House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

NINTH REPORT

The Trade and Industry Committee has agreed to the following Report:—

IMPACT ON INDUSTRY OF THE CLIMATE CHANGE LEVY

I INTRODUCTION

1. In March 1998, the Chancellor of the Exchequer asked Lord Marshall of Knightsbridge, Chairman of British Airways, to consider whether, and if so, how best, economic instruments could be used to improve energy efficiency in business and reduce greenhouse gas emissions from that sector, in order to help the UK meet its emissions reductions target under the Kyoto Protocol.[1] This request followed the publication by HM Treasury in July 1997 of a Statement of Intent on Environmental Taxation which stated that "just as work should be encouraged through the tax system, environmental pollution should be discouraged" and promised that the Treasury would use environmental taxes in situations where they met various tests of good taxation. These tests were that environmental taxation must be well designed, meet objectives without undesirable side-effects, keep compliance costs to a minimum, have acceptable distributional impacts, and take account of implications for international competitiveness.[2]

2. Lord Marshall, assisted by a Task Force of Department of Trade and Industry (DTI), Department of the Environment, Transport and the Regions (DETR) and HM Treasury officials, reported in November 1998.[3] Although asked to consider how greenhouse gas emissions could be reduced, Lord Marshall concentrated on finding ways of reducing CO₂ emissions which it is predicted will comprise 83% of all greenhouse gas emissions in 2000.[4] He concluded that:

all sectors of the economy need to contribute to the achievement of the UK's Kyoto target, which was likely to be only the first of the commitments required to secure adequate climate change
a range of economic instruments would be necessary to ensure that the Kyoto target was met
an emissions trading system would be required, but only a pilot scheme was practicable for the present.

3. Lord Marshall's key conclusion was that "there probably is a role for a tax if businesses of all sizes and sectors are to contribute to improved energy efficiency and to help meet the UK's emissions targets".[5] In terms of the design of a tax he suggested that it should:

send a clear signal to industry of the long-term direction of policy
be based, "at least in broad terms", on the carbon content of fuels
protect combined heat and power (CHP) and renewables in some way
give special treatment to energy intensive industries
recycle revenues in full to business, including by means of a fund geared at promoting energy efficiency.

Government Response to Marshall Report

4. The Chancellor of the Exchequer announced in the March 1999 Budget that he agreed with the thrust of Lord Marshall's recommendations.[6] He proposed the introduction of a Climate Change Levy in the Finance Bill 2000, to be implemented in 2001. The business and commercial sectors will be liable for the Levy on their final energy consumption: energy used for domestic and transport purposes will be exempt. Energy-intensive industries — defined as those subject to the Integrated Pollution Prevention and Control (IPPC) regime — will be eligible for reductions in the rate of Levy if they reach agreement with DETR on improvements in energy efficiency and reductions in greenhouse gas emissions. The revenue raised by the Levy is to be recycled to business (and others) by means of a 0.5% cut in the rate of employers' national insurance contributions (NICs). £50 million will be set aside for promoting energy efficiency and stimulating renewable sources of energy. The Government also accepted that there was a need to establish pilot emissions trading schemes, with which several companies are presently involved.

5. The administrative details of the Levy have been the subject of a recent consultation exercise by HM Customs and Excise, which closed on 28 May. Customs and Excise published illustrative rates for the Levy, based on the Treasury's indication that the Levy would raise "around £1.75 billion in its first full year", which were 0.21p/kWh for coal and gas and 0.60p/kWh for electricity.[7] These figures implied that those energy-intensive industries agreeing energy efficiency improvements with DETR would be offered a 50% reduction in the rate of the Levy.[8] Ministers were at pains to insist in oral evidence to us that these figures were all "illustrative";[9] they seem to have been chosen in order to ensure that the Levy raises enough revenue to permit the rate of employers' NICs to be reduced by 0.5%.[10]

