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Unexpected generosity from the Chancellor

ImageOn the tenth birthday of the CCL George Osborne has boosted the discounts enjoyed by organisations in Climate Change Agreements

The Climate Change Levy is now celebrating its tenth birthday. Last year, it raised exactly one-third of a billion pounds (£666m) from large and medium-sized non-residential energy users.

It is generally accepted that the Levy itself has had a negligible impact upon energy consumption behaviour, at least among those who pay at its full rate.

However, few larger users have ever paid the 100 per cent Levy. From the start, discounts have been available to all those business sectors (now 56 in number) that have signed up for Climate Change Agreements (CCAs). Signing a CCA has mostly ensured an 80 per cent Levy discount. This figure was reduced to 65 per cent last year, but has now returned to 80 per cent, and is due to increase to 90 per cent from April 2013.

Climate Change Agreements are a quintessential example of an integrated approach to energy-saving policy. They combine carrots (the Levy discounts), sticks (the threat of full payment for non-compliance) and tambourines (drawing senior management attention to energy consumption).

Deliver investments

Effectively they consist of a compact between government and various discrete commercial sectors (usually trade associations), which commit their overall membership to deliver agreed amounts of energy-saving investments, in return for a smaller cheque to the Exchequer. The prospect of failing – and therefore having to write rather larger cheques to the Exchequer in consequence – has been shown to concentrate minds wonderfully.

Some have criticised the agreements as being unambitious. Superficially this is true bearing in mind, a) the basic yardstick used by government negotiators that all CCAs should only incorporate energy saving measures which pay back capital expenditure within 24 months, and b) that only 60 per cent of identified efficiency measures need be taken up to achieve the discount. Such savings as have occurred might legitimately be assumed to have happened anyway.

Would that this were so. Over the years, much evidence has emerged that the Levy has had a negligible effect upon the energy behaviour of all those without the Agreements. The energy and carbon savings have nearly all come from those sectors with CCAs.

The return to 90 per cent discount formed part of the package of tax relief for energy intensive industries announced with great fanfare in the Chancellor’s Autumn Statement, at the end of November. According to that statement, between April 2013, when the new 90 per cent rate is introduced, and March 2015, this discount will cost the Exchequer some £35m.

This appears to be a genuinely one-sided offer. Inexplicably, there has been no suggestion that any of the CCAs might be tightened so as to ensure some extra energy savings take place.

Indeed past evidence suggests that the loss to the Exchequer may well be understated. For instance, when in 2011 the discount rate was returned to 80 per cent, after a year at 65 per cent, the cost was given as £90m across the same period. Crudely, that suggests that each 5 per cent increase on the discount cost the public purse £30m over the two-year period. So logically the Chancellor’s latest discount may be worth more like £60m rather than £35m to the 56 participating industrial sectors.

Precise figures

Curiously, these examples seem to be the first time since it was launched, that the Government has provided precise figures detailing the cost to the Exchequer of forgoing its anticipated Climate Change Levy income.

This has made it extremely difficult to calculate – for instance per tonne of carbon saved – the precise cost of the policy. This is surprising, as the former Prime Minister, Gordon Brown, had an oft-repeated claim that this was the “jewel in the crown” of his carbon abatement programme.

Exactly five years ago, the authoritative National Audit Office (NAO) did state that the cost of the discount scheme in 2005/6 was “around £300m” a year. In August 2007 the NAO cited Cambridge Econometrics as identifying the sum forgone in 2003/4 as £350m.

These estimates provide the same kind of revenue loss cost per 5 per cent discount as emerged when the 80 per cent reduction was restored last year. Quite why the Treasury is projecting the cost of its latest generosity quite so low remains a mystery.

More importantly, there is no evidence that increasing the discount from 65 per cent to 90 per cent, over such a short period, will in practice encourage any extra energy-saving investment. Given these hard financial times for governments, I stand amazed at the generosity of the present Chancellor of the Exchequer.

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