‘Climate change levy’ to encourage energy efficiency

This reform follows closely the recommendations made in Lord Marshall’s report on the role of economic instruments and the business use of energy, published in November 1998.

The ‘climate change levy’ is intended to help meet the UK’s targets for reducing greenhouse gas emissions. The Government says the levy will entail no increase in the tax burden on business as the revenues will be recycled in full to business. These reforms are intended to promote energy efficiency, encourage employment opportunities, and to stimulate investment in new technologies.

The new levy will be introduced in April 2001. The tax rates applying to different fuels will be set out in Finance Bill 2000. Following Lord Marshall’s recommendations, the Government is announcing the climate change levy in advance to give businesses time to adjust.

The Government expects the levy to raise around £1.75 billion in its first full year (2001-02) and save around 1.5 million tonnes of carbon a year by 2010. The levy will apply to gas (natural gas and liquefied petroleum gas), coal and electricity used by business, agriculture and the public sector for energy uses.

However, the levy will not apply to fuels used by the domestic or transport sectors, or fuels used for generation or non-energy purposes. The levy will not apply to oils, which are already subject to mineral oils duty.

Announcing the reforms in his Budget speech to the House of Commons, UK Chancellor Gordon Brown reassured energy intensive industries that the would take their requirements into account when setting tax rates: “The Government recognises the need for special consideration to be given to the position of energy intensive industries given their energy usage, the separate Integrated Pollution Prevention and Control regulation and their exposure to international competition. In line with the recommendations made by the CBI, the Government will not be taking a blanket ‘across the board’ approach to setting the appropriate level of the new levy. The Government intends to set significantly lower rates for those energy intensive sites that agree targets for improving their energy efficiency which meet the Government’s criteria. The Deputy Prime Minister has written to the trade associations of the main energy intensive sectors on Budget day, and will begin negotiations with energy intensive sectors shortly.”

The Government says it will recycle the revenues of the levy to business and will cut the main rate of employer NICs by 0.5 percentage points from 12.2% to 11.7%.

“Businesses will also benefit from schemes aimed at promoting energy efficiency directly and stimulating the take-up of renewables sources of energy, like solar and wind power. The introduction of the climate change levy will therefore entail no increase in the burden of taxation on business,” said Brown.

The Green Party’s view is that “the Energy Levy on companies, promised to have a neutral effect, is pointless unless associated with plans for a progressive increase in such taxes to invoke change. The Chancellor’s introduction of a carbon tax in 2001, which results in a lowering of vehicle excise duty, is unlikely to have any significant effect.”