Select Committee on Environmental Audit Second Report


The Climate Change Levy package is made up of four main elements

1. The Climate Change Levy (CCL, or the Levy) is a tax charged on the energy used in business (and the public sector), its aim being to encourage organisations to use energy more efficiently, and thereby to reduce greenhouse gas emissions from these sectors below the levels they would otherwise have reached.

2. The Levy emerged from recommendations in the Marshall Report, published in 1998.[1] The policy was then announced in Budget 1999, legislated for in the Finance Act 2000 (as part of the initial UK Climate Change Programme), and came into effect in April 2001. Different rates are charged for different fuels (Box 1), based on their energy content; electricity attracts the highest rate because of the proportion of the energy used to generate it which is lost in combustion, transmission, and distribution. Levy charges appear on organisations' fuel bills, with the revenue collected and passed on to HM Revenue & Customs by power companies, in the same manner as VAT.

Box 1 CCL rates on different fuels (for 2007-08)

Source: HM Treasury, Budget 2007, Pre-Budget Report 2007

3. In outlining plans for the Levy, the Government stressed the need for special consideration for energy-intensive industries exposed to international competition.[2] The result was the introduction, alongside the CCL, of Climate Change Agreements (CCAs, or the Agreements), enabling companies in a number of industrial sectors to claim an 80% discount on the Levy in return for agreeing to meet certain energy efficiency targets. As of 2007 there were Agreements covering 51 different industrial sectors, comprising around 4500 'target units' (a facility, or cluster of facilities, owned by one company and sharing a single target).

4. A further element of the CCL package is the use of Levy revenues to accelerate energy efficiency. Budget 2001 was clear that: "All [CCL] revenues will be recycled back to business".[3] One element of this was through a 0.3% reduction in employers' National Insurance Contributions (NICs) from April 2001. The second element was through the creation in 2001 of the Carbon Trust (to provide carbon reduction investment, loans and advice to business); as well as an Enhanced Capital Allowance (ECA) scheme, administered by the Carbon Trust, to encourage the purchase of energy efficiency equipment.

5. The fourth main element of the package is a total exemption from paying the Levy on alternative energy sources in order to encourage their development, chiefly:

  • Electricity generated from renewable sources (with the exception of large-scale hydroelectric power plants with a declared net capacity of more than 10 megawatts); and
  • Energy used in 'good quality' combined heat and power stations, and electricity generated by combined heat and power.[4]

The CCL package is the second largest measure in the UK Climate Change Programme

6. At the time the revised UK Climate Change Programme was published, in March 2006, the CCL and CCAs were projected to be two of the three most important contributions towards the Government's 2010 target of a 20% reduction in UK CO2 from 1990 levels. Since then, projections of their impacts have been reduced slightly, but the CCL still features as the second biggest measure on its own, with a projected annual saving of 12.8MtCO2[5] (million tonnes of carbon dioxide) in 2010 (Table 1). Between its announcement in 1999 and the end of 2005, the Levy alone is estimated to have saved a cumulative total of some 60.5MtCO2.[6] The Government projects that the Levy and Agreements together will be responsible for around a third of all the carbon savings achieved by UK policy by 2010.[7]

Issues tackled in this report

7. Notwithstanding its importance to the UK Climate Change Programme, the CCL package has from its beginning been the subject of some controversy. For instance:

Table 1 The CCL and CCA were two of the top three policies in the 2006 Climate Change Programme

Sources: Climate Change: The UK Programme 2006, Defra, March 2006; NAO, The Climate Change Levy and Climate Change Agreements, August 2007

8. The Environmental Audit Committee has monitored the development and impacts of the Climate Change Levy package, and the criticisms made of it, since it was first proposed in 1999; but this is the first report we have devoted entirely to it. In 2006 we summed up the views expressed over a number of Committee reports:

    EAC has in the past expressed concerns about the Climate Change Levy and its associated negotiated agreements—in particular, the failure to increase the rates of the Levy since its introduction and the size of the savings which the Government claims have been achieved through Climate Change Agreements. The evaluation conducted by Cambridge Econometrics and published a year ago suggested that the Levy was not having a significant impact on industry. It concluded that energy efficiency improvements within industry might well have occurred in the absence of the Levy, as a result of technological change and the relative decline of UK energy-intensive sectors; and that, if the Levy had had an effect, it was likely that this was simply due to its announcement rather than to the ongoing impact of Levy rates. The recent Budget has at least increased the rates, though it remains to be seen whether the scale of the increase will have any significant impact.[9]

9. In July 2006 we asked the National Audit Office (NAO) to carry out a study into the effectiveness of the CCL and CCAs. In August 2007, following publication of the third set of biennial results from the Climate Change Agreements, the NAO published its report (Box 2). This found that both the CCL and CCA had driven genuine carbon reductions; but that the impact of the Levy was now harder to discern, and that CCAs were now forecast to achieve less than formerly projected.

10. Drawing on the work of the NAO, plus the evidence we received from a variety of sources, in this report we attempt conclusively to address these issues. The overarching questions we examine in this report are:

  • How effective has the CCL package been in reducing carbon emissions?
  • What have been the economic impacts of the CCL package on UK business?
  • Should the CCL package be reformed, and in what ways?
  • What are the wider lessons to be learned from this policy: both about reducing emissions from the business sector, and about climate change policy more generally?

1   In March 1998 the then Chancellor appointed Lord Marshall, then President of the CBI, to investigate ways in which economic instruments could be used to drive reductions in greenhouse gas emissions. Lord Marshall reported in November 1998, making a number of policy recommendations designed to reduce emissions without harming business competitiveness. Among the policies implemented from these recommendations were the CCL package and the UK Emissions Trading Scheme. HM Treasury, Economic Instruments and the business use of energy: A report by Lord Marshall, November 1998. Back

2   HM Treasury, Budget Report 2001, March 2001, para 6.22 Back

3   HM Treasury, Budget Report 2001, para 6.20 Back

4   In addition, the exemption also applies to other alternative energy sources: electricity generated from coal mine methane; fuel used in certain processes using recycled materials which compete with dual use processes; and waste Liquefied Petroleum Gas, low value coal and solid fuels re-sold. Back

5   To be precise, the figure originally published by the Government was 3.5MtC (million tonnes of carbon). Recently, the Government has begun expressing all carbon emission figures in terms of carbon dioxide; this report follows suit, converting original Government figures from carbon into CO2 where necessary. One tonne of carbon is contained in approximately 3.67 tonnes of carbon dioxide; 3.67 (or more precisely, 44/12) is the ratio of the molecular weight of carbon dioxide to the atomic weight of carbon. To convert an original savings figure of 3.5MtC into CO2, one multiplies by 44 and divides by 12, yielding 12.83 MtCO2Back

6   HC Deb, 24 July 2007, col 1000W Back

7   "Speech by the Rt Hon Gordon Brown MP, Chancellor of the Exchequer, to United Nations Ambassadors, New York", HM Treasury press release 31/06, 20th April 2006 Back

8   HM Treasury, "GDP deflators at market prices, and money GDP", 20 December 2007, Back

9   Environment Audit Committee, Sixth Report of Session 2005-06, Keeping the Lights On: Nuclear, Renewables, and Climate Change, HC 584-I, para 37 Back

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