Budget 2016: Osborne confirms carbon tax reform and new CfD funding

George Osborne has today (16 March) confirmed a major reform of business carbon taxes and agreed the next round of funding that will be allocated to new renewable energy projects, as the Chancellor set out the UK Government's 2016 Budget.

Delivering his eighth Budget announcement to a lively House of Commons this afternoon, Osborne provided some positive news on carbon reporting regulations and the next Contracts for Difference (CfD) auction, and also confirmed new funding for energy storage and demand-side response technologies. 

But the Chancellor failed to answer a number of other key green policy questions. (Scroll down for full 2016 Budget document). 

Carbon Reduction Commitment

In a packed Budget that “puts the next generation first”, Osborne confirmed that the Carbon Reduction Commitment (CRC) will be abolished, with effect from the end of the 2018-19 compliance year.

The official Budget document states that the CRC will be replaced, “in a revenue-neutral way”, with an increase in the Climate Change Levy (CCL) from 2019 – although this CCL rise does mean that renewable energy generators will now have to pay a higher tax, as the Chancellor controversially removed the CCL exemption for clean energy generation in last year’s Budget.

Osborne said: “Many retailers have complained bitterly to me about the complexity of the Carbon Reduction Commitment – it’s not a commitment, it’s a tax. So I can tell the House, we’re not going to reform it. Instead, I’ve decided to abolish it altogether… the most energy-intensive industries remain completely protected and I’m extending the climate change agreements that help many others.”

Contracts for Difference

The Chancellor went on to confirm that £730m will be dedicated to the next wave of Contracts for Difference (CfD) auctions for offshore wind and “other less-established technologies” – double the amount put into the first CfD auction.

“The Energy Secretary and I are announcing £730m in further auctions to back renewable technologies and we’re now inviting bids to help develop the next generation of small modular reactors,” Osborne said.

The official Budget document reads: “The government will auction Contracts for Difference of up to £730m this Parliament for up to 4GW of offshore wind and other less established renewables, with a first auction of £290m. Support for offshore wind will be capped initially at £105/MWh (in 2011-12 prices), falling to £85/MWh for projects commissioning by 2026.”

Energy storage/demand-side response

Following the newly-formed National Infrastructure Commission’s report into the UK’s future low-carbon energy system, the Budget document states that the government will allocate “at least £50m” for innovation in energy storage, demand-side response and other smart technologies over the next five years

Osborne offered little positivity for the green economy from there on. In the same breath as announcing the scrapping of the CRC, the Chancellor agreed to provide yet more support for the UK’s fossil fuel industries in the form of tax cuts for oil and gas – the supplementary charge for oil and gas producers will fall from 20% to 10%.

Nuclear energy

The document states that the Government will launch the first stage of a competition to identify a small modular nuclear reactor (SMR) to be built in the UK, and will publish an SMR delivery roadmap later this year. It will also allocate at least £30m of funding for R&D in advanced nuclear manufacturing.

Osborne gave no mention of Hinkley power plant in today’s speech, and there is no mention of it in the full Budget document.

Flood defence spending

Budget 2016 announces an additional boost to spending on flood defence and resilience of over £700m by 2020-21. This is a welcome boost for Defra, given that this time last year we were reporting that the Department was struggling to fill a £600m black hole in its flood defence spending that was expected to be filled by businesses and local authorities.

Air quality

Osborne gave no mention of this critical issue in his speech, but the full Budget document does include new measures to support the transition to cleaner, zero and ultra-low emission vehicles

Specifically, the Government says it will:

  • Extend the 100% First Year Allowance (FYA) for businesses purchasing low-emission cars for a further three years, to April 2021. 
  • Reduce the main rate threshold for capital allowances for business cars to 110 grams/kilometre of CO2 and the FYA threshold to 50 grams/kilometre of CO2 from April 2018.
  • Continue to base Company Car Tax on CO2 emissions of cars, and consult on reforming the lower CO2 bands for ultra-low emission vehicles to refocus incentives on the cleanest cars beyond 2020-21.

High hopes dashed

Going into the 2016 Budget, hopes were high but expectations were understandable low among sustainability professionals and green groups. Clarity over the Levy Control Framework, more ambitious action on air quality, better support for SMEs on energy efficiency and a U-turn on the controversial CCS cancellation were all on our wishlist, but none received a mention today.

The most significant green policy announcement this week came a day before the budget, when Energy Minister Andrea Leadsom announced that the UK will enshrine in law a long-term goal of reducing carbon emissions to zero, as called for in last year’s historic Paris climate deal.

Ultimately, though, this was another Budget that failed to rise to the challenge set by the ambitious Paris Agreement, and Osborne just hasn’t quite delivered the Easter egg of green pledges we were all hoping for.

View the full green business reaction here.

Budget 2016 full document

Luke Nicholls

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