Climate Change Levy: are you ready for lift-off?
Average global temperatures are rising, as are sea levels; habitats are changing, and vulnerable species are being lost, and it’s all due to a group of gases that are turning Planet Earth into a greenhouse. In the UK, where climate change is causing warmer winters, and a wetter climate throughout the year, a new consequence of global warming will come into effect on 1st April: the Climate Change Levy.
In 1992, at the Earth Summit in Rio de Janeiro, Brazil, developed nations agreed to limit their emissions of greenhouse gases to 1990 levels in order to prevent “dangerous anthropogenic interference with the climate system". This was followed in 1997 in Kyoto, Japan, by a legally binding commitment by the developed countries to reduce emissions by 5.2% below 1990 levels between 2008 and 2012. However, a number of governments set themselves higher challenges, including the UK administration which aims to hit a target of a 12.5% reduction in greenhouse gas emissions.
1992 Earth Summit documents
Kyoto Protocol (requires Adobe Acrobat)
United Nations Framework Convention on Climate Change
How it works
Intended to aid the UK in achieving this goal, the levy is a tax on the business use of energy, imposed on the supplier, but passed on to the consumer to the tune of 0.43 pence per kilowatt hour (kWh) for electricity, 0.15 pence per kWh for gas, 1.17 pence per kWh for coal, and 0.96 pence per kWh for liquid petroleum gas (LPG). The onus for registration and payment is put on energy suppliers, with domestic customers protected from paying the levy by the application of the tax at the time of supply to the end consumer in industry, commerce and the public sector.
The levy is expected to raise around £1 billion revenue in its first year, which is to be recycled principally through a 0.3% reduction in employers’ National Insurance contributions, with £150 million being allocated for support for energy efficiency and renewables throughout 2001/2. Thus, the levy is designed to be revenue neutral, merely moving the burden of taxation from ‘social goods’ to ‘environmental bads’.
"Fuel and electricity bills are predicted to rise by around 10-15% . most organisations can reduce their energy bills by up to 10-20%"
“We cannot take energy for granted," said Dr David Vincent, Director of the Energy Efficiency Best Practice programme. “Fossil fuels are a finite resource, and their use is having a damaging impact on the local, national and global environments. Moving towards a lower carbon economy is unavoidable." He also added that an important part of the Government’s Climate Change Programme is in helping businesses adjust in order to remain competitive. “Responding positively to global warming means rethinking how we can use energy more efficiently and in particular, how to factor low carbon futures into business investment decisions," he said.
For those paying the tax, fuel and electricity bills are predicted to rise by around 10-15%, an increase which is intended to set climate change alarm bells ringing in board rooms, and consequently result in increasing energy efficiency, and the purchase of energy from renewable sources. According to the DETR, studies by the Government’s Energy Efficiency Best Practice Programme have shown that most organisations can reduce their energy bills by up to 10-20%, predominantly through no or low-cost measures, year after year.
Climate Change: The UK Programme
Climate Change Levy factsheet (requires Adobe Acrobat)
The New and Renewable Energy Programme
HM Customs and Excise
Department of the Environment, Transport and the Regions
Claiming your discount
Energy intensive industries, however, are being given a partial ‘get-out’ clause owing to the needs of their industry, and the Government’s wish not to push them out of the country, weakening the economy and merely moving undesirable emissions to another area. As a result, the Government has set up a process of Climate Change Levy Agreements, where they pledge to provide an 80% discount from the levy for sectors of industry that commit to challenging targets for improving energy efficiency or reductions in carbon emissions.
|"One potential problem facing energy consumers is in identifying whether their activities qualify as a 'business' use of energy"|
Companies that wish to take part in climate change agreements need to contact the relevant trade association, though they do not need to become a member. They will, however, have to act quickly as discounts in the levy cannot be claimed retrospectively. Alternatively, queries regarding joining sector agreements can be addressed to Duncan Egerton at the Department of the Environment, Transport and the Regions (DETR), on 020 7944 4822, or can be sent by email to Levy_agreements@detr.gsi.gov.uk.
A diverse group of industry sectors have already signed up to Climate Change Levy Agreements with the Government, ranging from the cement industry and motor manufacturers, to printing and animal feeds. One example of such an agreement is that taken up by the steel industry in which firms have agreed to cut their annual energy use by 11.5% by 2010, equating to an annual saving of up to 18% in carbon dioxide emissions. In order to manage the agreement for the five steel making companies and the associated downstream companies, the industry association has established UK Steel (Environmental) Ltd. Possible energy saving initiatives include a reduction in gas flare, and improved furnace operation.
Business and Climate Change: UK Advisory Office
Department of the Environment, Transport and the Regions information on the Climate Change Levy and Climate Change Agreements
At the other end of the scale, the smallest businesses, or those using the least amount of energy, may be classified by Customs and Excise as domestic supplies, and would therefore be exempt from the levy, under the de minimis principle, the same as that which is used to calculate VAT. Electricity supplied to consumers up to a maximum of 1000 kilowatt hours per month (33 kilowatt hours per day) falls into this category, together with small quantities of coal or coke (up to one tonne), piped gas (5 therms/145 kilowatt hours per day, or 150 therms/4,397 kilowatt hours per month), and liquefied petroleum gas (50 kilogram cylinders, or a tank capacity of two tonnes or less). This also means that businesses purchasing fuel for sale on to domestic customers are also exempt from the levy, though they need to satisfy HM Customs and Excise that this the case before they obtain the fuel.
