Climate Change Levy Has Been Proposed As a Measure to Encourage Business to Become More Energy Efficient and Thus Reduce Atmospheric Carbon Dioxide Emissions

RESEARCH PAPER 99/93 The Climate Change 24 NOVEMBER 1999 Levy The Climate Change Levy has been proposed as a measure to encourage business to become more energy efficient and thus reduce atmospheric carbon dioxide emissions. A tax on energy use, the Levy has attracted criticism from manufacturing industry and some environmentalists who would have preferred a carbon tax instead. In the 1999 Pre-Budget Report the Chancellor announced modified proposals including lower levy rates, wider exemptions, and greater revenue recycling to business. Stephen McGinness & Grahame Danby SCIENCE AND ENVIRONMENT SECTION Antony Seely BUSINESS AND TRANSPORT SECTION HOUSE OF COMMONS LIBRARY Recent Library Research Papers include: 99/78 By-elections since the 1997 general election 09.09.99 99/79 Unemployment by Constituency – August 1999 15.09.99 99/80 Railway Organisations 20.09.99 99/81 Asbestos 05.10.99 99/82 By-elections since the 1997 general election 24.09.99 99/83 Unemployment by Constituency – September 1999 13.10.99 99/84 Devolution and Concordats 19.10.99 99/85 The Procedural Consequences of Devolution 20.10.99 99/86 Economic Indicators 01.11.99 99/87 The prospects for Russia 08.11.99 99/88 The House of Lords Bill – Lords Amendments [Bill 156 of 1998-99] 09.11.99 99/89 Family Leave 11.11.99 99/90 Unemployment by Constituency – October 1999 17.11.99 99/91 Millennium Trade Talks – Food and Agriculture Issues 19.11.99 99/92 The Electronic Communications Bill [Bill 4 of 1999-2000] 24.11.99 Research Papers are available as PDF files: • to members of the general public on the Parliamentary web site, URL: http://www.parliament.uk • within Parliament to users of the Parliamentary Intranet, URL: http://hcl1.hclibrary.parliament.uk Library Research Papers are compiled for the benefit of Members of Parliament and their personal staff. Authors are available to discuss the contents of these papers with Members and their staff but cannot advise members of the general public. Users of the printed version of these papers will find a pre-addressed response form at the end of the text. ISSN 1368-8456 Summary of main points • The UK has signed up to international agreements to reduce greenhouse gas emissions to 12.5% below 1990 emission levels during the period 2008-2012. The Government has a separate pledge to reduce carbon dioxide emissions to 20% below 1990 rates by the year 2010. • The Climate Change Levy is one measure that has been proposed to achieve UK commitments. This measure is to address the business use of energy only and will come into effect in April 2001. • The Levy is intended to be revenue neutral towards business as a whole. The revenue raised from the Levy will be recycled through reduced national insurance contributions and additional support for energy efficiency measures. • Negotiations with business concerns along with Parliamentary scrutiny and debate have led to the Government: reducing the rates of the Levy overall; providing for a greater rebate for energy intensive industries; and, exempting electricity both from renewable sources and ‘good quality’ combined heat and power plants. CONTENTS I Climate Change Levy: Genesis 7 A. Climate change 7 B. Carbon Dioxide Emissions 8 C. Details of the Climate Change Levy 9 D. Response to the Levy 9 II Environmental taxation 14 A. General Principles 14 B. The Government’s Approach 17 C. The Marshall Report on the business use of energy 18 D. The potential for carbon taxation 22 E. The March 1999 Budget 26 III Climate Change Levy and Energy Policy 28 A. Customs & Excise consultation 28 B. Parliamentary questions 30 C. Trade and Industry Committee 31 D. Environmental Audit Committee 34 E. The Energy Tax Debate 35 F. Negotiations with industry 39 IV November 1999 Pre-Budget Report 43 Appendix A: The Marshall Report : Energy taxes in other EU countries 46 Appendix B: Commission Communication: Climate Change Data 48 RESEARCH PAPER 99/93 I Climate Change Levy: Genesis In his March 1999 Budget the Chancellor (Gordon Brown) announced a new levy on the business use of energy to be introduced from April 2001.1 There would be offsetting reductions in employers' National Insurance contributions (NICs) plus substantial rebates for energy intensive industries who could agree energy efficiency agreements with the Department for the Environment Transport and the Regions (DETR). Additional support would be provided for energy efficiency schemes and renewable sources of energy. This proposal follows closely the recommendations made in Lord Marshall's report on the role of economic instruments and the business use of energy, commissioned at the time of the March 1998 Budget and published in November 1998.2 However, the genesis of the Levy can be traced back to work published by the Organisation for Economic Co-operation and Development (OECD) in the early 1970’s which established the Polluter Pays Principle. This