Most of the Levy's impacts were
established before it came into operation
13. Before the Levy came into effect, the Treasury
estimated in 2000 that it would reduce annual emissions by some
7.3 MtCO2 by 2010, based on projections of its effects
on energy prices and hence demand.[11]
The most important attempt so far, however, to tease out the effects
of the Levy from other factors and estimate its impacts on carbon
emissions was carried out in 2005 by Cambridge Econometrics (CE)[12]
for HM Revenue and Customs, and published alongside Budget 2005.
This study drew on actual energy and emissions data in the period
since the Levy had been announced, comparing this with projections
of what business as usual (BAU) energy use would have been if
the Levy had not existed. These projections were made using what
the NAO describes as "one of the most sophisticated macroeconomic
models of the UK economy available", built up using historical
data on energy use and intensity across different economic sectors.[13]
14. The study's conclusions were that the Levy itself
(i.e., independent of other factors, including the impacts of
the Climate Change Agreements) led to a reduction in annual emissions
of 11.4 MtCO2 in 2002 from business as usual projections;
and that by 2010 these annual savings would increase to 13.6 MtCO2.
In reaching this latter conclusion the study assumed that the
Levy would be raised in line with inflation from 2005, rather
than from 2007 as has actually happened: accordingly, this estimate
has since been revised downwards to an annual saving from BAU
of 12.8 MtCO2 in 2010. This is the savings estimate
endorsed and relied on by the Government.
15. These estimated carbon savings were attributed
by Cambridge Econometrics to two separate factors: the 'announcement
effect' and the 'price effect'. The second of these is straightforward;
as the NAO paraphrases, the price effect "recognises that
from 2001 the Levy made energy more expensive and should therefore
have reduced demand. Higher prices affect decisions regarding
output and investment." The announcement effect is more interesting;
this "assumes that simply the announcement of the Levy in
1999 focused the attention of businesses on achieving energy efficiencies.
The result was a reduction in energy demand even before the Levy
raised energy prices in 2001."[14]
On this, Professor Paul Ekins, one of the lead authors of the
Cambridge Econometrics study, told us:
From looking at both the negotiation process
for the Climate Change Agreements and the very long lead-time
that went into the actual implementation of the Climate Change
Levy—a full two years between the report of the Marshall
Commission and when the tax was actually levied (during which
time the CBI waged an absolutely relentless campaign against the
Climate Change Levy, which I remember very well)—there was
an enormous information effect, such that with this issue of energy
prices, […] we found boards taking an interest in this issue
for practically the first time in their lives. It was no surprise
to me to find that, in the event, they discovered they could actually
save quite a lot of energy in a cost-effective way, and they then
went about and did that.[15]
16. The NAO explained that the carbon savings estimated
by Cambridge Econometrics are different to those in the Treasury's
2000 study for essentially two reasons. First, the Treasury only
took the price effect of the Levy into account, whereas CE in
addition estimated the impacts of the announcement effect. Second,
CE gave a different weight to the price effect than the Treasury.
Most interestingly, Cambridge Econometrics attributed most of
the impact of the Levy to the announcement effect rather than
the price effect. In other words, according to the evaluation
of the Levy relied on by the Government, most of the impacts of
the CCL were already established before the policy actually came
into effect in 2001, and have only marginally increased since
then.
17. The National Audit Office report on The Climate
Change Levy and Climate Change Agreements presented some evidence
which supported the basic premises behind Cambridge Econometrics'
findings. On the evidence for an announcement effect, the NAO
stated that a majority of the businesses it surveyed had said
that the imposition of the Levy had refocused their attention
on energy use; and drew attention to a business survey carried
out in 2002 by Green Alliance, which reported similar findings.[16]
As for the relative insignificance of the price effect,
the NAO analysed the impact of the Levy on energy prices as a
whole (Figure 1). This showed that when first introduced
the
Figure 1 Fuel price indices for the industrial
sector in real terms1 including the Climate Change
Levy
Notes:
1 Deflated using the GDP implied deflator at market prices.
2 Indices based on a survey of the prices (excluding VAT) of fuels
delivered to industrial consumers in Great Britain, with the inclusion
of an estimation of the
amount of Levy paid.
