What is the climate change levy?

A new tax on energy use in industry, commerce, agriculture and the public sector, the climate change levy (CCL), was introduced in April 2001. All UK businesses and public sector organisations will pay the levy, via their energy bills.
The full rates of the levy will be 0.43p/kilogram Wh for electricity, 0.15 p/k Wh for gas, 1.17 p/k on coal and 0.96 p/k for LPG.
Fuel oils will not attract the levy as they are already subject to hydrocarbon oil duty.

How will the CCL effect my company?

The effect of the CCL will vary from company to company, as there are many factors to take into account. However, energy bills could increase by 10% or more, depending upon a company’s circumstances and whether or not that company is able to make new or additional energy savings.

How can I reduce the impact of the CCL?

Companies that use energy from the “new renewable” sources or “ good quality” Combined Heat & Power, which are both exempt from the levy, and those which make efforts to reduce their energy usage will be less affected.

Companies can improve their energy efficiency by investing in new, proven technologies that will be listed under the forthcoming Enhanced Capital Allowance scheme. Under this scheme, there will be a system of 100% first year capital allowances for energy saving investment by the private sector. Firms making qualifying investments will be able to deduct the full costs of those investments in arriving at their Corporation tax or Income tax bills.

(Lists are published around the time of the Chancellor’s pre-budget Report).
In addition, the Environment and Energy Helpline (0800 585 794) run jointly by ETSU and BRECSU, can offer companies free expert advice and literature and a free on-site visit.

Could my Company Benefit from the 80% Discount?

Only companies that operate specific processes are eligible for the discount, via participation in a Climate Change Agreement. These processes are listed in parts A1 and A2 of schedule 1 to the Pollution Prevention and Control (England & Wales) Regulations 2000. The eligibility for agreements is by reference to these Regulations, wherever the company is located within the UK.

If a company does not operate a Part A process, it will not be able to enter an agreement and hence obtain the discount.

Companies the do not operate Part A processes, irrespective of whether the site is within the relevant size or output threshold specified in the Regulations (with exception of the thresholds for combustion plant), are eligible to enter an Agreement with the DETR, whereby they are given the discount in return for challenging targets to cut energy use.

How do I enter an agreement?

The agreements have a two-tier structure. Each sector containing eligible sites is represented by a sector association (trade association or body representing a sector of industry) that will have signed up to a sector wide agreement with the Government. This agreement will have a general target to cut energy usage or carbon emissions across the whole sector from the period to 2010.

If a company is eligible and wishes to join a sector agreement, it must contact the relevant sector association and enter into and Underlying Agreement (a sub-agreement). The sector association will advise on targets and any conditions that apply to the agreement.

I am eligible to enter an agreement, but I already operate as efficiently as possible. How can I commit to a target to reduce my energy usage further?

You may need to invest in energy efficient technologies – but, in many cases, you will be to obtain a 100% capital allowance, offset against tax, from 1st April 2001.

The Energy Efficiency Best Practice Programme will also be able to provide advice on energy efficiency measures. If you can demonstrate that you can make no further improvements over the 10 year lifetime of the agreements then your target could be a zero change.

Can my company have a separate agreement with the government?

No. Companies have a separate agreement with the Government direct. They must join the relevant sector agreement, which will be administered by a sector association unless they are a unique company with no relevant sector association.

Do I need too be a member of the Sector Association?

No. A company does not need to belong to a sector association in order to join an agreement. However, non-members may be charged reasonable administration costs.

How do I identify the relevant sector association?

If a company finds it is eligible but does not know which sector association to contact, it should contact the DETR with a description of its eligible processes.
The DETR will then be able to give them contact details for the relevant sector association.
Any queries can be addressed to DETR, 0207 944 4822.

My company owns sites that operate different eligible processes. Which sector association should I approach?

A company owning, for example, one site manufacturing a food product, a second site making animal feed and a third producing pharmaceutical products would need to join the agreements being negotiated with the FDF, UKASTA and CIA, respectively.
One site with multiple processes could follow the predominant process.

I am not a member of the relevant TA and they want to charge me more than their membership fee to join an agreement – is this acceptable?

Sector associations are entitled to charge non-members fees higher than their joining fees if they can justify the charges on their basis of reasonable administrative costs.
Sector associations have been advised that if they are unreasonable charges or practices to discriminate against non-members then they risk an investigation from the OFT on anti-competitiveness grounds.

How small does a company need to be in order to be exempt from the levy?

Only those small companies that are so small as to use domestic levels of energy will be exempt from the levy on the basis of size.
The thresholds are set out in the Finance Act 2000. However, as a rough guide, the exemption applies to energy supplies not more than:

• 35k Wh per day for electricity
• 45k Wh per day for gas supplied through pipes
• LPG supplied on cylinders, where the net weight of each is less than 50Kg and where fewer than 20 cylinders are supplied (or the gas is not for sale by the recipient)

Will the CCL be charged before VAT?

The CCL will be applied before VAT and therefore VAT will be charged on the levy. We expect that suppliers will show the energy charge, the CCL, and VAT as separate items.

I think the CCL is badly conceived and should be scrapped!

The basic design of the CCL follows the recommendations made in Lord Marshall’s report Economic Instruments and the Best use of Energy, published in October 1998. The government has since spent two years in consultation with industry in order to make the policy fair and practical as possible.

The government invited industry to offer alternatives to the eligibility criterion for entry into agreements during consultation, but none were suitable.

Does the CCL make a serious contribution to our environmental obligations?

The total climate change levy package – CCL and negotiated agreements – is expected to deliver a saving of approximately 5 million tonnes of carbon a year by 2010 – a significant contribution to meeting the Kyoto targets.

Does the CCL add to the burden of tax on business?

