Refocusing the Levy on carbon
would be difficult and of questionable benefit
104. The original recommendation for the Climate
Change Levy in the Marshall Report had been for a tax based on
carbon emissions, and applying equally to electricity generators
as well as other sectors. This proposal was only half-accepted
by the Government: the CCL was implemented as a downstream tax,
thereby excluding electricity generators, and based on energy
consumption not carbon emissions. One reason for this, as already
mentioned, was the Government's desire to protect householders,
who would otherwise have been affected by the rise in electricity
prices resulting from taxing generators.
105. The other main reason was identified by the
then Trade and Industry Committee (TIC), when it examined the
Government's early proposals for the Levy package in 1999: "the
Government's desire to protect the coal industry [
] at least
partly, explains the reluctance to link the taxation of energy
use to the carbon content of fuels."[151]
The point here being, of course, that coal is more carbon intensive
than gas; a carbon-based tax which applied to electricity generators
would therefore have incentivised power companies to switch from
coal to gas. As it is, since 2001 market forces have made coal
cheaper than gas, resulting in power companies switching from
gas to coal.
106. One of the implications of the focus of the
Levy on energy efficiency is that the price differential of Levy
rates on different fuels does not match their difference in carbon
intensity. Levy rates are currently calculated according to the
energy content of different fuels; on this basis, electricity
attracts a higher rate, reflecting the energy inefficiency in
transmitting electricity through the national grid. This means
that the direct burning of coal by industrial users attracts a
lower rate of Levy than their use of electricity, even though
the carbon emissions from burning coal will be higher than the
average carbon profile of electricity (Table 2).
Table 2 Carbon price equivalents for
the Climate Change Levy
Source: National Audit Office, The Climate Change
Levy and Climate Change Agreements, p 13
107. As a result of anomalies such as this, the fundamental
design of the Levy package has received considerable criticism
from a variety of organisations. Not least, in a report published
in 2002 the Royal Society concluded:
We believe the Climate Change Levy, in its current
form, is an inefficient way to reduce CO2 emissions,
primarily because it excludes certain energy users (including
households and transport) and targets energy use in general rather
than carbon emissions in particular. It also acts somewhat crudely
on the demand for energy, but fails to provide anything
significant for the supply side of the equation.[152]
108. This passage
makes it clear how the call for the Levy to be based on carbon
emissions, and the call for it to encompass power companies, go
hand in hand. Indeed, once the Government decided to implement
a downstream tax, the scope for basing it on carbon emissions
was both complicated and restricted. There are two essential reasons
for this.
109. The first
is the difficulty in calculating a carbon-based rate for electricityor,
more usefully, calculating different rates for different suppliersgiven
the different and changing proportions in which electricity is
generated by different fuels. The then DTI, in its response to
the Trade and Industry Committee in 1999, thought it too complicated
to set even one average carbon-based rate for electricity, given
that "The carbon content of electricity supplied is changing
all the time".[153]
Some witnesses in our inquiry did consider the possibility that
different CCL rates could be calculated for different electricity
suppliers or tariffs, reflecting the carbon profile of each; however,
the general conclusion was that it would be very difficult to
do so, and its impacts uncertain.[154]
Professor Ekins told us:
"Conceivably you would be able to differentiate an electricity
tax based on the carbon intensity of that electricity, but it
would not be simple and it would certainly greatly [complicate]
what at the moment is a relatively administratively easy instrument."[155]
His hope, instead, was that the next Phase of the EU ETS would
prove more effective in giving power companies an incentive to
switch from coal to less carbon-intensive fuels.
Professor Grubb was a little
more encouraging about the potential effects of differentiating
different electricity rates"I would think that the
impact could be non-trivial"but equally stressed that
it "would
be pretty complicated to implement, [
] and I honestly do
not know [about its impacts] until we have looked at it."[156]
110. The other reason why there is limited scope
to target carbon emissions follows from the first. If there were
only a single Levy rate for electricity, based on the average
carbon profile of all generators (or even if there were different
rates for different generators, but these did not vary significantly),
then the differentiating of Levy rates could only really incentivise
the switching between different fuelse.g., between coal
and gas, or coal and electricityrather than between different
electricity companies or tariffs. And as the Carbon Trust established
when it looked at the likely impacts of differentiating Levy rates
in this way: "our modelling studies indicate that this has
very little impact on business and public sector emissions. This
is because the opportunities for businesses to switch between
fuels in response to the carbon differentiation between coal,
gas and electricity are in fact extremely limited."[157]
Switching electricity suppliers would be simple; but switching
from using electricity (e.g., to run lighting and appliances)
to buying gas and using that to generate the electricity on siteor
trying to substitute electricity for coal in certain industrial
processeswould be at best difficult and expensive, and
at worst impossible.
