Climate Change Levy

What is the Climate Change Levy?

The Climate Change Levy (CCL) is an environmental tax on energy supplies to industry, commerce, agriculture, local administration and a number of other services. It does not apply at all to domestic energy supplies.

The Levy is intended to encourage greater energy efficiency and lower energy use by increasing the effective price of energy. As such, it aims to help the UK to meet its legally binding commitments under the Kyoto Protocol to reduce greenhouse gas emissions. The CCL is intended to reduce UK carbon dioxide emissions by at least 5 million tonnes by 2010.

The forms of energy covered by the Levy are electricity or gas obtained for end-use rather than resale from a third party supplier; hydrocarbon gases supplied in liquid form; coal and lignite (and cokes and semi-cokes thereof); and petroleum coke. Low-value solid fuel worth less than £15 per tonne and waste used as a source of energy are exempt from the Levy. Oil-based fuels are exempt as they are either liable to road fuel duties or to other excise duties.

Any company supplying energy supplies of the liable types to liable organisations is required to register with HM Customs and Excise, and to pay the tax - the cost of which is passed on to customers as higher prices. There is no turnover threshold for registration, as there is for Value Added Tax.

In July 2004, the rate of the Climate Change Levy was 0.07p per kilowatt hour for Liquid Petroleum Gas (when used for heating); 0.15p per kilowatt hour for gas, coal, lignite and cokes; and 0.43p per kilowatt hour for electricity. The rate for electricity is considerably higher than for other energy, because of the energy consumption and pollution frequently involved in producing electricity.

A number of exceptions to the regime are in place to ease the CCL's impact on energy-intensive business sectors. Horticultural firms are eligible for a 50 per cent rate and are assisted by a £50 million energy efficiency fund. Businesses in a number of other energy-intensive sectors are also eligible for a discount of up to 80 per cent if they sign up to industry-wide Climate Change Agreements which set challenging targets for improving energy efficiency. The eligible industries are aluminium; cement; ceramics; chemicals; food and drink; foundries; glass; non-ferrous metals; paper; steel; and around 20 smaller sectors (microelectronics, lime, distillers, textiles etc). Agreements are negotiated between the Government and trade associations representing the sectors (all of which are covered by the EU Integrated Pollution Prevention and Control regime).

Background

The Climate Change Levy is part of the Government's strategy for meeting its emissions commitments under the Kyoto Protocol.

At the United Nations Kyoto Conference in December 1997, a large number of developed countries undertook to adopt legally binding targets for reducing emissions of six greenhouse gases, of which carbon dioxide was by far the most significant. The EU took on a commitment to reduce emissions by 8 per cent from their 1990 level by 2008-2012, and in June 1998 the UK accepted a 12.5 per cent reduction target, as its contribution to the EU effort. The Government has also adopted its own target of reducing emissions by 20 per cent of 1990 levels by 2010.

The Climate Change Levy was proposed as part of the Government's strategy for achieving this in the report of the Taskforce on the Industrial Use of Energy, chaired by Sir Colin Marshall. This was followed by the announcement of plans for the Climate Change Levy in the Budget of 1999, undertaking to include the measure in the 2000 Finance Bill, to come into force on April 1 2001.

The proposed tax was immediately controversial, with many sectors of industry hostile to elements of the plans. In response to HM Customs' consultations, in the Pre-Budget Report of 1999 the Government promised to exempt a number of forms of "new" renewable energy generation and some forms of Combined Heat and Power generation, to provide £150 million to support energy efficiency improvements in business by 2000-2001 (through the Carbon Trust), to set up an Enhanced Capital Allowances Scheme for investment in energy efficiency, and to provide for up to 80 per cent discounts for energy-intensive sectors that sign up to specific agreements. In addition, the Government undertook to ensure that the measure was "revenue-neutral" and did not impact upon UK competitiveness, by cutting employers' National Insurance contributions by 0.3 per cent.

The rate of the CCL has remained at the same level since its introduction, although the range of exemptions (eg "green" power stations, coal mine methane) has been widened.

Controversies

The Government maintains that the Climate Change Levy has had a significant impact in contributing towards reducing UK emissions, without impacting on business costs.

However, this contention is widely disputed by business. Prior to the CCL's introduction, many sectors warned of dire economic consequences and heavy job losses if the scheme were implemented. To accommodate this, the Government made provisions for discounts under the Climate Change Agreement scheme. However, this was criticised in some quarters as perverse. Eligibility was to be determined by undertakings to reduce emissions: as such, those firms that had already done the most to promote energy efficiency had the least to gain, while those that had done little could benefit more.

At the same time, there were complaints about the sum available for energy efficiency investment as a corollary of the CCL. The Government responded by trebling this from £50 million to £150 million, but concerns about the quality of schemes promoted by the Carbon Trust persisted.

Many also objected to the structure of the CCL itself: it was argued that a tax on downstream energy use failed to discriminate between energy sources according to their carbon content. There was widespread support for a "carbon tax", which would tax more pollutant forms of energy more heavily than others, encouraging users to switch to less polluting sources. The CCL, moreover, ignores entirely the problem of domestic and road vehicle emissions, which contribute far more pollution than industry.

Furthermore, it has been noted that the CCL works directly against the policy of the Department of Trade and Industry's policy of ensuring that energy prices remain low. This sends confusing signals to business, it is argued.

In 1999, moreover, it was widely protested that the Treasury had not consulted sufficiently on the character of the CCL itself, with the more technical Customs consultation preventing many of the issues of principle from being debated.

Statistics

In 2002-2003, the Climate Change Levy raised £0.8 billion. It is projected to raise a similar sum in 2003-2004 and 2004-2005.

This represents 0.74 per cent, 0.69 per cent and 0.66 per cent of Customs revenues in those years.

Statistics 1 and 2: (Source: HM Treasury, "Budget 2004")

Quotes

" The CCL and its associated measures seek to encourage businesses to use energy more efficiently and to reduce emissions of carbon dioxide. The levy package is expected to reduce emissions by the equivalent of at least 5 million tonnes of carbon by 2010.
Levy."

HM Treasury, Budget Report 2004

"The FSB does not accept that the levy makes a significant difference to any climate change and sees its introduction by the government as being another way of justifying a tax hike."

Neil Hamper, Federation of Small Businesses, November 2001

"The Climate Change Levy is not a cost effective way of reducing the amount of carbon dioxide that is pumped into the atmosphere, as it is a tax on energy and not on greenhouse gases. Moreover, the levy does not apply to the use of fossil fuels by households and transport, and penalises electricity sources that do not produce