Fuelled with efficiency

The climate change levy will soon be a reality. Mark Johnston argues that while it may hurt industry to begin with it could lead to efficiency gains in the long term

`From now on the best response will be to make greater investment in energy efficiency’, said Paul Reeve, environment spokesman for the Engineering Employers’ Federation, speaking about the climate change levy in The Engineer two weeks ago.

Friends of the Earth could not agree more. Since Gordon Brown’s pre-Budget report made it clear that the Government is sticking to its guns on the principle of the levy, it is time for industry to turn from attacking the proposal to focusing on minimising the cost when it is finally introduced in 2001.

The reasoning behind the levy’s introduction could not be more important. The challenge to society of averting dangerous climate change will not go away. UN scientists say global cuts in greenhouse gases of 60% will be necessary to stabilise the Earth’s climate, and so the targets set at Kyoto, Japan, in 1997 for the period up to 2010 are just the beginning of a much longer process. There will have to be similar cuts in subsequent decades as the world economy necessarily moves to a future free from its dependence on fossil fuels.

Labour recognised the importance of the issue when in opposition and included a target in its 1997 manifesto to cut carbon dioxide emissions by 20% over the next decade. The levy will be one of a range of policies designed to fulfil this promise. A draft of the full programme is expected in January.

Given this overall framework, it was clear there could be no turning back for the Government. Looking forward, then, there are many options industry can pursue to cut emissions and reduce costs: the key question is which to choose.

The exemption from the levy for renewable energy sources and high-efficiency combined heat and power plants was a natural step. CHP is especially suited to the manufacturing and industrial sectors, where there is a need for electricity as well as space and process heat.

Moreover, with the liberalisation of the UK electricity market substantially complete, the exemption for renewables means that it is now possible for any company to opt out of the tax altogether by switching to a renewable energy tariff. This is a move for which there is no capital cost and which can be implemented in a matter of days. The only fear is that a sudden rush to subscribe will create a shortage on in supply.

Capital allowances and extra energy efficiency funds are also very welcome. They create clear incentives to invest in energy efficient technology and give greater flexibility to financing mechanisms.

Taken together, these measures will lead to the forecast saving of two million tonnes of carbon dioxide easily being exceeded. Indeed it has been suggested the impact of the levy on business attitudes and practices could save as much as four million tonnes of carbon dioxide over the decade – a tenth of the total requirement.

But clearly the environmental impact is not the only objective of the levy. Any incentive to save energy is clearly also an incentive that will lead to lower energy costs. And where greater efficiency is achieved – as it will inevitably be – then firms can reflect those benefits in reduced output prices. With greater all round efficiency, Friends of the Earth is certain that we will see a position where the UK at least maintains if not improves its competitive position in world markets.

There is, however, still more to be fought over. Not all the sectors bidding for negotiated agreements deserve them. The Government has decided that only industrial processes covered by the Integrated Pollution Prevention and Control regime are eligible to enter into negotiations over a reduced levy. But many industrial processes are registered under IPPC for discharges not related to climate change. It would be perverse to grant rebates here when there are other companies outside IPPC which have similar patterns of energy use.

In the end, though, the wider international picture gives us further certainty about the direction we are all moving in. There is already energy taxation in nine European countries, and a further five, including the UK, have plans to introduce it.

Patterns of energy use are already changing and will change a great deal more in the next century. There will have to be a considerable effort to slow the process of climate change and to create a more equitable world. This is the reality and the UK must not be left behind.

Mark Johnston is an energy campaigner for Friends of the Earth