Debate heats up over economic effects of Climate Change Levy

Disputes regarding the expected economic effects of the Government's planned Climate Change Levy have become a focus in the run-up to the autumn, when the Treasury is expected to announce which industries will receive exemptions or rebates from the Levy.


Thus far, three reports have been published that comment on the Levy’s effects on the economy. They are:

  • Select Committee on Trade and Industry – Ninth Report
  • Climate Change Levy: Impact on the UK economy, an industry-commissioned document
  • Cambridge Econometrics’ Climate Change Levy study

Wholehearted in its support for the principle of the Climate Change Levy, the Select Committee on Trade and Industry’s report nevertheless registered the concern that: “without appropriate modifications and exemptions, the Levy could prove a blunt instrument which does considerable damage to sectors of the British economy already struggling to maintain their profitability”.

The report recommends:

  • special provisions should be made for energy-intensive industries
  • attention should be paid to the regional effects of the Levy, not just sectoral effects, and makes particular mention of Northern Ireland as having “an entirely different energy market to that operating in the rest of the UK”
  • attention should be paid to the sectors that will gain from the Levy, with the financial sector given as an example.

Following the Select Committee report, an industry-commissioned survey has been released, forecasting 95,000 lost jobs in manufacturing. The Climate Change Levy: Impact on the UK economy survey – commissioned by the Engineering Employers’ Federation, the UK Steel Association and the Chemical Industries Association – urges the Government to seek CO² emission reductions in the domestic and transport sectors and to consider a delay to the implementation of the Levy, “to enable industry to invest in energy efficiency technology”.

Mark Johnston, an energy campaigner at Friends of the Earth (FoE), disputes the job loss forecasts put forth in the Climate Change Levy: Impact on the UK economy survey. “It’s an outrageous piece of economic modelling. If you put in perverse assumptions then you get the figures that they get,” he says, referring specifically to the survey’s assumption that all jobs lost will go abroad.

“We did some economic modelling last year, and it showed that for the economy as a whole the Levy would be a benefit,” says Johnston. “And many manufacturing sectors would benefit from it as well.”

FoE does not oppose rebates for some energy-intensive industries, but does not support wide-ranging exemptions or rebates. Regarding the UK steel industry, Johnston believes a rebate from the Levy is in the works. “They’re likely to get a rebate. The Government indicated that this spring.” Regarding the industry survey, Johnston sees it as part of the wrangling over rebate levels. “The political question is how large the rebate will be,” he says. “All these industries went into see the Government and they were putting out black propaganda out in advance to scare ministers.”

The FoE economic modelling is a Cambridge Econometrics study that assumes a 50% lower levy rate for five sectors:

  • basic metals
  • chemicals
  • pharmaceuticals
  • non-metallic minerals
  • other minerals

The study shows a net employment benefit from the Levy, with “employment in the economy as a whole forecast to be boosted by around 14,000 in 2002”.

The study also asserts that “of the 49 industries, only three are expected to see a reduction in employment. In the chemicals industry, which announced that thousands of jobs would be lost, a modest increase in employment is forecast”.

The Climate Change Levy is due to be introduced in 2001. It will form part of the Government’s attempts to meet its Kyoto target for CO² emission reduction.

Under the Kyoto Protocol the UK has a legally-binding target to reduce national emissions of six greenhouse gases by 12.5% for the period 2008-2012. The cut will contribute to the EU’s overall emission reduction target of 8%. In addition, the UK has a domestic aim to cut emissions of CO2 by 20% by 2010.

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