CO₂ Emissions

6. In 1990, the UK's total greenhouse gas emissions were equivalent to 216 million tonnes of carbon. Recent DETR figures estimate that total emissions in 2000 will have fallen to the equivalent of 189 million tonnes of carbon, 12.5% below their 1990 level. It is estimated that greenhouse gas emissions will rise during the next decade, primarily due to increased CO₂ emissions, reaching a total equivalent to 194 million tonnes of carbon in 2010.[11] In order for the UK to meet its legally-binding 12.5% target for reductions in greenhouse gas emissions, action is required to prevent CO₂ emissions increasing over the course of the next decade. The Government predicts that "the Climate Change Levy could save around 1.5 million tonnes of carbon a year by 2010".[12] If the Government's predictions are accurate then the Levy could contribute around 30% of the emissions reductions required between 2000-2010 for the UK to meet its Kyoto target.[13] Although the Climate Change Levy might assist the UK hit its Kyoto target for reductions in greenhouse emissions, it will not be the only tool necessary for the job, all the more so if the Government has serious ambitions of achieving its national target of a 20% reduction in CO₂ emissions from 1990 levels by 2010.

The Committee's Inquiry

7. Although the Customs and Excise consultation paper on the Levy dealt primarily with points of detail, many respondents used the opportunity of the consultation exercise to decry the whole scheme. Particular points of controversy included:

the potentially adverse impact of the Levy on UK competitiveness and jobs

the method used to recycle the revenue raised by the Levy, which might benefit the service and public sectors at the expense of heavy industry

the decision to base the Levy on the energy rather than the carbon content of fuels, so that electricity generated from coal, gas, nuclear and renewables might be treated equally

doubts about the Government's reliance on voluntary agreements with industrial sectors.

8. In the light of these concerns being raised, we decided on 11 May to conduct an inquiry into the likely impact on industry of the Climate Change Levy, as well as on the relationship between the Levy and the Government's energy policy following on from the Reports we made on the subject last session.[14] We received a large number of written memoranda as well as many responses to the Customs and Excise consultation exercise. We heard oral evidence on 6 July in the morning from John Battle MP, Minister for Energy and Industry, DTI and Michael Meacher MP, Minister for the Environment, DETR; Lord Marshall of Knightsbridge; the Energy Intensive Users Group; and Patricia Hewitt MP, Economic Secretary, HM Treasury; and in the afternoon from the Energy Saving Trust, Forum for the Future and the Institute for Public Policy Research; the Association of Electricity Producers; the British Retail Consortium; the Confederation of British Industry (CBI); and the British Cement Association. We are grateful for all of the evidence, written and oral, that we have received. We also aware of the evidence taken, and Reports issued, by other Committees on aspects of the Climate Change Levy, including the Environment, Transport and Regional Affairs Committee, the Environmental Audit Committee and the Treasury Committee.[15]

1 At the Kyoto Conference in December 1997, developed countries agreed legally binding targets for reducing their emissions of six greenhouse gases, the most significant of which was carbon dioxide (CO₂). The EU took on a commitment to reduce its greenhouse gas emissions by 8% from their 1990 level by 2008-2012. In June 1998 the UK accepted a legally binding 12.5% reduction target, as part of the EU effort. We refer to the UK's 12.5% emissions reductions target as the Kyoto target throughout this Report; and see paragraph 6 Back

2 HM Treasury, Budget Press Notice 4, 2 Jul 97 and HC Deb, 2 Jul 97, c311 Back

3 Economic Instruments and the Business Use of Energy, Lord Marshall, Nov 98 (hereafter Marshall Report) Back

4 There was some criticism of the Climate Change Levy's focus on CO₂ at the expense of other greenhouse gases - Apps, p3 paragraph 3 Back

5 Marshall Report, paragraph 100 Back

6 Economic and Fiscal Strategy Report, HM Treasury, Mar 99 paragraphs 5.61-5.65 Back

7 Consultation on a Climate Change Levy, HM Customs and Excise, Mar 99, (hereafter C&E) table 1, p6; the rate of Levy suggested to be applied to electricity is equal to "the amount of the Levy which would have been charged had the inputs to generation been taxed on the basis of their energy content", assuming a "conversion factor", which takes account of energy lost in combustion, transmission and distribution of 2.84. That figure is the subject of consultation. See C&E, section 6 and Marshall Report paragraph 120 Back

8 C&E, footnote 6, p6 Back

9 Qq 9, 83 Back

10 See paragraph 47 Back

11 Marshall Report, table 1 p6; the DETR figures were published in its consultation paper on the UK Climate Change Programme Back

12 HM Customs & Excise, Draft Regulatory Impact Assessment, Mar 99, paragraph 26 and Marshall Report, annex F, paragraph F10 Back