Budget 2011 and Environmental Taxes

Written evidence submitted by the Association for the Conservation of Energy

 

Introduction

 

The Association for the Conservation of Energy was formed in 1981 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 submit our views on Budget 2011 and green taxation.

Summary

 

· The Coalition Government has repeatedly asserted its wish to be the "Greenest Government Ever". In his Budget statement, the Chancellor George Osborne also stated that, "Green taxes will increase as a proportion of our total tax revenues". However, while there were some welcome references to energy efficiency – for example, the need to "encourage and incentivise take-up" of the Green Deal before it is introduced – Budget 2011 failed to seize a number of key opportunities to put investment in energy efficiency at the heart of our economic recovery.

· In particular we were disappointed by the absence of any announcement of a stamp duty incentive for householders making energy efficiency improvements to their home. Such an announcement had been heavily trailed by officially inspired leaks in the weeks preceding the Budget, and its absence on the day leads us to conclude that the Treasury intervened at the eleventh hour to remove it.

· We regret that the Budget contained no announcement of a reduced rate of VAT on the installation of energy efficient windows. We have been calling for this for some time, as it is a glaring omission in the list of energy saving products that already attract the reduced VAT rate.

· While welcoming the creation of the new Green Investment Bank with initial capitalisation levels of £3 billion, we were disappointed that the Bank will not have borrowing powers till 2015/2016 at the very earliest. The power to borrow is what would give the Bank its potential to leverage in billions of pounds held by institutional investors. Critically for energy efficiency, without the power to borrow, the Bank will not be able to raise low cost finance to support the Green Deal.

· While we have no intrinsic objection to a carbon price floor for electricity generation, we have two key concerns about the carbon floor price announced in the Budget. First, we believe that, at £16 per tonne, the price is likely to be far too low to have a significant influence on investment decisions. Second, as the floor price will be passed on to customers’ electricity bills, we believe that the adverse effects of this should be offset by an undertaking from Government that receipts from both the carbon floor and the EU Emissions Trading Scheme will be ringfenced to fund energy efficiency improvements in both the domestic and non-domestic sectors.

· Building on the previous point, we are concerned, more generally, that an increasing number of energy and climate change policies are being funded by means of outsourced "quasi-taxation". We refer principally to the raft of obligations that are placed on energy suppliers, the costs of which are then recovered from the consumer, either on a per kilowatt hour basis, or on a crude ‘per household’ basis that is fundamentally regressive. Recovering costs in this way runs counter to the "polluter pays" principle; it also gives no incentive to consumers to lower their energy use.

General Observations

 

1. The Coalition Government has repeatedly asserted its wish to be the "Greenest Government Ever". Furthermore, in his Budget statement, the Chancellor George Osborne reiterated his earlier promise that, "Green taxes will increase as a proportion of our total tax revenues". The jury is out as to whether either of these targets is on course to be met. The cut in fuel duty has to some extent been offset by the announcement of a carbon floor price, but it is uncertain as to how much revenue the latter will generate.

2. We were heartened by the acknowledgment in the Budget document that: "The Government is committed to the success of the Green Deal and will act to encourage and incentivise take-up so that the Green Deal will appeal to households, businesses and prospective providers alike, before it is introduced in 2012". We have long been concerned that considerably more public policy interventions are needed to ensure the success of the Green Deal by optimising take-up across all sectors. We are glad that our concerns appear to have been acknowledged by Government.

3. However, despite this welcome step, the Budget contained few other substantive references to energy efficiency and a number of key opportunities were missed to adjust fiscal policy in such a way as to put investment in energy efficiency at the heart of our economic recovery. Specifically, the "Plan for Growth", published by BIS and HM Treasury alongside the Budget document, contains only two references to energy efficiency, both in the context of the oft-repeated assertion that, "the Green Deal will enable households and businesses to invest in energy efficiency measures at no upfront cost". This constitutes somewhat less than a comprehensive assessment of the part that energy efficiency can play in boosting our economic recovery.

