HMT6 9 March 1999 CLIMATE CHANGE LEVY TO ENCOURAGE ENERGY EFFICIENCY A levy on the business use of energy, with offsetting cuts in employers' NICs and additional support for energy efficiency schemes and renewable sources of energy, will be introduced from April 2001. This reform follows closely the recommendations made in Lord Marshall's report on the role of economic instruments and the business use of energy, published in November 1998. The climate change levy will play a major role in helping meet the UK's targets for reducing greenhouse gas emissions. It will entail no increase in the tax burden on business as the revenues will be recycled in full to business. These reforms will promote energy efficiency, encourage employment opportunities, and stimulate investment in new technologies. Announcing the reforms, Gordon Brown said: "Climate change is recognised as one of the most significant environmental threats facing the world. This tax reform will benefit the environment we live in, put UK industry at the forefront of developing new technologies, and help encourage employment opportunities. "The Government also recognises the need for special consideration for energy intensive sectors, given both their energy usage and their exposure to international competition. In line with the recommendations made by the CBI, there will not be a blanket "across the board" approach to setting tax rates." The Government agrees with Lord Marshall's recommendation that the levy must be designed in a way that protects the competitiveness of UK firms. The Government therefore intends to recycle the revenues to business, and intends to cut the main rate of employer NICs by 0.5 percentage points. Businesses will also benefit from schemes aimed at promoting energy efficiency directly and stimulating the take-up of renewables sources of energy, like solar and wind power. The introduction of the climate change levy will therefore entail no increase in the burden of taxation on business. The Government also recognises the need for special consideration to be given to the position of energy intensive industries given their energy usage, the separate Integrated Pollution Prevention and Control regulation and their exposure to international competition. In line with the recommendations made by the CBI, the Government will not be taking a blanket 'across the board' approach to setting the appropriate level of the new levy. Subject to any legal and practical constraints, the Government intends to set significantly lower rates for those energy intensive sites that agree targets for improving their energy efficiency which meet the Government's criteria. The Deputy Prime Minister has written to the trade associations of the main energy intensive sectors on Budget day, and will begin negotiations with energy intensive sectors shortly. The Government is pre-announcing this tax change, as Lord Marshall recommended, to give businesses time to adjust. The new levy will be introduced in April 2001. The tax rates applying to different fuels will be set out in Finance Bill 2000. The Government expects the levy to raise around #1.75 bn in its first full year (2001-02) and save around 1.5 million tonnes of carbon a year by 2010. The levy will apply to gas (natural gas and liquified petroleum gas), coal and electricity used by business, agriculture and the public sector for energy uses. It will not apply to fuels used by the domestic or transport sector, or fuels used for generation or non-energy purposes. The levy will not apply to oils, which are already subject to mineral oils duty. Press notice C&E 11 describes the changes to mineral oils duty in this Budget. NOTES FOR EDITORS 1. The Government issued a consultation document on 26 October 1998 which set out a range of possible options for meeting the UK's legally binding target of a 12.5 per cent reduction in greenhouse gas emissions, and for moving towards the Government's domestic goal of a 20 per cent reduction in carbon dioxide emissions. The consultation period closed on 12 February. Over 700 responses were received. The Government has been assessing these responses, with a view to producing a draft programme later this year. 2. As made clear in the consultation paper, the Government believes that all sectors of the economy will need to play a part in tackling the problem of climate change. A mix of policy instruments will also be needed. 3. Action is already being taken in other sectors. For example: - the increases in road fuel duty over the period 1996 to 2002 -a key part of the Government's strategy to reduce the emissions of greenhouse gases from road transport - will save between 2 and 5 million tonnes of carbon in 2010 if continued at their present rate; - the Comprehensive Spending Review announced extra funding of #150m (on top of an existing programme of #215m) to improve energy efficiency in poorer households. The Government has also announced an extra #24m funding for the Energy Saving Trust; - allocations for local authority housing improvement, the New Deal for Communities and the Single Regeneration Budget will all bring substantial improvements to energy efficiency. 4. 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 tradeable 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 with the Pre-Budget Report. The Government is also taking forward Lord Marshall's recommendation on a dry run emissions trading pilot and is discussing with industry the details of setting up such a scheme. This could give UK industry and Government valuable experience of emissions trading, and help to give the UK a lead in this area. 5. Lord Marshall's report reviewed the experience of energy taxes in other EU countries. Six European countries currently have taxes on carbon or energy, and the German and Italian Governments have recently announced plans to introduce energy taxes. 6. Details of the schemes to promote energy efficiency will be announced as part of the Government's forthcoming draft climate change strategy later this year. Details of the schemes to help renewable sources of energy, like solar and wind power, will be announced as part of the Government's review of renewable energy policy. 7. A consultation document on the detailed design and administrative implications of the climate change levy is published by Customs and Excise today. Copies are available from: Judith Hope, HM Customs and Excise, 3rd Floor West, Ralli Quays, 3 Stanley Street, SALFORD M60 9LA Fax: 0161 827 0300 A draft Regulatory Impact Assessment is available from the same address, or on the internet at http://www.hmce.gov.uk 8. Copies of Lord Marshall's report are available from: HM Treasury Public Enquiry Unit, Room 89/2, HM Treasury Parliament Street, London SW1P 3AG Tel: 0171 270 4558 9. Copies of the Government's consultation document on the UK's climate change program are available from: DETR Free Literature, PO Box No 236, Wetherby S3 7NB Tel: 0870 1226 236 Fax: 0870 1226 237 It is also available on the internet at the DETR web site: http://www.detr.gov.uk HM TREASURY PRESS OFFICE Press Enquiries to: 0171 270 5238 Non-media enquiries to: 0171 270 4558 If you have access to the Internet you can find this news release at http://www.hm-treasury.gov.uk. Other Treasury material can also be found at this address. # = pounds sterling