111. We have sympathy with the Royal Society's
argument that the Climate Change Levy should have been set up
as an economy wide carbon tax (so long as other measures would
have ensured it did not exacerbate domestic fuel poverty).
Once the Government decided to implement the Levy as a downstream
tax, however, the practical scope for basing it on carbon emissions
rather than energy efficiency was greatly reduced. Professor
Grubb summed it up well: "in a sense, the whole debate about
whether the CCL should really be a carbon tax is probably yes
in principle, but actually in practice it makes very little difference."[158]
We still recommend that the Government should look into the
practicalities and potential benefits of basing Levy rates on
carbon content, and in particular the potential to vary rates
on electricity depending on the carbon profiles of different suppliers
and tariffs. However, the overall environmental value of the CCL
does not depend on its being based on the carbon content of different
fuels, and this should not be an overriding priority.
Agreements should be based on
absolute cuts in carbon emissions
112. A related proposal is to recast all Climate
Change Agreement targets in the form of absolute reductions in
carbon emissions rather than relative improvements in energy efficiency.
This is a much simpler matter than changing basis of the Levy
to carbon emissions, since its effectiveness would not hang on
incentivising a switch between different fuels. Already the CO2
emissions of CCA participants are calculated from the amount of
energy they consume, with energy usage converted into carbon dioxide
amounts using known carbon ratios of different fuels (with electricity
usage converted using the average carbon profile of the national
grid). These methods could easily be used to refocus CCA targets
and monitoring regimes on carbon. Setting absolute targets would
be equally straightforward, simply setting a specific cut from
a previous baseline. Indeed, the CCA system already allows for
targets to take this form; although, as the NAO noted, sectors
have been able to choose which form their targets take, and "Unsurprisingly,
relative targets were more popular amongst businesses"meaning
that only four out of 51 sectors have absolute targets.
113. AEA Energy and Environment argued that, given
the increasing need for achieving year on year reductions in CO2
emissions, and the increasing imposition of absolute carbon caps
elsewhere (through (i) the national carbon budgets to be introduced
by the Climate Change Bill, (ii) the EU ETS, and (iii) the CRC),
"the time is right for carbon agreements".[159]
Interestingly, the CBI used this argument as a reason to be cautious
about introducing absolute targets. Given that the UK economy
as a whole is to become subject to an absolute carbon cap, and
given that other areas of the economy may able to deliver cheaper
emissions savings, the CBI suggests that "a degree of efficient
growth in emissions from CCA sectors is manageable and justified
on competitiveness grounds (given the inability of many of these
sectors to pass carbon costs through to their customers)."[160]
114. We recommend that the Government reform the
Climate Change Agreements to express all targets in the form of
absolute reductions in carbon emissions. This would help to align
CCAs with the EU ETS and CRC, and with national carbon budgets;
and be relatively straightforward to introduce. We appreciate
the concerns expressed about this idea by some business groups,
but do not agree with the suggestion from the CBI that some CCA
sectors should be allowed room for "efficient growth in emissions":
any sector of the economy whose emissions are allowed to rise
exacerbates the problem and increases the pressure on all others
to cut theirs. The Government should investigate other means of
meeting the concerns of business groups, for example by ensuring
that CCA targets were set with reference to the differing scope
for carbon reductions in different sectors. Businesses would still
be able to use the CCA trading mechanism if they exceeded their
targets.
151 Trade and Industry Committee, Ninth Report of Session
1998-99, Impact on Industry of the Climate Change Levy,
HC 678-I, para 34 Back
152
Royal Society, Economic instruments for the reduction of carbon
dioxide emissions, November 2002, p vii Back
153
Trade and Industry Committee, Eleventh Special Report of Session
1998-99, HC 834, Response to Recommendation m Back
154
Q39, Q165 Back
155
Q201 Back
156
Q165 Back
157
Carbon Trust, The UK Climate Change Programme: Potential evolution
for business and the public sector, p 19 Back
158
Q165 Back
159
Q118 Back
160
Ev 127 Back