Select Committee on Environmental Audit Second Report


RECYCLING CCL REVENUE

57. One of the central features of the Government's design for the Climate Change Levy package has been the recycling of CCL revenue, with the explicit aim of further incentivising emissions reductions. This recycling has taken two main forms: an offsetting reduction in employers' National Insurance Contributions, and a channelling of revenue to fund the work of the Carbon Trust and related programmes. The Government's design was spelt out particularly clearly in a speech given at the United Nations by the Prime Minister, when Chancellor, in 2006:

    Central to our approach has been our willingness to take the difficult decision to introduce a Climate Change Levy […] and the hypothecation of its revenue to goods —cutting business taxes on jobs and new carbon reducing measures.

    And what the levy shows is that by targeting the marginal use of energy, we can provide real market incentives to energy efficiency; and that by taxing bads—emissions—we have been able to reduce taxes on goods—the cut in employment taxes for business.[71]

58. In the course of our inquiry we heard a number of views on this aspect of the CCL package. The main issues concerned:

  • how much revenue is offset via National Insurance Contributions, and how fairly this offset is distributed;
  • the effectiveness of programmes provided by the Carbon Trust, and the size of funding available to them; and
  • the effectiveness and scope of the Enhanced Capital Allowances scheme, administered by the Carbon Trust.

The effects of the cut in NI Contributions are complicated and controversial

59. Budget 2001 stated that: "All [CCL] revenues will be recycled back to business".[72] In fact, the 0.3% reduction in employers' National Insurance Contributions (NICs), introduced alongside the CCL in April 2001, has consistently reduced the Treasury tax take by more than it has gained from the Levy. Indeed, as Figure 2 indicates, given that the Levy is a flat-rate charge and was frozen until 2007, the surplus value of the cut in NICs has grown in every year since the Levy was introduced.



Note: CCL figures for 2006-07 are expected revenue.
Source: HC Deb, 7 February 2007, col 1051W

60. This is not without complication or controversy, however. The first issue is that, while the cut in employers' NICs may have meant that the CCL was revenue-neutral as far as the Exchequer was concerned (or, as we have seen, revenue-negative), it does not follow that it was necessarily revenue-neutral for each organisation paying the Levy. Given that employers' NICs are a tax on labour while the CCL is a tax on energy, the organisations that would benefit most from the offsetting cut in NICs are those with large head-counts and less intensive energy use (more likely to be retail chains and public bodies), with among those least likely to benefit being heavy industry, for the converse reasons. For its part, the Federation of Small Businesses argued that 88% of SMEs pay out more in CCL payments than they save from the cut in employers' NICs.[73]

61. More controversially, according to the evidence we received, the other issue here is that Budget 2002 announced a rise of 1% in all National Insurance Contributions, associated with a rise in funding for the NHS,[74] coming into effect in April 2003. Andrew Warren was very critical of the impacts of this on the Government's claims to have made the CCL revenue-neutral:

    For one year the National Insurance rate did go down, and it went down so as to make this actual revenue neutral, but the subsequent year it went back up again and that has been the position ever since. In effect, this has been a nice little earner […] Whilst the Climate Change Levy and Agreements have been described by the former Chancellor now Prime Minister as being very much the jewel in the crown of the Climate Change programme, I suspect that one of the reasons why the jewel will shine so well is because the revenues do flow in in rather large measure to the Treasury.[75]

UK ETG, meanwhile, had this to say:

    There is a slightly cynical concern about the history. In 2001, with the Climate Change Levy package, came a .3 per cent reduction in National Insurance Contributions by employers. In the Budget one year later there was a 1 per cent increase in said NIC. It might well have been a 1.3 per cent increase had it not been for the .3 per cent reduction, but that is not very transparent. There is a worry around the industry that there is that lack of transparency about that.[76]

62. The effects of implementing a cut in employers' National Insurance Contributions alongside the introduction of the CCL should have been both to win the support of businesses for the idea of the Levy, and to help genuinely change their spending priorities. With the subsequent increase in NICs, announced in 2002, we are far from convinced that these have been the effects. Overall, as we have long recommended, the Government should be far bolder in altering the balance of taxation between 'goods' (i.e., things that the Government would like to encourage, such as employment) and 'bads' (i.e., things such as pollution).

