UK Climate Change Levy: renewables, CHP granted exemption but revenue will be lower than forecast

The UK Chancellor has published his Pre-Budget Report with details of changes to the proposed Climate Change Levy. Pressure from industry has led to a levy rate reduction and an increased discount for energy-intensive sectors.

Overall, the revenue collected by the Climate Change Levy will be lower than originally planned (£1 billion instead of £1.7 billion), as Gordon Brown has announced a decrease in the base levy rate. The levy rate was initially proposed at:

  • 0.21p/kWh for gas and coal
  • 0.60p/kWh for electricity

The rate has been reduced to:

  • 0.15p/kWh for gas and coal
  • 043p/kWh for electricity

Because the Climate Change Levy is designed to be revenue neutral for the private sector, Brown also announced that the planned 0.5% cut in employers’ national insurance contributions to offset the levy will be reduced accordingly to 0.3%.

On the ‘green’ side, Gordon Brown’s decision to exempt renewables and combined heat and power generation from the Climate Change Levy is seen by environmentalists as an important boost to cleaner electricity.

Exemptions have also been granted to traction electricity used by rail freight locomotives, those “energy products which serve a dual purpose as a fuel and as a feedstock within the same process”, such as the generation of steam by CHP and its subsequent conversion into electricity, as well as electricity used in electrolytic processes (similar to chlor-alkali production and primary aluminium smelting).

On the subject of electricity for electrolytic processes, a Treasury spokesperson told edie: “We’re exempting it because it is inherent to the chemical process and it would be impossible to make it more energy efficient.”

The initial Climate Change Levy consultation document proposed a 50% reduction in the levy rate for energy-intensive industries. Brown’s Pre-Budget Report increases that discount to 80%, provided that energy efficiency targets are agreed by these industries with the Government.

Negotiations related to energy efficiency are ongoing with the deadline for energy efficiency target offers and the signing of Heads of Agreement extended to 20 December 1999. Smaller trade associations are expected to sign up to energy efficiency target offers and Heads of Agreement in early 2000.

The Government will also be consulting with industry to agree a list of energy efficient products and technologies that will qualify for the Climate Change Levy capital allowance scheme. The Pre-Budget Report also contained the decision to treble the capital allowance scheme’s funding from £50 million to £150 million in the first year of the levy’s introduction. According to the Treasury, this should allow for 100% first year capital allowances for energy-saving instruments.

The changes to the Climate Change Levy have received a mixed reaction. Environmental campaigning organisation, Friends of the Earth, has welcomed some changes and criticised others: “Gordon Brown’s statement was not as bad as it could have been,” said FoE executive director Charles Secrett. “He has stuck to his guns on the principle of the Climate Change Levy, and rightly exempted renewable energy from the new tax. But his statement is not as good as it should have been. There are too many concessions to polluting industries and the roads lobby. The Chancellor’s green promises in his last Budget are still there, but today they look a little brown around the edges.”

In particular, FoE is sceptical that the Chancellor can meet the promise to increase the planned CO2 emission cuts resulting from the Climate Change Levy to more than 2 million tonnes by 2010. FoE believes that the Chancellor is being overly optimistic about the impact of the planned energy efficiency agreements to be reached with industry.

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