Levy piles extra pressure on recession-hit sector

The Climate Change levy is set to add £90m to the net costs of the engineering sector in its first year and seriously damage the competitiveness of UK manufacturing.

The Climate Change levy is set to add £90m to the net costs of the engineering sector in its first year and seriously damage the competitiveness of UK manufacturing in the process, the Engineering Employers’ Federation warned this week.

A survey of 550 EEF members indicated that the sector would pay £174m on the new tax in its first year – about 17% of the total raised by the measure – of which it would recover only £84m through reduced National Insurance contributions.

The EEF said the results of the survey bore out its warnings that manufacturing would be hit disproportionately by the measure. The engineering sector’s contribution compares with its 8% share of the total economy.

Government ‘wrong’

EEF director general Martin Temple said the figures also proved that the government was wrong in its assessment that the CCL would not damage the competitiveness of British industry. ‘It is imposing an ever greater burden on manufacturing at a time when it is already in recession,’ he said.

The survey indicated that the metals sub-sector would be worst hit, with a £24.2m net annual rise in costs, while machinery and equipment faced a £16.8m additional burden and motor vehicle manufacturing an £8m hike.

The Society of Motor Manufacturers and Traders has estimated the CCL will increase the cost of making cars in the UK by 3%, which could have long-term implications for companies such as Ford, with manufacturing sites elsewhere in Europe.

One reason the engineering sector has been hit so hard is that very few of its companies are eligible for the 80% discounts on the levy. These are usually available by signing up to negotiated agreements. But the sector’s operations do not come under the Integrated Pollution Prevention and Control regulations and so are not eligible for agreements.

One of the biggest losers in this respect is the BOC industrial gases group, which faces an additional tax bill of £8m. Unlike all the companies in the EEF survey, BOC can pass this extra cost on – but this further increases the costs of the many companies that use its products.

‘That is affecting the competitiveness of British industry,’ said a BOC spokesman. ‘We were conducting our work on opposing the CCL on behalf of our customers.’

The most energy-intensive industrial operations, such as steel and chemicals, are covered by negotiated sector agreements and enjoy the 80% discounts, but even so they are facing an aggregate increase in their net costs of £150m a year.

Jeremy Nicholson, economic adviser to the Energy Intensive Users’ Group, said the EEF’s study showed that the tax’s impact had been ‘rather worse than everybody had feared’ and would increase the price of all sorts of British goods and cost jobs in the long term. ‘You can’t keep on picking on industry and manufacturing in particular. It’s going to come at quite a high social cost.’

Drop in output

In a second exercise, the EEF commissioned Oxford Economic Forecasting to model the longer-term impact of the CCL against three scenarios.

The first alternative extended the negotiated agreements to all manufacturing sectors. The second extended the agreements to all manufacturers with energy bills of £100,000 or more a year; and the last scaled down the size of the levy, getting rid of the NI rebate but channelling all the proceeds into incentives to invest in energy-saving equipment.

OEF estimated that the current levy would lead to a 3.88% drop in engineering output over the next 10 years, while the last option (the EEF’s preference) would limit the decline to 1.91%.

The EEF said it planned to submit this proposal to the Chancellor as part of its pre-Budget submission.