What is the Climate Change Levy?
The Climate Change Levy (CCL) is an environmental tax on energy supplies to industry, commerce, agriculture, local administration and a number of other services. It does not apply at all to domestic energy supplies.
The Levy is intended to encourage greater energy efficiency and lower energy use by increasing the effective price of energy. As such, it aims to help the UK meet its legally binding commitments under the Kyoto Protocol to reduce greenhouse gas emissions. The CCL was intended to reduce UK carbon dioxide emissions by at least 5 million tonnes by 2010.
The forms of energy covered by the Levy are electricity or gas obtained for end-use rather than resale from a third party supplier; hydrocarbon gases supplied in liquid form; coal and lignite (and cokes and semi-cokes thereof); and petroleum coke. Low-value solid fuel worth less than £15 per tonne and waste used as a source of energy are exempt from the Levy. Oil-based fuels are exempt as they are either liable to road fuel duties or to other excise duties.
Any company supplying energy supplies of the liable types to liable organisations is required to register with HM Customs and Excise, and to pay the tax – the cost of which is passed on to customers as higher prices. There is no turnover threshold for registration, as there is for Value Added Tax.
A number of exceptions to the regime are in place to ease the CCL's impact on energy-intensive business sectors. Businesses in a number of energy-intensive sectors are eligible for a discount of up to 65 per cent if they sign up to industry-wide Climate Change Agreements which set challenging targets for improving energy efficiency. The eligible industries are aluminium; cement; ceramics; chemicals; food and drink; foundries; glass; non-ferrous metals; paper; steel; and around 20 smaller sectors (microelectronics, lime, distillers, textiles etc). Agreements are negotiated between the Government and trade associations representing the sectors (all of which are covered by the EU Integrated Pollution Prevention and Control regime).
The Climate Change Levy is part of government strategy for meeting its emissions commitments under the Kyoto Protocol.
At the United Nations Kyoto Conference in December 1997, a large number of developed countries undertook to adopt legally binding targets for reducing emissions of six greenhouse gases, of which carbon dioxide was by far the most significant. The EU took on a commitment to reduce emissions by 8 per cent from their 1990 level by 2008-2012, and in June 1998 the UK accepted a 12.5 per cent reduction target, as its contribution to the EU effort. The Government also adopted its own target of reducing emissions by 20 per cent of 1990 levels by 2010.
The Climate Change Levy was proposed as part of the Government's strategy for achieving this in the report of the Taskforce on the Industrial Use of Energy, chaired by Sir Colin Marshall. This was followed by the announcement of plans for the Climate Change Levy in the Budget of 1999, undertaking to include the measure in the 2000 Finance Bill, to come into force on April 1 2001.
The proposed tax was immediately controversial, with many sectors of industry hostile to elements of the plans. In response to HM Customs' consultations, in the Pre-Budget Report of 1999 the Government promised to exempt a number of forms of "new" renewable energy generation and some forms of Combined Heat and Power generation, to provide £150 million to support energy efficiency improvements in business by 2000-2001 (through the Carbon Trust), to set up an Enhanced Capital Allowances Scheme for investment in energy efficiency, and to provide discounts for energy-intensive sectors that sign up to specific agreements. In addition, the Government undertook to ensure that the measure was "revenue-neutral" and did not impact upon UK competitiveness, by cutting employers' National Insurance contributions by 0.3 per cent.
The previous Labour government maintained that the Climate Change Levy had a significant impact in contributing towards reducing UK emissions, without impacting on business costs.
However, this contention was widely disputed by business. Prior to the CCL's introduction, many sectors warned of dire economic consequences and heavy job losses if the scheme was implemented. To accommodate this, the Government made provisions for discounts under the Climate Change Agreement scheme. However, this was criticised in some quarters as perverse. Eligibility was to be determined by undertakings to reduce emissions: as such, those firms that had already done the most to promote energy efficiency had the least to gain, while those that had done little could benefit more.
At the same time, there were complaints about the sum available for energy efficiency investment as a corollary of the CCL. The Government responded by trebling this from £50 million to £150 million, but concerns about the quality of schemes promoted by the Carbon Trust persisted.
Many also objected to the structure of the CCL itself: it was argued that a tax on downstream energy use failed to discriminate between energy sources according to their carbon content. There was widespread support for a "carbon tax", which would tax more pollutant forms of energy more heavily than others, encouraging users to switch to less polluting sources. The CCL, moreover, ignores entirely the problem of domestic and road vehicle emissions, which contribute far more pollution than industry.
Furthermore, it has been suggested that the CCL works directly against the policy of ensuring that energy prices remain low. This sends confusing signals to business, it is argued.
In 1999, moreover, it was widely protested that the Treasury had not consulted sufficiently on the character of the CCL itself, with the more technical Customs consultation preventing many of the issues of principle from being debated.
The Coalition government elected in May 2010 said it believed that climate change was "one of the gravest threats" faced by the world today and that "a wide range of levers" was needed to cut carbon emissions. The new government announced its intention to reform the Climate Change Levy "in order to provide more certainty and support to the carbon price". The relevant legislation was subsequently included in the Finance Bill 2011.
In the March 2011 Budget, the Chancellor announced that the Climate Change Agreements scheme would be extended until 2023 and the existing 54 participating sectors would continue to be eligible for the scheme and the Levy discount. This extension was intended to provide industry with more certainty to invest in energy efficiency measures with longer payback periods. The Climate Change Levy discount on electricity would be increased from 65% to 80% from April 2013 for CCA participants.
A consultation on draft legislation for the Finance Bill 2012 was published by the Treasury in December 2011. The proposed measures included a reduced rate of Climate Change Levy on electricity only from 35 to 10 per cent with effect from April 2013, rather than to 20 per cent as announced at Budget 2011.
Climate Change Levy Rates
1 Apr 2011 – 31 Mar 2012
Electricity – 0.485 pence per kilowatt hour
Gas supplied in Great Britain by a gas utility or any gas supplied in a gaseous state that is of a kind supplied by a gas utility – 0.169 pence per kilowatt hour
Gas supplied by a gas utility to a person who intends to cause the gas to be burned in Northern Ireland – 0.059 pence per kilowatt hour
Any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state – 1.083 pence per kilogram
Any other taxable commodity – 1.321 pence per kilogram
Climate Change Levy Rates
1Apr 2012 – 31 Mar 2013
Electricity – 0.509 pence per kilowatt hour
Gas supplied in Great Britain by a gas utility or any gas supplied in a gaseous state that is of a kind supplied by a gas utility – 0.177 pence per kilowatt hour
Gas supplied by a gas utility to a person who intends to cause the gas to be burned in Northern Ireland – 0.062 pence per kilowatt hour
Any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state – 1.137 pence per kilogram
Any other taxable commodity – 1.387 pence per kilogram
"I am worried about the combined impact of the green policies adopted not just in Britain, but also by the European Union, on some of our heavy, energy-intensive industries.
"We are not going to save the planet by shutting down our steel mills, aluminium smelters and paper manufacturers. All we will be doing is exporting valuable jobs out of Britain.
"So we will help them with the costs of the EU Trading Scheme and the carbon price floor, increase their Climate Change Levy relief and reduce the impact of the Electricity Market Reforms on these businesses too.
"This amounts to £250 million package over the Parliament. And it will keep industry and jobs here in Britain."
Chancellor George Osborne; Autumn Statement – November 2011