A paper published today (23 November) by the Grantham Research Institute on Climate Change and the London School of Economics is a direct response to a Treasury consultation which sought views on proposals to simplify business energy efficiency tax.

The paper highlights that carbon taxes would be a more beneficial in meeting climate targets than the current complex energy taxes which offer different incentives for different fuel sources.

The paper states: “The instrument of choice to achieve the Government’s policy objectives should be a price on the carbon content of energy, rather than on the amount of energy consumed, in order to address the greenhouse gas externality.

“Carbon pricing addresses a specific market failure: the greenhouse gas emissions from energy use which cause climate change. Internalising this cost in the price of electricity will make users include the real cost of emissions in their decision about how much energy to consume.”

Perverse incentive

The authors of the paper argue that an energy tax would likely result in low-carbon energy becoming more expensive, with cheap clean energy likely to be penalised under a broad energy tax.

The paper warns the Treasury that the current policy regime is creating a ‘perverse incentive’ for businesses to target higher carbon content fuels over electricity. This ‘disproportionate fiscal burden’ is at risk of discouraging decarbonisation objectives.

To combat this, the paper calls on the government to replace the CCL, Carbon Reduction Commitment, Energy Efficiency Scheme, Climate Change Agreements and the Carbon Price Support Rate with a single carbon pricing policy.

The paper states: “Ending the CCL exemption for renewable energy generators means that it is now an energy tax rather than a carbon pricing instrument. The justification appears to be a desire to drive greater energy efficiency rather than carbon reduction per se; however, removing the exemption has increased the cost of low-carbon energy and so has hindered carbon reduction efforts.”

Complex policies

The paper calls for a higher carbon price that is consistent across different fuels and different sectors. Currently, there are at least eight policies that price carbon in the UK which offer up differing pricing brackets creating a complex policy environment.

Adding to the confusing mix is the Climate Change Levy, which since the Summer Budget; renewables are no longer exempt from. Electricity was taxed between £37.11 and £65.70 per tonne of carbon-dioxide-equivalent of emissions in 2013-2014 across the range of policies.

Carbon prices applied to natural gas ranged between £3.45 and £21.77 per tonne, while coal was priced lower at £2.34 to £6.68 per tonne. A variety of companies have called for a global carbon price to be established as a way of bypassing burdensome regulations and fighting climate change.

Consultation Reforming the Business Energy Efficiency Tax Landscape

Matt Mace

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