House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

IMPACT ON INDUSTRY OF THE CLIMATE CHANGE LEVY

IV POLICY-MAKING

46. As we have commented previously, the Government took a number of important decisions on the design of the Climate Change Levy in the period between the publication of Lord Marshall's report, in November 1998, and the commencement of the Customs and Excise consultation exercise, in March 1999:

to recycle revenues primarily by reducing employers' NICs

to fund energy efficiency improvements and renewables by £50 million from Levy revenues

to base the Levy on energy use not the carbon content of fuels

to deal with the energy intensive industries by means of agreements on their energy use.

The UK Offshore Operators' Association declared that it was "disappointed" that "so much of the design and application of the Levy appears to have been decided without consultation with business and industry".[175] The Institute of Chemical Engineers criticised the Government's "less than holistic" approach to consultation and the CBI urged that "this should not be the final Government consultation with businesses on the Levy" .[176] Some witnesses were also unhappy that the Government had prepared its proposals for the Levy without publishing a cost-benefit analysis or regulatory impact assessment.[177] We are disappointed that the Government, despite a welcome commitment to consult on financial proposals, failed to consult on several of the key decisions determining the design of the Climate Change Levy. At the very least, this has undermined the potential for Government and industry to work closely together on reducing the UK's greenhouse gas emissions.

Role of the Treasury

47. Many of the key decisions taken about the design of the Levy were clearly inspired by the Treasury, particularly the decision to recycle Levy revenues by reducing employers' NICs. The Customs and Excise consultation paper published "illustrative" rates of the Levy, based on 50% reductions for energy intensive industries, which were intended to show how enough money could be raised to cut the rate of employers' NICs by 0.5%. Ms Hewitt denied that, from the Treasury's perspective, the primary aim of the Levy was to raise enough money to reduce the rate of employers' NICs by 0.5%.[178] We note the assessment offered by Mr Agar of the CBI that it was possible "the Treasury has thought about NICs reductions first, worked our how much that is worth and then translated that into rates for an energy tax".[179] When we asked Ms Hewitt what might happen if the Levy did not appear to be raising enough revenue to provide the anticipated reduction in employers' NICs, for instance due to considerable reductions in Levy rates being offered to a number of industry sectors, she was unable to offer us any clear guidance.[180] She was also unable to explain how the figure of £50 million was arrived at for the fund promoting energy efficiency and renewables drawn from the revenues of the Levy.[181] We remain to be convinced that the Treasury has not seen the Climate Change Levy as an opportunity for the Chancellor to offer the majority of the business and commercial sectors a significant tax cut, by reducing employers' NICs, in his next Budget.

Role of DTI

48. While the Treasury is taking the lead in the design and implementation of the Levy, DETR is also playing an important part in negotiating agreements with industry on energy efficiency. It is anticipated that at least the outlines of these agreements will be ready in the autumn, so that indicative rates of Levy and proposed discounts can be published in advance of the Budget.[182] DTI's role in respect of the Levy is less obvious. The written memorandum submitted by DTI and DETR told us that "DTI is providing assistance to DETR in the negotiations [with industry] and is attending the meetings with the industry sectors".[183] The Energy Intensive Users Group informed us that it was "disappointed" with the role DTI was taking. Mr Blakey said that "we thought one of its roles was to be a champion of industry...if they are being a champion they are keeping pretty quiet about it".[184] We will assess DTI's role in relation to the Climate Change Levy by the extent to which the measure can be introduced without harming the competitiveness of British industry.

Energy Taxation Abroad

49. The written evidence from DTI and DETR stated that "seven of our EU partners have introduced explicit taxes on the carbon or energy content of fuels and the Italian Government proposed a carbon dioxide tax in its last budget".[185] Several of the energy-related taxes introduced abroad were drawn to our attention by witnesses, [186] and we asked the Parliamentary Office of Science and Technology to supply us with an analysis of such taxes in operation in other OECD countries.[187] The Energy Intensive Users Group noted that the proposed German tax would add far less to the costs of energy intensive industries than the UK proposal.[188] The Chemical Industries Association explained that the German tax combined a reduced rate for energy intensive industries with a cap on the net payment individual firms could make equal to 120% of their equivalent of employers' NICs.[189] The Association also mentioned the Dutch experience, where negotiations are continuing about the possibility of energy intensive firms being exempted from further energy taxation if their plants perform to world class energy efficiency standards.[190] The British Retail Consortium commended a Californian scheme, whereby firms are taxed on energy consumed in excess of a benchmark figure calculated according to sector and based on the square-footage of the site operated.[191] The Energy Intensive Users Group was concerned that "very little attention [seems to have] been paid to what is going on in other countries".[192] When asked about the German energy tax, Mr Meacher could only tell us that it was "horrendously complicated" and that he did not know the full details of it.[193] The Government needs to be aware of, and make use of, the best practice of other countries in relation to energy taxation, not least to help uphold the international competitiveness of UK firms once the Levy is introduced.

The Way Ahead

50. The Energy Intensive Users Group argued to us that, with regard to the Levy, "the whole process of consultation is too short" and that the Government had moved forward with "undue haste".[194] Lord Marshall, however, countered that "to give two years' forewarning" of the Levy was very good.[195] The Government must work hard to allay the fears of much of UK industry that the Levy will harm competitiveness, but we do not believe that delaying the introduction of the Levy beyond 2001 would be helpful, either in terms of ensuring that the UK meets its Kyoto target or providing the long-term signal to industry that energy efficiency must be taken seriously. Ms Hewitt announced to us that she had "invited representatives of the major energy intensive sectors to meet Michael Meacher, John Battle and myself at the Treasury on 27 July" to allow industry representatives to speak directly to ministers about the on-going negotiations between industry sectors and DETR about energy efficiency agreements.[196] We hope that the forthcoming meeting between Ministers and industry representatives, announced for the first time at, and possibly in response to, the Committee's evidence session on 6 July, will mark a new approach by the Government to its consultations about the introduction of the Levy. We expect the Government to work closely with industry to achieve energy efficiency gains which do not harm, and indeed might improve, the international competitiveness of industry — the "win, win" situation Ms Hewitt mentioned to us.[197] Recent actions by the Government, particularly the decision, taken without consultation to recycle almost all the revenues of the Levy by cutting employers' NICs, have raised serious concerns about the effect the Levy might have on energy intensive sectors of the British economy.