There is no addition to the burden of taxation. The CCL is designed to be revenue neutral for the private sector as a whole with no overall benefit to the public finances.

In line with the government’s commitment, the CCL shifts the burden on taxation from “social goods” like employment to “environmental bads” like pollution.

The CCL is not neutral: will it hit manufacturing and subsidises services?

No. The CCL package is expected to be broadly neutral between services and manufacturing.
“ Broadly neutral” means, taking the CCL package as a whole, expectations are that manufacturing and services each to pay broadly as much in the levy as they get back via the National Insurance Contributions (NIC’s) reduction and the additional support for energy efficient measures.

What does Government analysis show about the effects on employment?

The Government expects that a fully revenue neutral instrument, such as the CCL/NIC’s package, which raises the relative price of energy and lowers the relative price of labour, will have a favourable impact on employment.

What about those less developed countries that have not signed up to Kyoto (e.g. Brazil)?

Developed countries must take a lead on climate change. Most industrialised countries, with which the vast majority of trade is conducted, have agreed terms under the Kyoto protocol.

On current projections, most OECD countries will have to introduce new measures of one form or another to meet their Kyoto obligations.

Are UK energy tax rates still well above those of major competitors like Germany?

Seven European countries now have some form of energy or carbon tax, and France and Belgium are now working up proposals. It is very difficult to compare different countries. Energy taxes work in different ways in different countries (with different tax bases and complex systems of exemptions). However, the headline rates for the UK’s CCL are towards the middle of the range of rates operating in the seven EU countries that already have carbon or energy taxes.

The picture is changing all the time. The German Parliament has agreed stages 2 and 3 of their eco-tax reform, which will increase the rates operating there significantly before the CCL comes into effect in 2001. In the wider picture on business taxation: UK has the lowest rate of corporation tax of any major EU country.

Will the CCL hit the competitiveness of the UK industry?

No it won’t. All the revenue raised will be recycled to business, through a 0.3 percentage point reduction in employers’ NIC’s and additional support for energy efficiency measures.
There will be an 80% discount to sectors that agree energy-efficiency targets that meet the Governments criteria.

There will be an additional £150million of Government assistance to business for energy efficiency measures, (including the introduction of a system of enhanced capital allowances for energy saving investments).

There will be exemptions from the CCL for electricity generated from “new” renewables and electricity used in “good quality” combined heat and power plants.

An increased proportion of electricity generated from gas-fired power-stations would make the CCL unnecessary?

The climate change levy and the Stricter Consents Policy on gas-fired power stations address different issues.
The CCL is designed to permanently improve energy efficiency across the business and private sectors – delivering savings of about 5 million tonnes of carbon a year by the 2010.

The stricter consents policy is – as has always been made clear – a temporary measure to protect the security and diversity of electricity supply while distortions in the electricity generating market are addressed.

The Government has already announced that the stricter consents policy will be lifted as soon as the new wholesale electricity trading arrangements are introduced.

When will a domestic emissions trading market be up and running?

The Government is keen to have an operational trading scheme up and running as soon as possible and will continue to work closely with the Emission Trading Group on its final decision.

Why doesn’t the Government drop the CCL and pursue emissions trading instead?

Lord Marshall concluded that their was a role for both a tax emissions trading as part of a package of measures to encourage business to find cost-effective ways of reducing greenhouse gas emissions; Lord Marshall and the Government see these instruments as complementary.

The vast majority of SME’s are unlikely to form part of a trading system. The Government very much supports emissions trading and has recently announced a £30million kick-start for a domestic emissions trading scheme.

The climate change levy package includes recycling of the revenues raised back to business through a cut in employers NICs.
Scrapping the CCL package would therefore result in higher taxes in jobs, which would run counter to the Government’s objectives of switching the burden of taxation from “goods”, like labour, to “bads”, like pollution.

Why don’t you give a complete exemption from the CCL for firms which accept binding emission targets?

Firstly.
The purpose of the current CCL discounts is to protect the international competitiveness of energy intensive firms which are exposed to international competition.
A CCL discount or exemption for any firm which takes on a binding emission target would be a significant departure from the original intentions of the CCL and could apply to firms which are already net gainers from the CCL package.

Secondly
A CCL exemption would only incentives companies that are currently subject to the CCL to take on emissions targets.

Other significant sectors such as the power generators or transport which are already exempt from the CCL would be excluded from the benefits from this type of incentive and hence would not participate in the trading scheme.

Why would the abolition of the CCL jeopardise emissions trading?

An effective emissions trading scheme requires firms to take on binding emissions targets that deliver real emissions reductions.
The business led Emissions Trading Group concluded that incentives would be required for firms to take on these targets voluntarily. As a result the Government has announced a £30million kick-start for a domestic emissions trading scheme. And many energy intensive industries are already finalising challenging targets as part of the climate change levy negotiated agreements.

Therefore if the CCL and the negotiated agreements were scrapped, the Government would face a stark choice; either dramatically increase the size of the financial incentive, or impose mandatory, arbitrary targets on firms in order to get equivalent environmental benefits from energy intensive sectors through their participation in trading alone.

Those who wish to scrap the CCL and replace it solely with trading would have to explain how the Government would set mandatory targets and what effect they would have on business or how they would finance this significant additional spending/incentive.
There would also be the difficult choice for smaller firms: force them to fulfil the requirements for joining an emissions trading system, or leave them with no new incentive to reduce their use of energy.

Would emissions trading alone be less bureaucratic than the CCL?

The CCL itself will impose minimal compliance costs.
The setting of emissions trading targets in the sort of emissions trading scheme that would be needed to produce environmental benefits comparable to the CCL is likely to require a similar process to the setting of targets under the CCL’s negotiated agreements, but on significantly larger scale – bringing in its own bureaucracy and difficulties.