Climate change levy
ACCA’s response to the Consultation Document issued by H. M. Customs & Excise is set out below.
In formulating our response to the Climate Change levy proposals we have canvassed the views of a number of high profile intensive users of energy together with those of the members of the ACCA Taxation Committee.
We have been surprised at how respondents have generally been against the new tax as outlined in the consultation document. Despite our institutional support for pro-environmental initiatives, based on the input we have received we must express our opposition to the levy. We discuss the issues below.
The Underlying Principle
The driving force for the energy tax has been the assumption that carbon dioxide is the main culprit for climate change. The DETR is currently launching a national initiative to enable businesses to measure their greenhouse gas emissions, and convert them to their carbon equivalents. The process of measuring emissions will encourage companies to set energy reduction targets, thus ensuring a more efficient use of energy, a reduction in energy consumption and hence a reduction in Green House Gas emissions.
We agree that it is far better to adopt the precautionary principle and be pro active in this field rather than reactive, when it is too late to resolve the climatic impact of mans' activities. However, we believe that any introduction of taxes with an 'environmental' label should recycle all the revenues back into environmental concerns. Any other approach would lead to the tax being seen as a general government revenue generator, and therefore defeat the purpose of an environmental tax.
Whilst we fully support the governments commitment to the Kyoto Protocol (12.5% cut of CO2 1990 levels by 2010), in retrospect, the governments personal pledge of a further 7.5% reduction may now seem somewhat ambitious. However, this national CO2 target is not legally binding, and therefore the implementation of taxes may be preventable, bearing in mind the governments own projections of a decline of 7% in the six GHG basket by 2010 plus a possible further 3% reduction from its planned tax increases relating to road transport.
Why A Tax - The Commercial Impact
Lord Marshall concluded that a number of options should be considered. He stated that it was unclear from his consultation whether economic instruments had a role but his own personal belief was that a role did exist for them as part of a package. The other components of the package foreseen were, broadly speaking, voluntary agreements and options trading. However the underlying ethos for any measure was that the UK competitive position should not be affected.
The contributors to this response whose products are exposed to international competition emphasised their grave concern at the tax causing a significant increase in their costs and making their products globally uncompetitive. They consider that their energy use efficiency is continuously monitored and improved upon and they would be perfectly willing to sign an agreement with the Government to reduce their energy use by a stated percentage by 2010.
In addition the levy is to target 30% of UK energy users and disproportionately the recession bound manufacturing sector. For instance British Steel, which has been shedding thousands of jobs over the last few years, will receive a £5m national insurance reduction but pay £220m in additional energy tax. It is precisely this type of business that will be worst affected due to the price inelastic global market place in which it operates.
Business Agreements
The consultation document itself talks of the signing of specific energy reduction agreements with energy intensive businesses. The signing of such an agreement would result in a reduced levy being applied to those sectors. The Marshall report however, separates out the levy and business agreements.
Our reading of that report is that essentially a business specific agreement should exclude the levy being applied. We consider the use of agreements to be the way forward. There should be no need for an energy tax.
In our view there should be a mandatory requirement for all significant businesses to enter into a business agreement with the Government on an energy use reduction plan. The First Year Capital Allowance definition or the Corporation Tax payments on account definition could be used (depending on the number of businesses that could be administered by the Government in the scheme), to define a "significant business".
Other Specifics of the Consultation Paper
We have already stated our concern regarding the introduction of the proposed energy tax. However, if the Tax is implemented along the lines laid out in the consultation document then there are a number of further issues that need to be considered. These are discussed below:
Part A
Preface
"Recycle the revenues"
There being two separate government agencies responsible for the tax we are concerned that there will be no central accounting to ensuring symmetry between revenue received against that paid out. There is also sufficient latitude in the wording of paragraph 1.3 - the revenue from the levy will be passed back in full by "cuts in employer NICs and schemes to promote energy efficiency" - that the Government will find this new tax a useful revenue raiser.
The proposed revenue will be revenue neutral. Approximately £1.75 billion will be raised annually - all but £50 million being used to lower NI contributions. The £50 million will be used for energy audits & SME advice. The full recycling of the tax revenue must continue in future years.
A tax imposed for environmental reasons should recycle any revenue back into the area in which the tax was implemented to better (i.e. hypothecation). This can include projects such as clean technology investments, energy efficient capital investments and upgrading of equipment. As the tax proposal stands, only 2.86% of revenue will be re-invested. Hypothecating revenue will significantly improve energy efficiency in business, and the tax levy could be lowered in due course once the political targets and legal commitments have been met.
Part B - Outline of the structure and scope of the Levy
Section 3 - Design of the levy
Much of the sentiment for the design of the levy is taken from the Marshall report. We would like, however, a detailed explanation as to how the Government considers that the competitive position of UK industry will not be adversely affected by the imposition of this tax, which is a very substantial revenue burden on energy intensive industries.
Section 4 - Scope of the levy
Significant exclusions from the levy are anticipated. However, those caught within its scope will have a large administrative burden, especially those who need to recover the levy. The proposals gloss over the fact that many of those who, in certain circumstances, will need to make a repayment claim will be ordinary consumers.
Section 5 and 6 - Basis of calculation
We are concerned that the tax is designed so that it can be progressively increased in successive years. This has been the pattern for all "new" taxes, especially those with an environmental label attached to them. We do not consider it appropriate that the Government should be able to treat this levy simply like any other tax, where upward adjustments could be made by statutory instrument and hence outside proper parliamentary debate.
Part C - Reliefs and Special Treatment
This part of the consultation document exemplifies how bureaucratic the tax is likely to be. It is full of instances where the tax may or may not apply based upon varying circumstances, use-mix and reason for the use. Clearly the entire tax structure from the outset is destined to be intensely complex and unwieldy. It runs counter to the "design criteria" at 1.4.
Section 15 - Renewables
Renewable energy (non-fossil fuel) does not emit GHG, yet under the proposed tax scheme, all types of energy will be taxed, despite the objective being to reduce CO2 emissions. Fuel switching to renewables should be encouraged to reduce CO2 emissions, yet no clear incentive exists if they are being taxed too. Taxing renewables, therefore, is an ineffective way to lower emissions and meet legally binding targets. The opportunity to encourage using technology run on renewable fuel has been missed.
It is not sufficient to consider providing help to electricity producers who use renewable sources after they have been taxed. We do not accept, as stated in the Marshall report, 'that renewables would have to be taxed for simplicity'
Section 24 - Penalties, Interest and Appealable Matters
There will have to be effective enforcement procedures, and consideration must given to the fact that this is a new tax with new rules - as a result errors and late payments will inevitably occur.
Conclusion:
In summary we are opposed to the climate change levy because we fear that
- the competitiveness of UK business will be affected
- the objectives of introducing the tax will not be met
- revenues will be recycled into fully
- renewables will be taxed, disincentivising a change in behaviour.