Climate of confusion

Industry claims the Climate Change Levy is ill-thought out, unfair and could even be counter-productive.

This month, companies all over the UK will have received unwelcome news from their energy suppliers — notification that from 1 April their bills will be augmented by about 15% to take account of the Climate Change Levy.

The deluge of queries trade associations received about the notices suggests there is still an alarming degree of ignorance about the CCL, or ‘energy tax’, as it is more commonly known.

‘We’re getting the most incredible number of calls at the moment,’ says Helen Woolston, environmental adviser to the Engineering Employers’ Federation.

Controversy has surrounded the CCL, introduced with the aim of encouraging industry to be more energy-efficient, since it was announced. The government is adamant that the measure is ‘fiscally neutral’, with the £1bn a year the levy is expected to raise being recycled through reductions in National Insurance contributions. But the neutrality will only work in aggregate. Big employers with minimal energy consumption, such as service industries, will clearly be big net gainers at the expense of energy-intensive operations with relatively few workers.

Woolston says confusion especially surrounds the question of eligibility for 80% discounts on the levy introduced as a concession to big energy users. This is because the basis for the discounts is negotiated agreements between industry sectors (represented by their trade associations) and the government. The big reductions in the levy are granted in return for a commitment by energy users to make significant cuts in carbon dioxide emissions against 1990 levels. However, only installations covered by the Integrated Pollution Prevention and Control (IPPC) regime are eligible.

While most of the energy-intensive industries — steel, chemicals, paper, cement, aluminium, and glass — are covered by IPPC, most manufacturing operations are not. Consequently most manufacturing companies (and others) will have to pay the levy in full (see table overleaf). The net impact on manufacturing will be severe.

One big anomaly arising from the use of IPPC as the criteria for discount agreements is that this regime excludes industrial gas producers. This means the concession designed to mitigate the levy’s impact on the UK’s most energy-intensive companies does not cover BOC, one of the 10 biggest electricity consumers in the country.

Hugh Mortimer, BOC’s commercial manager for utilities, says his company will have the largest CCL bill in the UK. ‘It will be several million pounds.’

BOC does not face a threat from imports for its core products of hydrogen and oxygen — the freight costs are prohibitive — so it can pass the cost on. But customers competing internationally, such as Corus, will be weakened. ‘It’s the knock-on effect,’ he says.

Initial effects

The EEF commissioned Ernst & Young last year to assess how many UK manufacturing companies with annual energy bills of £100,000 or more would be excluded from negotiated agreements and what the levy would cost them. The survey found there were just over 3,000 such companies, 705 of which would be net beneficiaries from the NI rebates.

The remaining 2,298 — accounting for 1.3 million employees — would incur a total additional cost of over £95m. Even when the gains of the 705 are offset, the net loss to the sector was just over £81m (see table previous page for individual sectors).

Even many companies eligible for a cut in the levy will face a big net increase in costs. The chemicals industry will be one of the larger losers. ‘It’s going to be of the order of £20m a year, maybe a little bit more,’ says Keith Wey, senior economist at the Chemical Industries Association.

The chief energy buyer at one of the larger chemical groups says the measure threatens the international competitiveness of UK companies: ‘The CCL is a big issue to companies that trade internationally. The tax is an additional burden because our competitors don’t pay any.’

David Gillett, head of environment at the Paper Federation of Great Britain, says the sector faces an additional net charge of £10m–£12m a year, without accounting for the cost of meeting commitments under its agreement for a reduced levy.

No tax will ever be welcomed, but the strength of opposition to the CCL stems from the belief that in many cases it will achieve the opposite of what is intended.

The EEF highlights instances where the IPPC criteria would encourage companies to use less energy-efficient technologies which would qualify for the rebate, rather than newer, more efficient ones that would not. In the automotive industry, for instance, newer technologies such as metal sintering are not covered by IPPC, whereas more traditional processes are.

David Fletcher, chairman and chief executive of Sheffield Forgemasters, draws attention to a feature of the tax which will have a contradictory effect in the steel sector: the exclusion of fuels which are also feedstocks in an industrial process. Thus under CCL it will be more advantageous to melt iron ore by burning coke, which comes into this category, than to recycle steel from disused cars, although recycling creates less carbon per tonne of steel produced. ‘The perversity of the tax is that it actually encourages you to generate CO2 It has not been thought through,’ says Fletcher.

