Climate change agreements
The Climate Change Levy
Contents
- Introduction
- The Levy Package
- Application of the Levy
- Horticulture
- Energy Intensive Sectors and Climate Change Agreements
- Legislation: The Finance Act 2000
- Help Available
- Annex 1: Background to the Levy
- Annex 2: Sector Associations involved in negotiations with Defra.
Introduction
The climate change levy is a tax on the use of energy in industry, commerce and the public sector, with offsetting cuts in employers' National Insurance Contributions - NICs - and additional support for energy efficiency schemes and renewable sources of energy. The levy forms a key part of the Government's overall Climate Change Programme. The basic design of the levy follows the recommendations made in Lord Marshall's report Economic Instruments and the Business Use of Energy, published in October 1998.
The levy will play a major role in helping the UK to meet its targets for reducing greenhouse gas emissions. It entails no increase in the tax burden on industry as a whole and no net gain for the public finances. The reforms are intended to promote energy efficiency, encourage employment opportunities and stimulate investment in new technologies.
The Levy Package
The Government has taken into account Lord Marshall's recommendation that any tax needed to be designed in a way that protected the competitiveness of UK firms. Therefore the Government is returning the revenues from the levy to the non-domestic sector, principally through a cut in the rate of employers' National Insurance Contributions of 0.3 percentage points. Businesses will also benefit from schemes aimed at promoting energy efficiency and stimulating the take-up of renewable sources of energy, e.g. solar and wind power. £50 million per annum of revenue will be allocated to these schemes - a major increase from current levels of funding. There is also a scheme of 100% first year capital allowances for certain energy saving investments, which is expected to be worth up to £70 million in 2001/02.
Application of the Levy
The levy was introduced on 1st April 2001. It was announced in the March 1999 Budget to give businesses a full two years time to adjust. Rates of levy are 0.15p/kWh for gas, 0.98/kg (equivalent to 0.07p/kWh) for liquefied petroleum gas (LPG), 0.44/kWh for electricity and, 0.12p for any other taxable comodity. The levy is expected to raise around £1 billion in its first full year (2001/02). The levy package is expected to lead to reductions in carbon dioxide emissions of at least 2.5 million tonnes of carbon a year by 2010.
The levy does not apply to fuels used by the domestic or transport sector, or fuels used for the production of other forms of energy (e.g. electricity generation) or for non-energy purposes. The levy does not apply to energy used by registered charities for non-business uses, and energy used by very small firms, ie those using a de minimis (domestic) amount of energy.
The levy does not apply to oils, which are already subject to excise duty.
There are also several exemptions from the levy, including:
- Electricity generated from new renewable energy (e.g. solar and wind power)
- Fuel used by good quality combined heat and power schemes ("Good Quality CHP" - certified via the CHP Quality Assurance Programme CHPQA)
- Fuels used as a feedstock
- Electricity used in electrolysis processes, for example, the chlor-alkali process, or primary aluminium smelting.
The Government also proposes an exemption for natural gas in Northern Ireland for 5 years. This is to help develop the emerging gas market. This proposal has not yet had EC State Aid Approval.
The Levy will be added to bills before VAT and, although there will be no legal requirement for it to be shown, is likely to appear as a separate item on energy bills. For further information on the administration of the levy, please contact the HM Revenue & Customs Climate Change Levy, email: helpdesk.ccl@hmrc.gov.uk; for National Advise Service, telephone: 0845 0109000.
Horticulture
The Government recognises that the horticulture sector is relatively energy intensive, contains a large number of smaller companies and is exposed to significant international competition. Other countries with energy taxes have also tended to afford their horticulture sectors special treatment. Consequently, the Government has implemented a special package of measures for horticulturists (growers of fruit, certain vegetables, flowers, shrubs, trees, and certain seeds) to improve energy efficiency in the sector. The assistance package includes:
- A special allocation for the sector from the energy efficiency fund to provide site specific advice;
- Inclusion of thermal screens in the list of technologies qualifying for enhanced capital allowances. Thermal screens are panels used to reduce the volume of a building to be heated during cold periods and are used in greenhouses;
- A temporary 50% discount on the levy for a period of up to five years. This is intended to give the sector some relief while anticipated energy efficiency measures take effect.
Some horticulturists may also benefit from the exemption from the levy for energy from good quality CHP.