simply meant that the originator of pollution should be the one to pay for the environmental damage caused by that pollution. The Polluter Pays Principle was initially adopted in the early 1970s when strict environmental regulations were first being introduced in OECD countries, and complaints about high costs and negative effects on competitiveness were beginning to emanate from industry. Governments were being pressured to help industry cover the costs of complying with these new regulations or to impose similar costs on imports through compensating import levies. The 1972 OECD Recommendation of the Council on Guiding Principles concerning International Economic Aspects of Environmental Policies3 included recommendations not to subsidise the environmental costs of industry, except in limited cases, and not to use trade remedies or import duties to compensate for these costs. These recommendations, which were intended to guide government responses to the competitive effects of environmental regulations, have been largely maintained for the last twenty years. The Amsterdam Treaty, like the Treaties of Rome and Maastricht, provides that "the polluter should pay" principle forms a basis of Community policy on the environment.4 Principle 16 of the Rio Declaration5 relating to the internalisation of environmental costs also makes reference to this Principle. A. Climate change The fundamentals of climate change, often referred to as global warming, have been detailed in many studies and papers. It is not envisaged that this paper will repeat this 1 HC Deb 9 March 1999 c 181 2 HM Treasury, Economic instruments and the business use of energy: a report by Lord Marshall, November 1998 http://www.hm-treasury.gov.uk/pub/html/prebudget99/marshall.pdf 3 OECD (1972), Recommendation of the Council on Guiding Principles concerning International Economic Aspects of Environmental Policies [C(72)128] 4 Art. 130R(2), Treaty establishing the European Community, as amended by the Maastricht Treaty of 7 February 1992. Now Art. 174(2) in Treaty of Amsterdam 10 November 1997 5 Earth Summit 1992, The United Nations Conference on Environment and Development, Rio de Janeiro 7 RESEARCH PAPER 99/93 information beyond that necessary to understand the reasoning behind implementation of the Climate Change Levy. For further detail on climate change may be found in any number of Library research papers,6 POST briefings7 and select committee reports.8 In brief, the presence of certain gases within the global atmosphere provides a mechanism by which heat from the sun can be trapped and retained. Without this mechanism the average surface temperature would be much lower, and its variation between night and day so severe that advanced life could probably not have evolved. A major role is played by two gases: water vapour and carbon dioxide. Carbon dioxide (CO2) is an essential component of the world’s biosphere and is a major by-product of the biosphere and the consumption of fossil fuels such as coal, oil and gas. As industrialisation has progressed greater amounts of carbon dioxide have been released into the atmosphere every year. This has caused a rise in the concentration of carbon dioxide in the atmosphere. An observed rise in the global mean surface temperature over recent years has accompanied this. The United Nations organised a body of scientists, the Intergovernmental Panel on Climate Change (IPCC), to study the problem. The IPCC believe that the industrial use of fossil fuels has increased the concentration of carbon dioxide in the atmosphere and caused the temperature of the world to increase. This conclusion resulted in an agreement at the Kyoto Summit 1997, between the developed nations to stabilise their carbon dioxide emissions at 1990 levels by the year 2000 and at 5% below 1990 levels over the period 2008-2012. B. Carbon Dioxide Emissions The IPCC worked on several assumptions, a business as usual assumption and a series of others. Under the business as usual scenario the models predict a rise of between 1.5 and 3.5 degrees Celsius in global mean surface temperature over the next century. Although cuts of 5% have been agreed, models predict that a cut in emissions of 60% would be required to stabilise the atmospheric concentration of CO2 at current levels, and so avoid further warming. There are three major sources of anthropogenic carbon dioxide emissions: transport, domestic energy use and industrial energy use. The most recent statistics available from the DETR show that carbon dioxide emissions for 19969 can be accounted for by power stations (43 million tonnes of carbon dioxide), road transport (31 million tonnes) and 6 For example, Library RP 97/141, Climate Change After Kyoto, 24 December 1997 7 For example, POST Report 121, Living in the Greenhouse, December 1998 8 For example, Environment Audit Select Committee Report, Climate Change: Government Response and Follow-up, 12 February 1999, HC 88 1998/99 9 DETR, Digest of Environmental Statistics No.

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