Comments on Specific Fiscal Issues

 

Stamp Duty Incentive

4. As already noted, we were disappointed that the Budget contained no announcement of a stamp duty incentive for householders making energy efficiency improvements to their home. Such an announcement had been heavily trailed in the weeks preceding the Budget, and its absence on the day leads us to conclude that the Treasury intervened at the eleventh hour to remove it.

5. ACE has been calling for such an incentive for nearly a decade. Owner occupiers account for 68% of householders in England [1] , but to date, despite considerable discounts offered by suppliers under CERT and its predecessors, relatively few of these households are improving the energy efficiency performance of their properties. We believe that a stamp duty incentive offers a simple and low-cost option for Government to effect a significant change in householder attitudes.

6. We are firmly of the view, however, that any stamp duty incentive should not be restricted only to householders taking up the Green Deal. This would unfairly penalise those who choose to finance improvements to their property out of general household funds or, for example, by taking out a green mortgage.

Reduced rate of VAT for energy efficient windows

7. A reduced (5%) rate of VAT already exists for the installation in households of a range of energy saving products and materials. The list of eligible products has been extended over recent years – and recent additions include ground- and air-source heat pumps, micro-CHP units and wood-fuelled boilers. However, we believe there is no good or logical reason why this should not be further extended to cover low emissivity (‘low-e’) glass. We have been pressing Government for some time to remedy this omission, and we were disappointed that Budget 2011 did not do this. We shall continue to press Government to make the change, so that householders are encouraged to replace old, heat-leaking windows sooner rather than later, and with the most energy efficient glass available.

Green Investment Bank

8. We have long argued that the Green Investment Bank (GIB) should be a proper bank, not a fund – and that it should have adequate levels of capitalisation, with borrowing powers enshrined in its constitution. We therefore welcomed the announcement in Budget 2011 that the GIB will be a proper public green bank; we also welcomed initial capitalisation levels of £3 billion, which are higher than anticipated some months previously – and not too far adrift of the minimum of £4 billion recommended by Ernst & Young in their recent report [2] .

9. However, in a blow to the potential for the Green Investment Bank to drive energy efficiency, Budget 2011 delayed the Bank’s borrowing powers until at least 2015, subject to the Government meeting its target to eliminate the annual structural deficit. This is a significant own goal.

10. The power to borrow is the most critical aspect of the GIB. It would give the Bank the potential to leverage in huge resources held by institutional investors. Critically for energy efficiency, without the power to borrow the Bank will not be able to raise low cost finance on which a successful Green Deal critically depends. This short-sighted decision by the Treasury not only imperils the success of the Government’s flagship energy efficiency policy, but also fails to address the wider low carbon investment needs of the UK. We shall continue to press the Government to bring forward the 2015 date and drop the condition that the deficit must be eliminated before borrowing can begin.

Carbon Price Floor for Electricity Generation

11. The Budget announced that, following consultation, a carbon price floor for electricity generation will be introduced from April 2013. This made good promises in both the Coalition Statement and the Conservative election manifesto. ACE supports in principle the introduction of a carbon floor price. However, that support is conditional upon the combined receipts from the carbon floor and the EU ETS being ringfenced to fund energy efficiency improvements in homes, businesses and industry. Evidence from the US indicates that investment in energy efficiency delivers seven times the CO2 savings than carbon taxes and prices [3] . Ring-fencing this revenue for energy efficiency can therefore greatly increase the carbon reductions resulting from taxation policies.

12. By contrast, failure to use receipts in this manner would impact upon the productivity of British industry, raise public anger at increases in their bills and exacerbate fuel poverty. Even at £16 per tonne, the Treasury expects the floor price to raise £1.6 billion a year by 2015/2016. This is a significant sum that should be used to fund energy efficiency improvements, rather than simply to line Treasury coffers.

13. We are also concerned that the price is too low to drive a significant increase in investment in low carbon power generation.

14. One of the arguments often made against environmental taxation is that the amount of revenue raised is unpredictable because a successful environmental tax will, by definition, change "environmentally negative" behaviour, resulting in a drop in tax revenue. By contrast, combining the receipts from the carbon price and the auction of EU ETS permits will create a more predictable and stable revenue stream for the Treasury at any given price floor. This in turn will provide a stable funding stream for the energy efficiency programme that we are advocating.