Energy Intensive Sectors and Climate Change Agreements
The Government also recognises the need for special consideration to be given to the position of energy intensive industries given their energy usage, the requirements of the Integrated Pollution Prevention and Control regime and their exposure to international competition. Consequently, the Government has provided an 80% discount from the levy for those sectors that agree challenging targets for improving their energy efficiency or reducing carbon emissions. Climate change agreements have now been concluded with almost all of the eligible sectors.
The Government defines an 'energy intensive' sector as one which carries out activities which are listed under Part A1 or A2 headings in Part 1 of Schedule 1 to the Pollution Prevention and Control (England and Wales) Regulations 2000 (Statutory Instrument 2000 No.1973), as amended by the Pollution Prevention and Control (England and Wales) (Amendment) Regulations 2001 (Statutory Instrument 2001 No. 503). This criterion applies throughout the UK. Sites operating Part A PPC activities will be subject to a legal requirement to use energy efficiency - other sites are not subject to this requirement. Small sites which fall below PPC size thresholds (with the exception of thresholds relating to combustion plant), but which would otherwise be covered by the proposed regulations, will also be eligible for the relevant sector agreement. The regulations cover the main energy intensive sectors of industry, and in agriculture, livestock units for the intensive rearing of pigs and poultry.
There are ten major energy intensive sectors (aluminium, cement, ceramics, chemicals, food & drink, foundries, glass, non-ferrous metals, paper, and steel) and over thirty smaller sectors. Defra has responsibility for the climate change agreements with these sectors. Agreements have been negotiated with the relevant sector trade associations on behalf of the companies within the sectors concerned.
Facilities identified in these agreements are eligible for the 80% Levy discount until 31 March 2003. Eligibility for discount from 1 April 2003 will depend on whether the first targets set in the agreements have been met.
Information on the climate change agreements process can be found on the Defra website at www.defra.gov.uk/environment/ccl/index.htm or from the Defra Climate Change Levy Secretariat (telephone 020 7082 8171 or 8740).
Companies wishing to find out about a specific climate change agreement should contact the relevant trade association. A list of trade associations with an agreement in place or under negotiation with Defra is at Annex 2. Contact details are included amongst the material made available for prospective participants. Companies which are not members of trade associations will be able to join the relevant sector agreement without having to join the trade association if they so wish. Trade associations may make an appropriate (ie reasonable and justifiable) administrative charge for non-members.
Legislation: the Finance Act 2000
Legislation to implement the levy is contained in the Finance Act 2000, which received Royal Assent on 28th July 2000. Section 30 and Schedules 6 and 7 refer.
Help Available
The purpose of the levy is to encourage the efficient use of energy, not to raise tax. Consequently, the Government has put in place a range of measures to assist energy users to improve their energy efficiency. The measures are as follows:
- Action Energy (formerly the Energy Efficiency Best Practice Programme). Advice and a wide range of best practice publications can be obtained via the Environment and Energy Helpline, email: help@actionenergy.org.uk, telephone 0800 585 794. Further information about the scheme is available from the Action Energy web-site or from the Scottish Executive's Energy Efficiency Office web site.
- An energy efficiency fund. This will build on the Best Practice Programme and provide energy efficiency advice and audits to businesses. It will also work to stimulate research, development and take up of renewable sources of energy and other low carbon technologies via a new body, the Carbon Trust. This will enable business to be involved in decisions on how best to use the energy efficiency fund. The Carbon Trust also has a role in updating the list of technologies eligible for enhanced capital allowances (see below).
- A system of 100% first year capital allowances for energy saving
investments 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. Initial qualifying technologies
will be:
Motors
A list of approved technologies under these headings is on the UK Energy Technology List. Investments in technologies on this list qualify for the 100% enhanced capital allowance. However, formal claims for tax relief can only be made following Parliamentary approval of legislation which was included in the Finance Bill 2001.
Good quality CHP
Boilers
Lighting systems
Variable speed drives
Refrigeration
Pipework insulation
Thermal screens
The approved lists will be dynamic, with new technologies being added to the lists as they are proven, and subject to Exchequer cost controls. Conversely, technologies may be withdrawn from the list once they become 'standard' practice. For more information, please contact the Environment and Energy Helpline or see the ECA web site at www.eca.gov.uk.
