Good Idea, Shame about the Practice: The Climate Change Levy Aims to Improve Energy Efficiency. but with Many Businesses Exempt and Others Facing Weak Targets, It Is Less Than Efficient Itself. (Energy)
Sorrell, Steve, New Statesman (1996)
The climate change levy forms the centrepiece of Britain's climate change programme and is expected to make a major contribution to meeting both the UK'S target for greenhouse gas reductions under the Kyoto Protocol and the government's "goal" of reducing carbon dioxide emissions. The introduction of the levy represents a real political achievement and there is no doubt that it has raised business awareness of climate change and encouraged significant emission reductions in many sectors. But the design of the levy is flawed, and it has locked the UK into a complex and inefficient policy framework.
The levy has its origins in the 1998 report Economic Instruments and the Business use of Energy by Lord Marshall, a former president of the Confederation of British Industry. Marshall acknowledged both the severity of the climate change problem and the potential of market-based instruments to tackle it. He recommended the introduction of an energy or carbon tax for business, on condition that 1) the revenues were recycled in full to business, with a portion being used to promote energy efficiency, 2) the impact on energy-intensive industry was reduced, while retaining incentives for energy efficiency, and 3) combined heat and power and renewable electricity were not disadvantaged.
Many industries lobbied vigorously against the taxation proposals and sought to gain exemptions. They succeeded in reducing the levy, and approximately 7,000 installations gained an 80 per cent discount provided that they took on targets to reduce energy use or carbon emissions. The levy package was eventually introduced in April 2001 and consisted of the levy itself, climate change agreements with energy-intensive industry, a [pounds sterling]50m annual research and development fund, and a system of capital allowances to encourage investment in energy-efficient technologies.
The levy is a revenue-neutral energy tax for business, commerce and the public sector. It is levied on coal, gas and electricity use, with oil products, combined heat and power fuel and renewable electricity exempt. Coal and gas prices increase by 0.15p/kWh and electricity prices by 0.43p/kWh. The price impact of the levy has been undermined, however, by reductions in industrial electricity prices. These fell by 23 per cent between 1995 and 2001, while the fall between 2000 and 2002 more than offset the increase from the levy. To the extent that these trends result from the operation of a competitive electricity market, they are to be welcomed. But unless the levy rates are adjusted upwards to compensate, the energy market will not be delivering a consistent and effective signal to improve energy efficiency and reduce carbon emissions.
The levy is an energy tax applied to only a portion of final consumers. This contrasts with the economists' preferred option of a carbon tax applied at the point at which fossil fuels enter the economy. The second option is simpler to administer, more effective and more efficient. But there are two reasons why it was not chosen in the UK.
First, the government wanted to protect the five million UK households living in fuel poverty by avoiding energy price increases for domestic consumers. But the blanket exemption of all households in order to protect a minority is a crude and inefficient approach which reduces the incentive to improve energy efficiency in this sector and creates severe problems for the UK in meeting its Kyoto obligations.
Second, the government wanted to protect the declining UK coal market by basing the tax on energy rather than on carbon, and by taxing electricity at the point of consumption rather than taxing the fuel input to electricity generation. An intentional by-product of this decision was that electricity from nuclear and hydro sources was also subject to the levy, despite making no contribution to carbon emissions. The design of the levy shielded coal-fired power stations from major cost increases at a time when the Department of Trade and Industry was reviewing fuel sources for electricity generation, restricting consents for new gas-fired stations, and planning reform of the electricity market. …