CRC Energy Efficiency Scheme (formerly the Carbon Reduction Commitment)

15. No substantive announcements were made in the Budget about this Scheme, save to confirm that the first allowances on sale in 2012 will be priced at £12 per tonne of carbon dioxide. However, it had been widely hoped that the Chancellor would bow to pressure from all sides (including the CBI and other industry representatives) and revert to the original proposal to recycle the revenues from CRC allowance sales to participating organisations.

16. To a chorus of criticism the Chancellor dropped this original proposal in last October’s Spending Review, announcing that CRC revenues would simply be "used to support the public finances", i.e. swallowed up by the Treasury. All informed commentators believe that this will act as a reduced incentive to Scheme participants to lower their carbon emissions. We are therefore disappointed that Budget 2011 gave no sign that the Government were minded to reverse their October decision.

Landlords Energy Saving Allowance (LESA)

17. The Landlords Energy Saving Allowance (LESA) is a tax allowance, introduced in April 2004, that allows private sector landlords to claim up to £1,500 (per property) against tax every year for investment in energy saving. However, awareness among landlords is low and the value allowable is not high enough to incentivise significant whole-house retrofits of properties. We have therefore been advocating that the current £1,500 cap be significantly raised to incentivise the installation of more expensive energy efficiency measures. This should be accompanied by an awareness campaign by the Treasury, who have to date been remarkably coy about advertising the existence of LESA – no doubt one reason why the Allowance has only ever been claimed by less than 0.2% of those eligible to do so.

The rise of outsourced "quasi-taxation"

18. Finally, we have mounting concerns that an increasing number of energy and climate change policies are being funded by means of outsourced "quasi-taxation". We refer principally to the raft of obligations that are placed on energy suppliers, the costs of which are then recovered from the consumer on a crude ‘per household’ basis. According to DECC [4] , in 2010 these obligations accounted for 4% of an average annual domestic gas bill and 12% of an average electricity bill.

19. The obligations include the Carbon Emissions Reduction Target (CERT), Community Energy Saving Programme (CESP), Feed in Tariffs, Renewables Obligation and of course, and the newly announced carbon floor price. There are a number of flaws in this gathering trend:

· In some cases it has not been made clear whether the costs will be recovered through a ‘per household basis’ or a ‘per kilowatt hour basis’ – however situations where all consumers pay a flat rate, regardless of their income or level of energy consumption, are fundamentally regressive.

· It is not transparent. Consumers do not know exactly how much they are paying via their fuel bills to fund the various policy initiatives.

· Soaring fuel bills are already having a damaging effect on household incomes. By requiring bills to carry in addition the costs of an ever-increasing number of climate change policies, there is a real danger that the general public will be "turned off" the whole environmental agenda.

· If costs are recovered from all energy customers at a flat rate this would run counter to the basic principle underlying environmental taxation, i.e. that "the polluter pays". There is no penalty for environmentally negative activity, and no reward for "good behaviour".

20. In this regard we were interested to read in the "Plan for Growth" [5] that the Government plans to introduce "a new framework to cap the impact of levy-funded support on energy bills". As far as we are aware, no further detail has yet emerged as to the Government’s plans – and we would urge them to clarify their intentions without delay.

20 April 2011


[1] English Housing Survey 2008

[2] Ernst & Young LLP, Capitalising the Green Investment Bank, Key issues and next steps, October 2010

[3] RAP, Delivering Energy Efficiency on a Large Scale: Challenges and Lessons Learned, November 2009, slide 14 http://www.raponline.org/docs/RAP_Cowart_BHamilton_DeliveringEnergyOnLargeScale_Bern_2009_11_04.pdf

[4] DECC, Estimated impacts of energy and climate change policies on energy prices and bills , July 2010

[4]

[5] HM Treasury and BIS, The Plan for Growth , March 2011, para. 2.159