanding that one size of instrument does not fit all. The Government is also currently consulting businesses on ways to streamline and simplify these policies. Despite the range of different business-oriented climate change policies, there is still a shortfall in policy for small businesses.

While it might have been preferable for the Government to have introduced an economy-wide carbon tax, once it implemented the Levy as a 'downstream' tax, the scope for basing it on carbon rather than energy was greatly restricted, and its benefits made questionable. Climate Change Agreements, on the other hand, should be reformed so that their targets are in the form of absolute reductions in carbon emissions, rather than relative improvements in energy efficiency.

The CCL has not worked quite as expected. According to economic theory, businesses should have acted rationally by seeking to reduce their costs through increased energy efficiency. In practice, they appear to have needed an extra stimulus to change their approach to energy use. This has profound implications for climate change policy more widely. If even large companies require additional policies to drive behavioural change, this must be all the more true for small businesses, public bodies, and private households. The Government should report on how it is applying this lesson the across the whole of the UK Climate Change Programme.

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Prepared 10 March 2008