The work of the Carbon Trust should be expanded

63. The Carbon Trust was set up alongside the CCL in April 2001. Budget 2001 stated that "Over three years, £100 million of the CCL revenues will be directed to the Carbon Trust", and that the work of the Trust would initially "concentrate on short-term measures in support of saving energy, including providing energy-efficiency advice to business."[77] Since then, the Trust has expanded its range of activities, including an interest free loans programme for small businesses to purchase energy efficiency products.

64. In 2006-07, the Carbon Trust worked with around 300 large businesses covered by Climate Change Agreements and/or the EU Emissions Trading Scheme, leading to implemented annual savings of over 360 thousand tonnes CO2.[78] A recent report on the Carbon Trust by the National Audit Office found that over 80% of organisations were satisfied with the service they received, with 45% very or extremely satisfied, and that 76% would not have implemented the same level of energy or carbon savings without the Trust's input.[79]

65. Notwithstanding this, we received a number of anecdotal comments from representatives of energy intensive industries, which suggested that for these firms the services provided by the Trust were positive but not especially insightful in terms of helping them increase their energy efficiency. Matthew Croucher of the Society of Motor Manufacturers and Traders told us:

    [M]ost of the advice they have given is fairly generic. When they have had some specialist knowledge put in there, things like compressed air, and things like that, our members have found that sort of help useful but, generally, you are inviting a consultant to come on site for a number of days and you often do not get back much more than you knew already, because a lot of the people on the site know what they are doing. That is what they spend their whole life doing—trying to improve energy efficiency.[80]

Nick Sturgeon of the Chemical Industries Association echoed this: "they are a bit generic in their focus [… F]or complex specialised sites I think it is difficult for them to provide the expertise."[81] Ray Gluckman of UK ETG agreed that the Trust is more effective on "non-process-specific things" such as providing advice on efficient types of technology to purchase, but that the Trust is "looking at ways of addressing the more complicated technologies with more in-depth reviews of them. So I think they are trying to find the right niche at the complex end of the spectrum as well, but it is difficult."[82]

66. The other main aspect of the Trust's work on which we heard a number of comments was its interest-free loan scheme for SMEs.[83] Overall, the scheme seemed to be welcomed, but there were concerns that its size and scope were too small. Some of the representatives of large and energy intensive firms we spoke to regretted that they were ineligible for the scheme.[84] Meanwhile Andrew Warren, having made clear his opinion that the Carbon Trust was doing "excellent work", said:

    If I have a criticism of the Carbon Trust on that it is that the number of small businesses to whom this could be applicable who know about it is actually very small; but certainly those who have subscribed to this, and who have got zero interest loans payable back at the end of a five-year period to install energy-saving measures, have found that actually it has been a tremendously successful programme.[85]

67. Interestingly, although we asked for views on the work of the Carbon Trust in our call for evidence, we did not receive any further evidence on this scheme. Perhaps revealingly, the memo from the Federation of Small Businesses made no mention of it, while concluding:

    [L]ack of clear advice and information together with the constraints faced by SMEs has prevented most small businesses from taking steps to improve energy efficiency [… M]ore Government investment in technical innovation and in financial incentives on energy efficiency for small businesses would go a long way to improving emissions reduction among small businesses.[86]

68. Witnesses from the Carbon Trust were themselves very positive about the success of the loans scheme. James Wilde, the Trust's Director of Insights, told us:

    They are actually a very popular and very effective mechanism. Since we introduced the scheme as a pilot, the financial amount of loans committed has doubled year on year until the fourth year, which was last year, and reached £18 million, in which year we gave 480 loans and saved about 50,000 tonnes of CO2. The good thing about those carbon savings is that the persistence is very high because it is associated with capital investments. The persistence is around nine years so we are saving a lot of carbon through this scheme and it is also cost effective. There is an overall net benefit to the economy.[87]

Mr Wilde stressed that "there is a huge potential to grow the scheme and at the moment we are constrained really by the amount of capital we have. There is loads of demand out there."[88] His evidence is supported by a recent National Audit Office report on the Carbon Trust. This found that some 96% of loan recipients would not have bought the relevant energy efficient equipment otherwise, and confirmed that the Trust had adequate controls to ensure that loans were spent on energy saving equipment and subsequently repaid.[89]

69. We note that there appears to be significant demand for the Carbon Trust's SME loan scheme. It is reducing emissions, and it should bring about a net benefit to the UK economy through reducing overheads and increasing the growth of energy efficient products and services. For these reasons we recommend the Government provides funds to expand the scheme significantly.