There is also a danger that external developments will undermine the basis on which negotiated agreements have been signed. The paper sector’s agreement, for instance, could be jeopardised by the postponement or cancellation of combined heat and power projects because of the recent increase in industrial gas prices.

Economic viability?

This highly efficient technology for producing electricity — around 80% efficiency against 40%–60% for other forms of generation — is ideally suited to paper mills. But the price of gas is now threatening the viability of such projects. ‘There clearly is a risk,’ says Gillett. ‘Whether or not all these projects will carry through nobody knows, because the economics have changed.’

Sectors that have reached agreements under the CCL have generally committed themselves to cuts of 20–40% in emissions relative to 1990 levels. In virtually all cases agreements are based on a reduction in the units of energy consumed per tonne of production, though the steel industry has gone for cuts in an absolute limit.

If a sector fails to meet its obligations, individual companies in the sector will be audited and those that fail will have to repay their discount. ‘If you wanted a mess, you couldn’t really have ordered a better one,’ says Gillett.

Woolston adds that some EEF members say there is a fine line between the cost of complying with a rebate agreement and paying the levy in full.

‘I’ve had calls from companies saying it was not worth their while to join a negotiated agreement,’ says Woolston. She adds that a company would probably need to spend between £70,000 and £80,000 a year on its energy bills to justify the cost of the exercise.For companies not covered by agreements the scope to cut their tax bill by investing in energy efficiency is even more limited. ‘Many of the industries penalised for not being covered by IPPC tend to be newer and cleaner, using kit that is as efficient as possible,’ she says.

Other firms, having been hit by the CCL on top of the sterling/euro exchange rate, say they cannot afford to invest in energy efficiency, no matter how attractive it is made.Industry largely remains convinced that the measure is fatally flawed and will fail to achieve its objectives.

‘The issue is the unfairness of it. You have a penalty even though you’ve signed up to a rebate agreement,’ says Fletcher at Forgemasters. The levy will cost his firm an extra £500,000 a year. He says a system of grants for commitments to improve energy efficiency would be far more successful.

As the CCL was introduced as part of last year’s Finance Act, there is clearly scope to amend it year on year. And there the government seems to realise it has an imperfect instrument and is prepared to make changes. Treasury Minister Stephen Timms told the CBI recently that he might consider alternative criteria to IPPC as the basis for negotiated agreements in future.

Such uncertainty is unlikely to help companies as they consider whether energy-saving investments are worth making. Industry would prefer a system of emissions trading to replace the tax. A scheme to complement the CCL should come into effect next year. ‘The hope is that the CCL will be removed,’ says Wey at the CIA.

However, it seems unlikely that the government will have the political courage to scrap the tax completely.

Sidebar:

The defence: why CCL is needed

The Climate Change Levy was introduced following a report by Lord Marshall on ways of encouraging industry to increase energy efficiency, and hence reduce carbon dioxide emissions and help the UK meet its commitments under the Kyoto protocol. Energy prices to industry had been falling and the government felt an opposite signal was needed.

Lord Marshall also suggested the energy tax should be fiscally neutral. The government justifies recycling the revenue through National Insurance contributions as a measure to help job creation and says the tax was never intended to be neutral across all sectors.However, industry has been vocal in its complaints about this, and also about the decision to limit rebate eligibility to sites covered by the Integrated Pollution Prevention and Control (IPPC) regime.

The Engineering Employers’ Federation and other associations have argued that the IPPC regulations, which measure propensity to pollute rather than energy intensity, are the wrong criteria on which to base negotiated agreements, but the Treasury has refused to budge.The government argues that extensive consultation took place from the time of the Marshall report onwards. In addition to the special treatment for energy-intensive industries, ministers point out that the government will provide £100m for 100% capital allowances in investment in approved energy efficiency technology, to be offset against corporation tax. As yet, however, the list of qualifying technologies has not been finalised.

Businesses will also be eligible for three half-days of energy audit consultancy, to identify savings. The government has provided £33m for this.

Both these schemes will be administered through the Carbon Trust, which has taken over the government’s Energy Technology Best Practice programme.

Helen Woolston, environmental adviser to the EEF, says: ‘We recommend any company to have an audit as the next step. Our concern is that the government may not have set aside enough for this.’