- An exemption from the levy for electricity generated from 'new' renewables (ie solar power, wind power, etc - but NOT large scale hydro-electric schemes or some energy from waste).
- An exemption from the levy for the fuel input to 'good quality'
combined heat and power. Good quality combined heat and power will
need to have been verified by CHPQA, a voluntary programme designed
to provide a universal method to assess, monitor and certify the quality
of CHP schemes for a range of purposes, including eligibility for exemption
from the climate change levy and for the enhanced capital allowance
scheme. The Programme is based on a Quality Index (QI) approach, providing
a practical, reliable and determinate method of measuring the thermal
efficiency and environmental quality of the range of CHP installations
of different sizes, type, and fuel use.
CHP schemes have to achieve a Quality Index (QI) of at least 100 and an electrical efficiency of at least 20% to qualify as Good Quality and be eligible for exemption on all electricity used on site or sold direct to other users - electricity generated from good quality CHP will be subject to the Levy if it is not sold on site or sold to another user through a bilateral electricity contract. CHPQA contains a methodology for scaling back the exemption for schemes with a QI below 100.
A document describing the CHPQA scheme CHP QA - A Quality Assurance Programme for Combined Heat and Power was published in July 2000. Further information and advice can be obtained through the CHPQA website www.chpqa.com/ or the Energy and Environment Helpline, telephone: 0800 585794.
Annex 1: Background to the Levy
The UK Climate Change Programme was published on 17th November 2000. It sets out the Government's proposals for meeting the UK's legally-binding target of a 12.5% reduction in greenhouse gas emissions, (Kyoto Protocol) and for moving towards the Government's domestic goal of a 20% reduction in carbon dioxide emissions. The Climate Change Programme document can be obtained from the Defra web-site at www.defra.gov.uk/environment/climatechange/.
In the 1998 Budget, the Chancellor asked Lord Marshall to consider whether, and if so, how best, economic instruments - such as a business energy tax or tradable emissions permits - could be used to improve energy efficiency in business and reduce emissions. Lord Marshall's report to the Chancellor, Economic Instruments and the Business Use of Energy, was published in November 1998. The Government has also taken forward Lord Marshall's recommendations on an emissions trading scheme. Proposals for such a scheme are being developed by the Government with input from the Emissions Trading Group set up under the auspices of the CBI and the Advisory Committee on the Environment (ACBE). This could give UK industry and Government valuable experience of emissions trading, and help to give the UK a lead in this area. The Government envisages that carbon trading might be used by companies to help achieve energy efficiency targets in climate change agreements.
Annex 2: Sector Associations with agreements or in negotiation with Defra:
Agricultural Industries Confederation
Aluminium Federation
British Apparel and Textile Confederation
Britsh Beer and Pub Association
British Calcium Carbonate Federation
British Cement Association
British Ceramic Confederation
British Compressed Gases Association
British Egg Industry Council
British Glass Manufacturers Confederation
British Lime Association
British Meat Processing Association
British Non-Woven Manufacturers Assocaition (Geosynthetics)
British Poultry Council
British Printing Industry Federation
British Tyre Manufacturers Association Ltd
Chemical Industries Association
Cleveland Potash Ltd
Cold Storage and Distribution Federation
Confederation of British Metal Forming
Conferation of Paper Industries
Dairy UK
Food and Drink Federation
Gypsum Products Development Association
Kaolin and Ball Clay Association
Maltsters Association of Great Britain
Mineral Wool Energy Savings Company Ltd
Metal Packaging Manufacturers Association
National Association of Master Bakers
National Farmers' Union
National Farmers Union (Horticulture)
National Microelectronics Institute
Packaging and Industrial Films Association
Non-Ferrous Alliance
Slag Grinders Association
Spirits Energy Efficiency Company
Society of British Aerospace Companies Ltd
Society of Motor Manufacturers and Traders Ltd
Surface Engineering Association
Target 2010
UK Leather Confederation
UK Renderers Association
UK Steel Association
Wallcovering Manufacturers Association
Wood Panel Industries Federation
Closed Sectors
Vehicle Builders and Repairers Association
National Microelectronics Institute (Cathode Ray Tube)
Reprotech
Contact details are included amongst the material made available for prospective participants.
[Note - this list is not exhaustive.]
Page last modified: 22 May 2007