70. Despite the significant efforts already directed by the Carbon Trust to large firms, some evidence suggests there is a shortfall in provision for energy intensive sectors in terms both of very specialist advice and loans for energy efficiency investment. We were struck by the evidence from energy intensive sectors that the Carbon Trust's consultants were less able to supply advice on how to make overall production processes more efficient, especially given that AEA Energy & Environment had highlighted this as precisely the area where there might be substantial room for ongoing efficiency savings. We recommend that the Government reviews the needs, for more assistance from the Carbon Trust, of larger and more energy intensive sectors, and assesses how best this demand can be met.

Evidence for the effectiveness of Enhanced Capital Allowances is mixed

71. Another measure introduced alongside the CCL was the Enhanced Capital Allowance (ECA) scheme. This was designed to stimulate investment in low carbon technologies by bringing forward tax relief on capital expenditure on certain energy efficient products, assessed as qualifying for inclusion on an Energy Technology List (ETL). Qualifying companies and products on the List are published on the ECA website, under categories such as 'Boiler equipment', 'Heat pumps', and 'Lighting'. Companies cannot claim any more money in tax relief under this scheme than they would ordinarily, but are able to claim the total amount of tax relief in one year rather than over several; as Budget 2001 explained, this means "Businesses […] will obtain significant cash flow benefits because they will receive tax relief for their investment much earlier than would otherwise be the case."[90] The way in which ECAs are meant to work is outlined in Box 3. The scheme is administered by the Carbon Trust, which each year revises the ETL to ensure it reflects current best performance. Budget 2001 estimated the cost to the Exchequer of the scheme at around £70m in 2001-02, rising to £130 million in 2002-03.[91]

72. We received a number of comments on the ECA scheme, most suggesting that it has not been as successful as the Treasury expected, and urging that its scope be widened. EEF, for instance, told us that "Our industry had great hopes for the Enhanced Capital Allowances scheme",[92] but that "The take up of Enhanced Capital Allowances (ECA) has not been as comprehensive as envisaged."[93] A number of reasons were given for this, by EEF and others:

Box 3 Benefit provided by Enhanced Capital Allowances

Enhanced Capital Allowances are given at 100% of expenditure in the first year. This means that the whole of the qualifying investment can be set against tax for the year in which the equipment was purchased. This provides a financial advantage over the normal capital allowance of 25% on a reducing balance basis, which would spread the tax relief over a much longer period.

ECAs do not mean that firms can claim more money in tax relief; but because they are able to claim the total in one year they benefit from improved cashflow, and from avoiding the depreciation of the balance in real terms over a number of years.

Taking the example of a large company, paying 30% corporation tax and making an investment of £10,000, the table below shows the cashflow benefit of the ECA compared to ordinary capital allowance.



Source: Gambica / REMA, Making the Most of the Climate Change Levy Package, 2002

  • Ignorance of the scheme: Gareth Stace of EEF told us: "I think it is not as well publicised as it could be […] I think a lot of our members are very unaware of the Enhanced Capital Allowance scheme."[94] On this theme, the memo we received from United Closures and Plastics Ltd., stated: "as the UK's largest manufacturer of injection moulded plastic caps (closures), not only are we ignorant of the enhanced capital allowance scheme but also the supplier of the machines to our group have no knowledge of this scheme."[95]
  • Insufficient financial benefits: EEF suggested that the financial benefit of being able to offset 100% of the cost from taxes in the first tax year actually only represents around 5-10% of the product cost—while qualifying products may often be more than 10% more expensive than less efficient alternatives. The Environmental Industries Commission suggested that take up would be boosted if ECAs were to offer 150% tax offsets against purchases from the ETL.[96] EEF suggested this could be raised to 200%.[97]
  • Only profit-making companies can benefit: By its nature, only businesses that are in profit can use the scheme; firms which are for a period making a loss—and thus, one might suppose, in most need of such financial inducements—are the ones unable to benefit. EEF commented: "This is a major drawback and therefore take up is limited."[98]
  • Types of eligible technology are too restricted: The scheme is restricted to plant and machinery; this means that all other kinds of products related to energy efficiency are ineligible, both for inclusion on the Energy Technology List and for receipt of an ECA. This includes products related to the fabric of buildings (e.g., insulation, double glazing), as well as most high efficiency lighting. The memorandum we received from Hambleside Danelaw, a building products manufacturer, argued that: "Extending the ECA scheme [to products affecting the fabric of buildings] would encourage businesses that are commissioning the building of new premises, moving to new premises or refurbishing existing facilities to consider more seriously the greener options".[99] Also excluded are whole systems (as opposed to individual pieces of equipment), and equipment specific to individual economic sectors. The Government is currently consulting on which types of technology should be eligible for the scheme.