Government guide to the levy
Environment and Energy Help Online
However, there will also be a number of discounts and even exemptions from the levy with no strings attached what so ever. The horticulture sector will be eligible for a discount of 50% for up to five years, with natural gas in Northern Ireland being entirely exempt for the same time period. Other exemptions include certain new forms of renewable energy, good quality CHP plants, and for electricity used in some electrolytic processes, such as primary aluminium smelting. On top of this, one of the bad boys of the environment, oil, which is already subject to excise duty, will not be taxed, and nor will road fuel gas, heat, steam, or energy from waste.
|"Those paying the lower VAT rate are likely to qualify for lower levy rates"|
One potential problem facing energy consumers is in identifying whether their activities qualify as a ‘business’ use of energy. The most straightforward guide to deciding who qualifies for exemption or a reduced rate of the levy is whether or not they already qualify for a reduced rate of Value Added Tax (VAT). Those paying the lower VAT rate are likely to qualify for lower levy rates. However, although the tax has been designed to be similar to VAT in many ways, it is termed a ‘sticking tax’, which means that, unlike VAT, businesses will not be able to reclaim it.
Reductions in the tax will be managed through a scheme of annually reviewable self-certification, the forms for which (known as Supplier Certificate PP11) are available from the Department of the Environment, Transport and the Regions (DETR) website, as well as from that of HM Customs and Excise, or by post from HM Customs and Excise, at CCL COPE (Certification), Custom House, Furness Quay, Manchester, M5 2XX, telephone number 0161 261 7079/7259/7095. Those hoping to take advantage of exemptions and reductions from the beginning of April 2001 should ensure that their completed certificates reach their suppliers by 26 March in order to allow time for processing. However, those involved in climate change agreements should not send certificates to their suppliers until they have received certification from the DETR showing that the facility is covered by an agreement.
For those hoping to qualify as domestic consumers, the classification includes dwellings; communal residences, such as homes for the elderly and disabled, hospices, monasteries and convents, and residential accommodation for schools and universities; and self-catering holiday accommodation, with garages and subsidiary buildings within close proximity being treated as the same residential unit. Hospitals and prisons are not exempt from the levy as they are part of the public sector.
Landlords making profit from renting out accommodation will have the levy charged on the portion of the energy supply that is subject to the standard rate of VAT.
Charities, in particular, need to beware that although they may be non-profit organisations raising money ultimately for philanthropic purposes and in order to cover their expenses, their activities will be classified as ‘business’, making them liable to pay the levy, unless the de minimis rule applies. Activities carried out by charities, which HM Customs and Excise will consider to be business, include the sale of donated goods; the hiring out of charity run buildings such as village halls; and the provision of membership benefits by clubs, associations and other similar bodies. The Government urges anyone who is not clear as to whether or not what they are operating is a business, to read VAT Notice 701/1 Charities.
However, all is not lost for charities, as premises that are also being used partly for domestic or ‘non-business’ charity work could be eligible for exemption from the levy, although this must account for at least 60% of the energy use. Such customers need to notify their energy supplier of the percentage of their fuel and power that qualifies as non-business use.
Although a number of schools and educational establishments do qualify for charitable status, such as voluntary aid schools, foundation schools, and city technology colleges, most other schools, colleges, and universities are more likely to have to pay the levy, even if they are maintained by their local education authority.
Government guide on levy reduction or exemption
Customs and Excise, for VAT and CCL information
PP11 Supplier Certificate (requires Adobe Acrobat)
PP10 Supporting Analysis (requires Adobe Acrobat)
Enhanced Capital Allowance Scheme
Another scheme that the UK Government has devised in order to counteract climate change, is the Enhanced Capital Allowance Scheme, designed to support a number of technologies, including combined heat and power (CHP) and materials for pipe insulation, which meet the relevant energy efficiency criteria. Further technologies could be added to the programme subject to certification and cost-effectiveness, according to the Government. Formal claims to the scheme can be made after April 2001. The programme also includes a £50 million fund which is being made available for energy efficiency and renewables in order to provide advice and audits to small and medium sized enterprises, promote the development of new sources of renewable energy, and to encourage the research, development and take up of low carbon technologies and energy saving measures through a ‘Carbon Trust’.
Enhanced Capital Allowance Scheme
Anyone still confused about how they should be making both energy and financial savings have at their disposal a plethora of websites containing information on the Climate Change Levy and other Government schemes. Otherwise, advice can be obtained from a variety of consultancy companies, such as Stark Energy Information Systems which uses computer programmes to calculate optimum energy savings, BRECSU which provides information on energy efficient building design, or Greenergy, which gives advice on the reduction of greenhouse gas emissions and runs a levy rebate programme.
UK Government Energy Efficiency Best Practice Programme
BRECSU for energy efficient building advice
Stark Energy Information Systems
Rundown of European Union environmental taxes