Memorandum submitted by The Association
for the Conservation of Energy
INTRODUCTION
The Association for the Conservation of Energy
was formed in 1982 by major companies active within the energy
conservation industry, in order to encourage a positive national
awareness of the needs for and benefits of energy conservation,
to help establish a sensible and consistent national policy and
programme, and to increase investment in all appropriate energy-saving
measures. We welcome this opportunity to comment upon the role
of the Climate Change Agreements and related policy measures.
CONCLUSION
Climate Change Agreements have delivered more
energy, hence carbon, savings than a non-interventionist policy
would have done—albeit the absolute amounts have been less
than anticipated. It is likely these could all have been delivered
at a lower cost to the public purse, had the original discounts
recommended by its progenitor, the Marshall Report, remained at
50 rather than 80%.
A. Climate Change Agreements
A1. The Climate Change Levy is the longest
established instrument designed to affect the business sector
in order to meet binding international climate change commitments.
In this context, the Climate Change Agreements (CCAs) are the
first example of an integrated policy approach in this context,
combining "carrots" (80% discounts), "sticks"
(the threat of full payment for non-compliance) and "tambourines"
(drawing management attention to energy consumption), which this
Association has long described as absolute prerequisites for any
successful energy efficiency scheme.
A2. That the CCAs have delivered more energy
savings than would have occurred in its absence is now presumed
by government. The latest review, prepared for this Committee
in August by the National Audit Office, appears to accept the
government's estimate that the scheme will be delivering savings
of 1.9 MtC by 2010, all of which are additional to those that
could reasonably have expected to be delivered by business-as-usual.
This figure is a reduction of one-third on the 2.9MtC which had
been assumed would accrue by government, as recently as 2004.
A3. However, the Cambridge Econometrics
2005 modelling suggests that most sectors would have surpassed
their targets regardless: "A combination of technological
change and relative decline in UK energy-intensive sub-sectors
of manufacturing . . . implies that the energy (and therefore
carbon) and energy efficiency targets would have been met without
the Agreements."
A4. Bearing in mind that a)the basic yardstick
used by government negotiators that all CCAs should incorporate
only energy saving measures which would return all their capital
within 24 months, and b) that only 60% of such identified saving
measures needed to be taken up to achieve 80% reductions, such
additional savings might legitimately be assumed to occur automatically.
When the Levy was first mooted, this Association published a detailed
study showing how such (self-evidently) cost-effective savings
were already factored in to the DTI's official energy forecasts
for 2010.
A5. In practice, we conclude that it was
the economic modelling—both from the DTI and Cambridge Econometrics—which
proved over-optimistic. A significant policy lever was required
to realise much of these cost-effective savings, for all the reasons
set out so lucidly in the EAC report Energy Efficiency, HC 159/I,
published July 1999—and indeed in many subsequent committee
reports.
A6. Relying upon business-as-usual would
simply have meant that the 1.9 MtC savings would not have been
realised. That is even though all were so cost-effective as to
have been factored into the DTI's original presumptions under
business-as-usual. There is, admittedly post hoc, acknowledgement
of this: according to the 2006 nPower survey of business opinion,
50% of major energy users acknowledged that compliance with CCAs
resulted in these additional energy savings.
A7. Apart from anything else, the very existence
of the Levy has refocused some attention onto fuel bills. This
focus was assisted by the decision by every large energy company
to make the Levy an identified item on fuel bills: this was against
the express wish of Customs & Excise at the time, apparently
fearful that businesses might seek to reclaim the expenditure
as if it were Value Added Tax.
B. Value for money
B1. In its January report on the cost-effectiveness
of the government's 2006 climate change programme, the NAO stated
that the cost in 2005-06 to the Treasury, of forgoing its anticipated
full Levy revenue from the 51 industrial sectors now incorporated
within the CCA, was "around £300 million". The
August NAO review cites Cambridge Econometrics as identifying
the sum forgone in 2003-04 as £350 million.
B2. The Treasury has never confirmed publicly
the correct figure. It can be assumed that this figure would be
at least £100m less, had the discount been limited to the
50% recommended in the progenitor Marshall report (1998), rather
than the eventual 80%: it is improbable that the "stick"
effect would have been any less.
B3. This makes it extremely difficult to
calculate what the precise cost per tonne of carbon saved from
the CCA has been, in order to verify the former Chancellor (now
Prime Minister)'s oft-repeated claim that this was the "jewel
in the crown" of his carbon abatement programme. But on the
basis of the two figures given, the "NAO" figure works
out at £158 per tonne of carbon saved, the "Cambridge
Econometrics" figure some £184. This should be contrasted
with the cost per tonne saved to the public purse of other programmes
identified in the January NAO Report on the climate change programme
(eg the Energy Efficiency Commitment at a negative cost of £270,
or Warm Front, at a negative cost of £420 per tonne).