73. The Carbon Trust made a strong defence of the ECA scheme. James Wilde told us: "Awareness in the target audience is actually pretty high, it is around 40%, and we promote the scheme with a wide range of different marketing activities."[100] He also stressed the effectiveness of the Energy Technology List in its own right:

    There are about 14,000 products on that scheme and each year we are trying to raise the bar of what qualifies. It is typically the top 10 to 25% performing products in a given category. Last year, for example, we added 2,000 products and took away 1,200. One of the big drivers within this scheme is the effect it has in transforming the market, so a lot of manufacturers improve the products they are bringing to market just to get on the ETL, whether or not they think their clients are going to claim ECAs or whether they are not. For example, the public sector buys a lot of equipment off the ETL and they cannot claim ECAs, so a big driver for change is that energy technology list in its own right.[101]

At the same time, he agreed that "there are opportunities to expand the qualifying types of equipment or systems that would allow this scheme to have a bigger effect going forward."[102]

74. Some evidence suggests a lack of awareness of the Enhanced Capital Allowances scheme. This could be linked to the restricted scope of the scheme, which excludes many technologies, such as insulation products. We recommend that the scope of the scheme be expanded, to include a wider range of energy efficiency products, including those relating to thermal efficiency of buildings, lighting efficiency, whole systems, and sector-specific products. The Government should also state an estimate of the costs to the Exchequer, and effects on the use of the scheme, of increasing the allowance from 100% in the first year to 150% and to 200%.

Hypothecation of revenues should be more transparent, and funding increased

75. One overall issue which emerged as we looked at the recycling of CCL revenues was the transparency with which their use is reported, and the extent to which they were actually hypothecated. For instance, EEF wrote in their memo:

Equally, in arguing that the Climate Change Levy was actually "a nice little earner for the Treasury", Andrew Warren remarked that the Carbon Trust's budget was only around 10% of the roughly £¾ billion which the CCL brings in each year.[104] To be more precise, in 2006-07 the Carbon Trust's budget was around 14% of total CCL revenues for that year.[105]

76. The Government's descriptions of the uses of CCL revenue are confusing. Budget 2001 stated that "All [CCL] revenues will be recycled back to business through a 0.3 percentage point cut in employers' national insurance contributions and additional support for energy-efficiency measures and energy-saving technologies", and the Prime Minister has specifically described "the hypothecation of its revenue to goods—cutting business taxes on jobs and new carbon reducing measures". This clearly suggests that CCL revenue would fund both the offsetting cut in employers' NICs and the work of the Carbon Trust and ECA scheme. But as we have seen, the 0.3% cut in employers' NICs has consistently been worth more than receipts taken in from the Levy, so that it would be impossible for the Levy to fund both.

77. Further confusion is prompted by the website of the Department for Business, Enterprise and Regulatory Reform, which confirms that the Climate Change Levy will continue to fund "awareness raising, advice and consultancy support services on climate change and resource efficiency". Moreover, further confusion is prompted where the same webpage suggests that several aspects of the Carbon Trust's work, including "Carbon Trust energy efficiency loans scheme for small and medium sized enterprises", will not be funded by the CCL, but instead funded separately as part of the new Environmental Transformation Fund (worth £370m over the three years of the current Spending Review period).[106] From the Carbon Trust themselves we heard that "A large proportion of our funding comes through the Climate Change Levy, but we do get funding from other sources such as DBERR and the devolved administrations",[107] and that "the Carbon Trust does get funding from a number of sources and primarily it would not consider itself 'funded by the CCL'."[108] Professor Grubb of the Carbon Trust also stated that, in his view, the extent to which the Trust's funding was hypothecated from Levy receipts was not that important.[109]

78. We note the fact that the Treasury has explicitly accepted the principle of hypothecating funding in the case of the Climate Change Levy. This only makes it more important that the Government be more transparent and consistent about its use of CCL money. We recommend that the Government clarifies whether CCL revenues are offset by the 2001 cut in NICs, or whether they are available to fund low carbon programmes—since Levy receipts are too small to fund both. If the CCL is being used to fund low carbon investments, the Government should report on what it is funding each year, and how much if any revenues are left over to go into the Consolidated Fund.