3 Indices based on the average unit value (excluding VAT) of sales
to industrial consumers.
Source: National Audit Office, The Climate Change
Levy and Climate Change Agreements, August 2007
18. Levy's impact "was not that great a change
in the context of historic prices". On top of this, the Levy
is set at a flat rate rather than as a percentage of energy prices;
given that market energy prices have increased since 2001 while
Levy rates have not been adjusted upwards proportionately (and
indeed were completely frozen until April 2007), this means the
proportion of energy costs made up by the Levy has been declining
since it was first introduced. In other words, in terms of its
impact on energy prices, the Levy was introduced at a relatively
low level, and has only declined since then. The NAO backed up
these findings by citing the results of their survey, which revealed
that "companies do not recognise the Levy as a major decision
driver":
All of the Levy-only organisations we surveyed
indicated that the Levy currently has no discernible material
effect on investment decisions. Those that had invested in energy
efficiency were unable to quantify how much of an influence the
Levy was in such decisions, if any.[17]
This led the NAO to conclude: "These results
suggest that the Levy was not set at significant rates initially,
and has become less significant over time."[18]
Other views on the size of the
Levy's impacts are more sceptical
19. The headline conclusion of the Cambridge Econometrics
study, that the CCL had been responsible for significant emissions
savings, has received criticism from a number of business groups;
although, in making this argument, they have tended to concentrate
on the impacts claimed for the announcement effect, while endorsing
the finding that the price effect has been very limited. The NAO,
for instance, found that of the seven Levy-only businesses it
surveyed only one believed the Levy had driven emissions reductions.
The UK Emissions Trading Group (UK ETG) told us that while business
sector emissions may have fallen below business as usual projections
after 2001, this could partly be explained by factors other than
the Climate Change Levy, not least the weather (more temperate
weather reducing demand for heating or air conditioning). Ray
Gluckman of UK ETG argued: "it is believed there were a couple
of very mild winters after the announcement of the CCL and that
that weather effect was not properly taken into account [by Cambridge
Econometrics]."[19]
EEF and UK Steel also suggested that an economic downturn in the
British steel sector in the early years of this decade contributed
to the reduction from BAU projected emissions, and that a failure
to properly take this into account also skewed Cambridge Econometrics'
findings.[20] These broad
sentiments of business groups towards the effectiveness of the
Levy were shared by Andrew Warren, director of the Association
for the Conservation of Energy, who told us: "I really am
very dubious as to whether the arrival of what was not a very
heavily publicised Levy upon ordinary businesses' bills […]
has made more than a marginal difference."[21]
20. A strong theme to emerge from the evidence we
received was that, whatever the impacts of the Levy have been
overall, its impacts on small and medium-sized enterprises (SMEs)
and larger but less energy-intensive organisations (for instance,
retail chains) have been less significant. According to the NAO:
The saving brought about by the announcement
effect is likely to have been concentrated amongst large rather
than small businesses. This is because small businesses generally
have fewer resources with which to monitor government policy so
are less aware of new announcements. […] Outside of energy-intensive
sectors, there is little evidence of the price effect having led
to a significant improvement in energy efficiency.[22]
On this theme, the Federation of Small Businesses
drew our attention to research it carried out in 2002 and 2004,
which showed that "For small companies, technical problems
and the cost of changing production processes are barriers to
increasing efficiency but so too is a lack of quality information
and advice", and thus that "uptake of energy efficiency
measures [among SMEs] in response to the levy have been negligible."[23]
These findings were substantiated by a major study published in
2005 by the Carbon Trust, The UK Climate Change Programme:
Potential evolution for business and the public sector. As
Professor Michael Grubb, Chief Economist at the Carbon Trust,
told us:
[I]n the course of our study we received a lot
of indications that for the less energy-intensive parts it was
not a very effective instrument. It was better than nothing but
essentially the price signal of the CCL on its own for organisations
which were either very, very small SMEs or which were not energy
intensive and totally focused on other things was pretty modest.[24]
21. Significantly, Professor Grubb explained that
this study not only found that the Levy was essentially ineffective
for smaller and less energy intensive firms, but that:
[I]n a way the bigger finding in our study or
the more, if you like, newsy item was that about half of total
emissions associated with business and public sector use were
from non-energy intensive sectors—light industry, the commercial
sector, the public sector, also many SMEs […][25]
As a result, the Carbon Trust's report recommended
the creation of a new mandatory auction-based trading scheme to
target these sectors (excluding smaller organisations, falling
below a certain threshold for energy use); and in response the
Government is planning to introduce the Carbon Reduction Commitment
from January 2010.[26]
This represents a considerable evolution of Government thinking,
given that the Marshall Report had specifically justified implementing
a tax such as the CCL because it would be more applicable to the
majority of businesses than a large carbon trading scheme:
Even when the international trading scheme is
fully developed, it is unlikely that all businesses will be involved.