B4. According to the NAO August review (page
24) the government considers the CCAs bring a net benefit—ie
negative cost—to the UK of £90 for every tonne of carbon
the policy saves: this more positive conclusion apparently reflects
savings to participating businesses of future fuel bills, as well
as benefits from improved air quality, set at £500 million.
B5. When introduced, the Levy was estimated
by HMRC to have increased total energy prices by on average around
15%: on which basis, it can be deemed to have increased prices
to those enjoying CCAs by just 3%. Until this year, given rising
real fuel prices, even that percentage has reduced subsequently.
Collecting the Levy (from both 100% and 20% payers) costs HMRC
0.4% of revenue, and costs energy suppliers £13 million a
year to administer.
C. Future of Climate Change Agreements
C1. On page 35 of its August review, the
NAO draws attention to the perverse effect of the Levy being applied
to manufacturers of energy saving equipment. Such manufacturers
have had their costs increased in line with all others (whether
like glass, mineral fibre and gypsum insulation at 20%, or like
others at 100%). As theirs is precisely the equipment demand for
which this public policy is designed to increase, this remains
a singularly perverse outcome, which it is still not too late
to reverse.
C2. One of the main policy drivers behind
the CCAs' effectiveness has been the threat that the full Levy
would be imposed, if any participants were established not to
be complying. A few sectors opted out early on, although subsequently
more have joined (the initial requirement, of needing to be registered
with the Environment Agency under Integrated Pollution Prevention
& Control, being wisely removed). But it has been established
that some 250 sites have failed to deliver their anticipated savings:
however as each recalcitrant formed part of a sector which overall
did succeed in complying, no penalty seems to have been imposed
(other than possibly informally, through peer pressure).
C3. Equally there has been little evidence
placed in the public domain that gives confidence that all the
savings claimed by the 51 participating sectors really exist:
during the initial discussions around the CCAs, government undertook
to be as transparent as possible in providing reassurance that
the £300 million (or even £350 million) forgone to participating
companies was legitimately spent. As of April 2007, just 9% of
target units have been audited, with errors in approaching one
in five cases.
C4. New policies have been introduced since
the Levy. Inevitably, practically all those manufacturers involved
with the European emissions trading scheme are also CCA participants.
The complexities of interaction between such policies are set
out in Para 4.7 of the NAO August review, including double administrative
costs; double taxation—electricity is covered by trading;
the difference between relative targets and absolute caps; and
the differing criteria for facility inclusion. There is also a
growing concern that—given the present nugatory price of
carbon within the trading scheme—participants may be inclined
to eschew making energy efficiency investments in favour of purchasing
(very cheap) credits.
C5. No announcement has been made about
the future of the Agreements (or indeed the Levy) beyond this
decade. It is not coincidental that the Carbon Reduction Commitment
will certainly cover all those CCA participants not previously
involved with the European emissions trading scheme.
D. Abolish the Levy?
D1. Were the Levy to disappear altogether,
the Treasury would be left with at least a £744 million annual
hole in its revenue—this being the sum collected in 2005-06,
the last year for which income has been reported. Because Levy
rates were for the first time increased this April, it is reasonable
to conclude that income will be significantly greater this year.
D2. Eliminating the Levy would also reduce
still further the proportion of ecological taxes, a continuing
concern to the EAC. It would remove even such limited impact upon
behaviour the Levy might be having upon 100% payers. However,
assuming the full introduction of the CRC contiguously, it would
be reasonable to offer complete exemption from the Levy to participants—so
long as the loss of revenue was at a minimum, made up from non-participants.
D3. Uniquely amongst EU15 countries, the
UK's "energy tax"—the Levy—was deliberately
imposed only upon the productive sector, and not upon households—who
also pay the lowest permissible rate of VAT (5%) on fuel consumption.
This is surely driven by awareness of the continuing failure to
eliminate millions of households from fuel poverty, despite statutory
obligations to do so.
E. Enhanced Capital Allowances
An important tax concession was introduced alongside
the Levy, to encourage investment in energy saving measures. This
was the Enhanced Capital Allowances, enabling those Levy payers
making profits to offset all expenditure in certain energy saving
measures in the first year (rather than over three or five years
as with conventional capital investments). However it is difficult
to provide absolute figures for the impact of this concession,
as HMRC does not record such expenditure in any accessible way.
However there is anecdotal evidence regarding the impact of these
Allowances, which does enable certain conclusions to be drawn:
1) The existence of a formal list of actual
branded products qualifying (held by the Carbon Trust) does provide
an effective official quality endorsement for such products.
2) As such, inclusion upon the approved list
can be used as an initial means of drawing positive attention
to a product, even if eventually no tax claim is made.
3) Conversely, the—apparently arbitrary—categories
of energy saving items which qualify has appeared to undermine
entire sectors unable to receive such endorsements (eg glazing,
fabric insulation).
4) Certain qualifying measures have traditionally
been categorised as maintenance rather than capital investment,
and thus have always been offset against tax fully in the first
year (eg pipe lagging).
17 September 2007
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