79. Another issue is the size of funding devoted for energy efficiency and low carbon advice and investment, whether or not it is derived from the Climate Change Levy. We heard calls from energy intensive sectors for much greater public investment in low carbon technology, to help achieve a step-change in emissions reductions.[110] In arguing that energy intensive sectors often required new technological breakthroughs in order to make such step-change progression, and that this would require significant capital investment, Dr Ian Bailey suggested to us that "what happens with the revenue from the Climate Change Levy could be as important as the price incentive itself."[111]

80. Whether or not the Levy receipts are treated as replacing the tax lost from the 2001 cut in NICs in terms of meeting general spending commitments, we believe that devoting only around 10-15% of the size of these funds to the work of the Carbon Trust is short-sighted. As the Stern Review highlighted, in order to meet necessary climate change targets, much greater public investment is required in low carbon research and development, and in helping to overcome organisational barriers to reducing emissions—precisely the areas in which the Carbon Trust works. Furthermore, we note that the Climate Change Levy brings in around double the amount in each year that the Government's new domestic Environmental Transformation Fund will spend over three years. We recommend funding for the Carbon Trust and the domestic Environmental Transformation Fund is increased, to match or go beyond receipts from the Climate Change Levy.


71   "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

72   HM Treasury, Budget Report 2001, para 6.20 Back

73   Ev 132 Back

74   HC Deb, 17 April 2002, col 591 Back

75   Q94 Back

76   Q81 Back

77   HM Treasury, Budget Report 2001, para 6.25 Back

78   Email from James Wilde to EAC staff, 18 January 2008. Back

79   National Audit Office, The Carbon Trust: Accelerating the move to a low carbon economy, November 2007, p 6, p 17 Back

80   Q77 Mr Croucher Back

81   Q77 Mr Sturgeon Back

82   Q77 Mr Gluckman Back

83   The Trust has expanded this loan scheme to encompass larger firms in Northern Ireland and Wales. Back

84   Q 78-80 Back

85   Q95 Back

86   Ev 132-3 Back

87   Q152 Back

88   Q153 Back

89   National Audit Office, The Carbon Trust: Accelerating the move to a low carbon economy, November 2007, para 2.10 Back

90   HM Treasury, Budget Report 2001, Para 6.27 Back

91   HM Treasury, Budget Report 2001, para 6.27. These figures must be treated with a degree of caution. They do not represent the overall cost to the Treasury in the long term (i.e., on an accruals basis). Just as businesses gain from the scheme gain, not by being able to claim more tax relief, but by being able to claim the same amount of tax relief in one year as opposed to its being spread over several, so the Treasury does not lose any more money in terms of tax foregone, but simply loses the same amount in one year rather than over a number of years. As businesses gain but only in cashflow, so the Exchequer loses but only in terms of deferred interest. Another reason why these figures must be treated with caution is that they are only forecasts. The Treasury has not to date published figures for the costs and impacts of the scheme in operation. At time of writing, HM Revenue and Customs (with HM Treasury and Defra) has prepared a draft report on the effectiveness of the ECA Scheme, but this has not yet been published. Back

92   Q42 Back

93   Ev 5 Back

94   Q42 Back

95   Ev 121 Back

96   Ev 111 Back

97   Ev 5 Back

98   Ev 5 Back

99   Ev 134 Back

100   Q156 Back

101   Q156 Back

102   Q156 Back

103   Ev 5 Back

104   Q94 Back

105   CCL receipts in 2006-07 are expected to be around £700m, while the Trust's budget in that year was £100m. (Although the Trust's accounts state that its "total expenditure" was £87 million, its "total activity" is stated as £100 million; the larger figure includes money distributed in loans, which is not classified as expenditure in the same way, as the Trust expects to receive the money back again in future years.) Back

106   "Environmental Transformation Fund", Department for Business, Enterprise & Regulatory Reform (BERR), www.berr.gov.uk/energy/sources/sustainable/etf/page41652.html Back

107   Q157 Back

108   Q159 Back

109   Q159 Back

110   Qq 78-80 Back

111   Q185 Back


 
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