Indeed, I doubt whether it will ever be practical for the majority
of small and medium sized enterprises (SMEs) and less intensive
users in industrial and commercial sectors to participate in the
international trading scheme. Taken together, these firms account
for around 60% of total carbon dioxide emissions from business,
and may offer scope for significant improvements in energy efficiency
and reductions in emissions.
Hence, my conclusion is that there probably is
a role for a tax if businesses of all sizes and from all sectors
are to contribute to improved energy efficiency and help meet
the UK's emissions targets.[27]
22. Overall, it seems that the Climate Change
Levy has not worked as originally planned —particularly
for less energy intensive firms and SMEs. Before the Levy
was implemented, the Treasury expected that its effect on the
cost of energy would drive significant emissions reductions, and
that a tax such as this would be especially suited to being applied
to small businesses and larger but non-energy intensive firms;
but neither appears to have been the case. The Treasury did not
make an estimate of the impacts of the 'announcement effect' prior
to implementing the CCL, but it now accepts that the majority
of the Levy's impacts came from it. We are left with the impression
that the Levy's reported impacts on carbon emissions have been
to an extent unforeseen and serendipitous.
23. While concerned by the weaknesses of the Levy,
we welcome the fact that the Government has not ignored these
problems. In responding to the recommendations of the Carbon Trust
by bringing forward plans for the Carbon Reduction Commitment,
the Government is targeting some of the sectors for which the
Levy has proved less effective. This shows a commendable flexibility
of approach and ability to learn through doing.
10 HM Treasury, Marshall Report, para 40 Back
11
National Audit Office (NAO), The Climate Change and Climate
Change Agreements, August 2007, p 14 Back
12
Cambridge Econometrics (in collaboration with the Policy Studies
Institute, Westminster University, and the Department of Applied
Economics, University of Cambridge), Modelling the Initial Effects
of Climate Change Levy, March 2005 Back
13
NAO, The Climate Change and Climate Change Agreements, p 14 Back
14
NAO, The Climate Change and Climate Change Agreements, p 15 Back
15
Q192 Back
16
NAO, The Climate Change and Climate Change Agreements, p 15 Back
17
NAO, The Climate Change and Climate Change Agreements, p 17 Back
18
NAO, The Climate Change and Climate Change Agreements, p 17 Back
19
Q60 Back
20
Q3 Back
21
Q91 Back
22
NAO, The Climate Change and Climate Change Agreements, p 16, p
17 Back
23
Ev 132 Back
24
Q 142 Back
25
Q142 Back
26
The Carbon Reduction Commitment (CRC) is a mandatory auction based
emissions trading scheme for the large non-energy intensive business
and public sectors. Emissions that are covered under Climate Change
Agreements and direct emissions included in the EU Emissions Trading
Scheme will not be covered by the CRC. In addition, firms with
more than 25% of their energy use emissions in CCAs will be completely
exempt. Participants will be required to purchase allowances corresponding
to their emissions from energy use, and then surrender them at
the end of the year. Government will cap the total energy use
emissions by setting a limit on the number of allowances available
for auction at the beginning of the year. The auction revenue
will be recycled to participants, so the scheme will be broadly
revenue neutral to the Exchequer. The earliest the CRC will come
into force is January 2010. Back
27
HM Treasury, Marshall Report, p 2 Back
