Brown’s heavy burden

Heavy industry faces a massive bill under the Government’s planned energy tax. Chancellor Gordon Brown is coming under strong pressure to rethink the levy, reports Andrew Cavenagh

The Government is expected to radically rethink its plans to impose an energy tax on business from April 2001 in the face of mounting protests. British heavy industry says the plans will cost hundreds of millions of pounds and put it at a huge competitive disadvantage to continental European rivals.

The tax is intended to encourage industry to cut emissions of greenhouse gases, in turn helping the UK meet internationally agreed emission reduction targets.

But submissions to the government consultation on energy tax, completed at the end of May, stressed the huge net cost to the energy-intensive industries – such as steel, aluminium, chemicals, cement – and surprised and embarrassed the Government.

A central recommendation of the task force set up last year under British Airways chairman Lord Marshall was that any tax should be cash-neutral. But the plan to charge companies a levy on the energy they consume, then refund it through a 0.5% cut in National Insurance contributions, favours labour-intensive operations and penalises energy-intensive industry.

The Energy Intensive Users’ Group, which represents trade associations in the big energy-consuming industries, suggests its members would incur a net cost of more than £500m. `Our members in the steel industry are looking at paying £235m in tax and getting £5m back,’ says Lisa Waters, the EIUG’s economic adviser.

Manufacturing leaders say a burden of this magnitude could be ruinous. Tom Campbell, managing director of Anglesey Aluminium Metal, warned it could close the UK’s three primary aluminium smelters, with the loss of thousands of jobs. He said the tax would increase the annual costs of his company’s Holyhead smelter, the country’s largest, by £13.8m or 12% on every tonne of aluminium produced.

There is little comfort from plans to allow big industrial users to pay a reduced rate of the tax if they cut their emission levels. It has been difficult to get figures for the reduction, because while Deputy Prime Minister John Prescott has been leading the discussions with the large users, it is the Treasury that will set the level of the tax. All that the large users can base their calculations on is an `indicative level’ of a 50% rebate.

Don McGarrigle, chairman of the electricity group on the Major Energy Users’ Council, says even this level of tax would add 25% to members’ energy bills. In Germany, heavy consumers pay no more than 20% of the standard rate.

Within any industry there are disparities in the energy efficiency of rival companies. Those that have made large investments to improve efficiency and reduce emissions will not want competitors which have failed to invest to benefit under an all-embracing agreement. They will want a mechanism that credits recent energy efficiency investment.

A further embarrassment to the Government on cash-neutrality is that the public sector would gain significantly: schools, hospitals and government offices employ large numbers of people relative to their energy consumption. The EIUG will emphasise this possible cross-subsidy.

Also, applying the tax at the point of consumption produces some strange anomalies. Large power stations, the largest emitters of carbon dioxide, will be almost exempt from the tax. Because the end consumer will pay a 0.6p per kilowatt hour levy on electricity, any charge on the production of the power would amount to double taxation. The generators would pass this on in higher prices. So it is proposed that power stations will pay tax only on the power they use for non-generating purposes.

The EIUG adds that this would give the generators no incentives to improve efficiency.

These are the complaints about the proposals, but are there any suggestions for how to improve on the tax?

The Electricity Association is concerned about the impact on its largest customers – the 55,000 companies in the UK that use more than 100,000kW, and which make up about 50% of total consumption. It recommends that a greater proportion of proceeds from the levy is directed into energy efficiency schemes. The proportion proposed at the moment is 5%.

The levy as planned would make no allowance for companies that generate or receive their power from non-polluting renewable sources or highly efficient combined heat and power plants.

David Green, director of the Combined Heat and Power Association, says increasing the installed CHP capacity in the UK to 10GW from the 5GW scheduled by 2001 would reduce overall carbon emissions by 4 million tonnes a year. That is more than twice the saving envisaged for 2010 through the levy.

The association wants companies using power from renewables and CHP to be exempt from the tax, and echoes the Electricity Association’s call for more of the proceeds to go into investment in industrial energy efficiency. Green says the tax must persuade companies to invest in CHP and renewables if UK industry is to help reduce greenhouse gas emissions. `In its current form, the levy will not give that signal.’

Chancellor Gordon Brown recently told the Confederation of British Industry that it would be in the interests of all concerned to address policy as well as technical issues in their consultation responses. Whether this will lead to a fundamental change in the proposed levy remains to be seen.

A Treasury spokeswoman said it was `too early’ to speculate on changes. But unless the levy is scrapped altogether, significant revisions appear inevitable.