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Carrots, sticks and tambourines. A programme that ticks all the boxes

ImageYes, it might need some tweaking here and there, but the Climate Change Levy really is a government programme that is exceeding expectations.

This is the story of a government programme that really works. So perversely you never seem to hear any politicians talking about it.

Being of a naturally sunny disposition, my natural propensity is always to concentrate upon initiatives that really do what it says on the can. One such is the Climate Change Agreement policy.

The Climate Change Levy – effectively, the UK’s energy tax – is the longest established instrument designed to affect the business sector, in order to help meet binding international (and now national) climate change reduction commitments.

Discounts on the Levy

The Agreements are the deals negotiated with 46 separate industrial sectors of the economy. These offer whopping 80 per cent discounts on the Levy in exchange for binding commitments to reduce energy consumption. When the policy was first introduced in the Budget of 2000, it was anticipated that by 2010, these Agreements would be delivering a reduction of 9.1 million tons of carbon dioxide. That estimate has turned out to be far too modest. Actually the levels of investments in energy savings stimulated look like working out delivering over 10.5 million tonnes in savings. That is some 13 per cent more than anybody anticipated at the time. All measures have been based upon energy saving investments that return the capital invested within 30 months. And that was at the old energy prices.

In practice, every single sector that delivered on these agreements is benefiting in two very pertinent ways. They are saving on their tax bills. And they are saving significantly on their fuel bills at the same time. Consequently there is very little, if any, moaning from participants about the impact of these negotiated agreements. On the contrary, they are saving everyone concerned a lot of money.

Granted, in strict economic terms, it could be argued that all of these investments should have been undertaken anyhow: they all made perfect economic sense. But as we all know, in the real world, that is far from what actually happens. Or there would be no need for all the legions of the energy services consultants, now augmented by on-the-ground assistance employed by the Carbon Trust, to persuade companies to do what is already in their best interests to do. But is somehow just not glamorous enough to attract attention to the boiler room from the boardroom, without an extra push.

In this context, the Climate Change Agreements (CCAs) are a shining example of a genuinely integrated policy approach to delivering energy saving. They offer carrots (those 80% discounts), sticks (the threat of full payment for non-compliance) and tambourines (drawing managements attention to energy consumption). Each of these three facets is a vital component of a successful energy efficiency policy tool. Omit any one part, it is far less effective.

Consider. The money saved by the tax break is almost certainly far less than the money saved by the energy saving measures it has prompted. So why is it necessary to offer this extra incentive?

The answer to that semi-rhetorical question is simple. We are talking about tax money. And tax money always commands a finance director’s attention, in a way humble fuel bills never seem to. That is the tambourine at work.

Avoiding paying more to the Treasury

The concept of avoiding, quite legally, paying more to the Treasury is always so appealing: a genuinely juicy carrot. But the threat of suddenly being asked to increase the amount due to the taxman for the Levy by four times, if you cannot demonstrate you are delivering the requisite energy savings, is a most effective stick.

The success of this policy highlights the disproportionate impact of programmes that affect taxation, whether organizational or personal. Decisions that affect an organisation’s expenditure on tax will be taken by people who wield significant influence. In contrast, those within an organisation with the responsibility for paying utility bills – those who could most vividly make the case for energy efficiency investments – are typically in less senior positions, and less able to follow through with the necessary actions.

There is a current government consultation running, concerning the future of these Climate Change Agreements. Obviously there are a few sensible changes that should be made to the detail. The requirements for sectoral savings should be absolute, rather than relative. There do need to be annual targets. And the proposal that each unit involved should be required to meet its’ individual target – rather than hiding behind other, better, performers – is a very sensible one.

But asking if this policy should continue? The answer is surely the ultimate no-brainer.

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