The levy on consumption of fuels and electricity aims to cut energy use. The government is proposing a downstream energy-based tax rather than taxing the carbon content of fuels. It stresses the tax will be "revenue neutral," entailing no overall increase in the tax burden on companies as revenues will be recycled in full to business. Lower tax rates for energy intensive industries will be conditional on improvements in energy efficiency.
"In the form proposed, it will increase company costs and harm their competitive position," says the CBI's Peter Agar. The confederation argues for alternatives, such as emissions trading. In partnership with the Advisory Committee on Business and the Environment, the CBI is designing an industry-wide scheme, which could later link to international trading (Windpower Monthly, April 1998).
This approach wins favour from the Association of Electricity Producers (AEP). Its members range from large fossil fuel generators to small renewable energy companies. "Business-wise, capping and trading goes with the grain and it would have a real impact on carbon emissions," says AEP's David Porter. The association has been scathing about the climate change levy (CCL), calling it "unconvincing" and a "dismal proposal." The AEP is sceptical about how a tax can meet a fixed environmental goal. With emissions trading, however, government can be confident about meeting its targets and industry will deliver the most efficient solution, maintains the AEP.
The renewable energy industry's chief concern is over the Treasury's proposal to tax all electricity at the rate of £0.006/kWh, regardless of source. The AEP says this aspect is "hard to understand." In an examination of the CCL proposals, a parliamentary trade and industry select committee recommends that ways are found to exempt renewables. And a select committee on renewable energy from the British upper house of parliament calls the levy on renewables "absurd." It says an exemption will mean that a substantial amount of electricity from renewables would be available at competitive prices.
The government is listening, it seems. Environment Minister Michael Meacher states that he is looking positively at exempting renewables from the levy. "I believe that an exemption for renewable energy could stimulate an additional demand which the renewable market needs," he says. The government may be helped in this by the launch in July of the Energy Saving Trust's accreditation scheme for renewables generation.
The CCL does have some supporters. Friends of the Earth has given the proposals a broad welcome. And the Royal Institute for International Affairs states the levy would be a powerful sign that the UK is matching words with deeds, persuading other countries to take their Kyoto commitments seriously.
The committee claims to have been disturbed by the unprecedented scale of the reaction to the proposed levy. It warns that without modifications and exemptions it could prove a blunt instrument, damaging some sectors of the British economy. At the same time, the committee believes the levy could improve energy efficiency in industry and commerce, so reducing CO2 emissions.
The Treasury's climate change plans are defended by Meacher. He points out they are still at the consultation stage. "Those who challenge the levy, often challenge its design rather than the need for a levy," he says. There are two years to get the details right, he says. Meacher stresses the proposals are one part of the government's overall climate change program, a major component of which is emissions trading. The two economic instruments have a complementary role to play, he argues.