Energy tax weapon in war on emissions

Fears that industry will end up footing most of the bill for the Government’s green policies have been allayed significantly over the past month, but there is still disagreement on how the sector can best make its contribution. The concerns peaked in March, when Chancellor Gordon Brown asked British Airways chairman Lord Marshall to lead […]

Fears that industry will end up footing most of the bill for the Government’s green policies have been allayed significantly over the past month, but there is still disagreement on how the sector can best make its contribution.

The concerns peaked in March, when Chancellor Gordon Brown asked British Airways chairman Lord Marshall to lead a taskforce that would look at how ‘economic instruments’ could be used to improve energy efficiency in the business sector and curb its greenhouse gas emissions. Many suspected that the Government was planning to milk the soft political target to realise its ambitions any such measures in the domestic and transport sectors would adversely affect more voters.

However, the report from the taskforce, Economic Instruments and the Business Use of Energy, published at the beginning of November, stressed that all sectors of the economy would need to play their part in meeting the commitments on climate change that the UK made at Kyoto at the end of 1997. These included the key undertaking to reduce emissions of the six main greenhouse gases, particularly CO2. The target is to reduce 1990 levels by 12.5% by 2008 2012.

And the need for a universal approach was also emphasised in the consultation document on the UK’s climate change strategy that the Government published a week earlier. The document stated that government action alone would not be enough and that individual companies, households and local authorities had critical roles to play.

Within such a framework, there is broad consensus that economic instruments in the business sector will help to achieve the targets. But views differ widely on which ones will work best. Lord Marshall’s taskforce concentrated on the two leading options an energy tax and tradeable emission permits.

Lord Marshall said tradeable permits, which would enable big energy consumers to buy or sell the right to emit specified volumes of greenhouse gases, would be a valuable contributor. But he concluded that they would need to be developed in the international arena and that it would not be practical to introduce a fully fledged scheme in the UK yet. Instead, he advocated a pilot scheme with interested players to strengthen the UK’s negotiating position.

In the shorter term, he concluded ‘there is probably a role for a tax’ not least because he doubted that it would ever be practical for most small and medium sized enterprises, which account for 60% of the business sector’s CO2 emissions in the UK, to participate in an international trading scheme.

The Confederation of British Industry remains opposed to an energy tax on the grounds that to influence behaviour significantly it would have to be set at a level that would damage UK competitiveness and so have an adverse impact on jobs and investment. It is not persuaded by the recommendation that any such measure should be ‘cash-neutral’ to avoid damaging British industry.

Fiona Davies, energy adviser in the CBI’s industrial policy group, said the various proposals for recycling the tax would inevitably disadvantage some companies. The suggestion that it could be returned through reduced National Insurance contributions, for instance, would not fully reimburse the biggest energy users because such operations were invariably not that labour intensive.

Davies also said that corporation tax relief for emission-reducing investments would be insufficient to return the estimated £1bn £2bn a year that would be raised. ‘I don’t think we can expect to see the whole amount of revenue recycled in that way,’ said Davies.

Reservations have also been expressed by The Engineering Employers’ Federation. Paul Reeve, head of environment and safety at the EEF, said the measure was likely to hurt large energy consumers which, for the most part, had made big investments in improving energy efficiency to reduce one of their main business costs. ‘Where people have done a lot, they will end up paying more money for doing business,’ he said.

The CBI believes that tradeable permits and negotiated agreements across industries used either separately or in conjunction will enable business to meet reduction targets more effectively. In response to the Marshall report, Adair Turner, the CBI’s director-general, said these two measures should be ‘the priority tools for achieving our Kyoto targets’ and that a tax should only be considered if these proved insufficient.

The CBI was disappointed that Lord Marshall did not recommend the early introduction of a UK-wide pilot scheme.

The EEF and others have reservations, however, about the wide-scale introduction of permits. Reeve said the burden such a scheme would impose on engineering firms in terms of assigning intellectual and other resources could not be justified. ‘For the vast bulk of engineering companies this is not the number one issue. I certainly wouldn’t want to wish a permit scheme on many companies.’

Energy taxes and/or tradeable permits are probably at least three years away. The Chancellor said on publication of the Marshall report that its recommendations would not be acted on in the near term. Lord Marshall himself said further work would be needed before the Government could ‘implement solutions on the ground’.

The need for further consultations involving the tax authorities mean proposals for an energy tax could probably not be produced before March 2000.

Nevertheless, economic instruments to control emissions are now firmly on the agenda. Industry will also have to start addressing the issue from next year, when regulations come into force to comply with the European Integrated Pollution Prevention and Control (IPPC) Directive. This aims to improve environmental protection through the regulation of specified industrial installations.

The Directive will significantly extend the scope of such regulation in the UK from the existing Integrated Pollution Control (IPC) regime and could ultimately cover about 6,000 installations including 538 in the mechanical engineering sector and 165 in vehicle engineering.

The new regulations mean plants will have to obtain a permit from an environmental regulator based on best available techniques (BAT) for the reduction of polluting emissions and harmful environmental impacts, such as odour and noise and improvement of energy efficiency. They will apply to new installations from 30 October 1999 and be phased in for existing installations by 2007.

The UK could go further than the IPPC Directive and include CO2 in the list of substances for which BAT-based limits must be set.