Climate change levy targets business for political not environmental reasons

UK business leaders have claimed the UK Government's proposed tax on energy use focuses on business and industry for political, rather than environmental, reasons and will therefore fail to meet its environmental objectives.

The Institute of Directors (IoD) says the climate change levy (CCL) should not only be applied to business energy use, but also to domestic energy use. Writing in the IoD’s Tax News bulletin, the IOD’s Deputy Head of Policy, Richard Baron, argues that the CCL needs to reflect the fact that all electricity users contribute to CO2 emissions. If this were the case, he says, it would be possible to tax electricity producers at source, thus increasing the proportion of electricity generated by environmentally friendly methods, such as renewables.

IoD argues that domestic electricity use, along with the domestic use of gas and oil for heating generates CO2 in the same way as industry and business. Therefore domestic use should be taxed: until it is, the IoD claims the CCL will not address the Government’s CO2 emissions reduction targets. Secondly, the IoD argues that because the CCL is “filtered through businesses”, the Government is unable to apply the tax upstream, at power stations, where proper account could be taken of the types of power station and their differing levels of CO2 emissions.

“Why should business be hit harder than other sectors? If you don’t tax all users then you don’t know where it came from, so you end up not being able to take account of where it was generated,” Baron told edie.

As the tax stands at the moment, Baron said, “the CCL has been imposed on business for political reasons, not for economical or environmental reasons.” As he put it in Tax News: “The exclusion of domestic energy means that individuals will be less aware of the effect on costs than they should be. Applying the levy to domestic consumers would have had the advantage of ensuring that its level remained in the political spotlight.”

The CCL, which will come into effect in April 2001, is a tax on the business use of energy. It is intended to raise around £1 billion in 2001/02 and to reduce carbon emissions by 5 million tonnes a year by 2010. Offsetting cuts in employers’ National Insurance Contributions and additional Government support for energy efficiency schemes and renewable sources of energy are intended to make the CCL revenue neutral for the private sector.

The IoD is the latest in a series of business groups to oppose the CCL. Following the Budget in March (see related story), the Confederation of British Industry (CBI) accused the UK’s Chancellor of the Exchequer, Gordon Brown, of endangering competitiveness by not extending exemptions to the CCL to more industrial sectors.

While environmentalists accept that the Government must begin to address the question of applying economic instruments to domestic energy use, they argue that this cannot be done until the politically-fraught problem of fuel poverty is dealt with. In the meantime, they say, the CCL is a useful way of encouraging business – the one sector that is already able to take advantage of liberalisation of the energy market – to reduce its CO2 emissions.

“There’s no doubt that domestic energy use is an issue that the Government should get to grips with,” Tim Jenkins, Friends of the Earth’s CCL research officer, told edie. “The damage was done when the Conservatives attempted to disguise a revenue raising tax on domestic energy as a green tax. The Government has to open a public debate on economic instruments for domestic energy use, but it needs to get rid of fuel poverty first. However, this is not an argument for industry to say they won’t do anything until the domestic sector is sorted out. This is just a tactic – and the IoD knows it will take time.

“Moving to taxation on domestic energy will be politically very difficult. The Government chose to focus the CCL on the industrial sector because it was sensible to do so. It allowed them to shift the tax burden on business from taxes on employment to energy use.”

The IoD also criticises administrative and enforcement aspects of the CCL:

  • administration: the IoD says many of the new rules on invoices and returns are unnecessary when existing VAT rules could have been used
  • enforcement: certain aspects of the enforcement provisions are “disproportionately” harsh, the IoD says; the enforcement provisions will penalise levy-payers even if they act in good faith; and it will be difficult to correct over-payments of the levy

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