Environmental Audit Committee

Environmental Audit Committee

House of Commons

30 August 2007


Reducing carbon emissions from UK business:

The role of the Climate Change Levy and Agreements

The Environmental Audit Committee (EAC) has today announced an inquiry into the roles played by the Climate Change Levy (CCL) and Climate Change Agreements (CCA) in reducing carbon emissions and energy use by the UK business sector. This follows a new study by the National Audit Office (NAO), prepared especially for the Committee. This inquiry by EAC will:

• review the effectiveness of the Climate Change Levy and Agreements in increasing energy efficiency and reducing carbon emissions;

• examine how they fit together with other policy measures, such as the EU Emissions Trading Scheme and the proposed Carbon Reduction Commitment;

• analyse their economic impacts on the businesses subject to them, and the wider economy; and

• consider whether and how they might be improved.

The CCL and CCA are two of the three most important policies in the UK Climate Change Programme, by estimated size of carbon savings. Together they are estimated to save 5.4MtC (million tonnes carbon) every year by 2010. The Levy is a tax on energy use, while the Agreements give certain industrial sectors a discount on the Levy in return for agreeing to energy efficiency targets.

The NAO study found that from its announcement in 1999, the CCL has driven energy efficiencies and emissions reductions, but that its impact had diminished by early 2007. According to the NAO, businesses subject to CCAs have overachieved against their original targets: this was the result of genuine improvements in efficiency as much as weak targets. However, the CCAs are now forecast to achieve less than was originally planned against business as usual projections. A survey by the National Audit Office found that businesses are unconvinced that the Levy has driven emissions reductions, and are divided over the effectiveness of Agreements.

The Climate Change Levy and Agreements were the first major climate change policy package aimed at the UK business sector. Since their introduction there has been considerable debate as to their design and effectiveness. Some have argued that the Levy should be reformed directly to target the carbon content of the energy used. Some business groups have expressed concerns about its potential effects on costs and competitiveness, while other commentators have asserted that it has saved businesses money. Environmental groups have argued that it should be strengthened, not least because it remained frozen for the first six years, meaning that in April 2006 Levy rates were around 13% lower in real terms than when originally introduced.

In 2006 the Environmental Audit Committee summed up the views it had expressed on the CCL and CCA over a number of reports:

EAC has in the past expressed concerns about the Climate Change Levy and its associated negotiated agreements-in particular, the failure to increase the rates of the Levy since its introduction and the size of the savings which the Government claims have been achieved through Climate Change Agreements. […] The recent Budget has at least increased the rates, though it remains to be seen whether the scale of the increase will have any significant impact.

This will be the first time that the Committee has a dedicated inquiry on this subject. This inquiry will enable the Committee to consider the issues relating to these policies anew and in greater detail.

The Committee invites organisations and members of the public to submit memoranda setting out their views on these issues. Some specific subjects on which the Committee would welcome comments are set out below, although respondents are free to comment on any issues which they consider relevant.

1. Is it right for the Levy and Agreements to target energy use, or should they be reformed to target carbon emissions directly? If so, how should they be changed?

2. With the advent of UK-wide carbon budgets from 2008 (proposed under the draft Climate Change Bill), how valuable is the focus of the CCL and CCA on the efficiency with which business consumes energy? Would it be better to have an instrument which enforced absolute caps in energy use (or CO2 emissions)?

3. How well do the Levy and Agreements fit together with other existing and proposed climate change policies, and what can be done to ensure maximum impact from complementary policies with minimum administrative burden and overlap?

4. Businesses are able to use carbon trading to meet their targets under the Climate Change Agreements. What have been the impacts of trading so far? Should trading be allowed in this way, or how should it be controlled?

5. What have been the economic impacts of the CCL and CCA on the organisations subject to them, and the wider UK economy?

6. Should the Climate Change Agreements be reformed in any way? For instance, should the Agreements be simplified, or the sectoral targets made more stringent?

7. What are the main barriers to accelerating energy efficiency in the business sector? How can these be overcome?

8. Products which can increase energy efficiency (such as insulating glass for windows) can be energy-intensive to manufacture. Policies such as the CCL and CCA can penalise manufacturers for making such products. How big an issue is this, and what, if anything, should be done about it?

9. Alongside the CCL, the Government introduced the Enhanced Capital Allowances, to further encourage firms to make energy saving investments. How well is this scheme working? How well does it fit with other existing or proposed climate change instruments?

10. The Levy exempts electricity from renewables, though so far this appears to have had little impact. Should it play a greater role in incentivising the growth of renewable electricity, and, if so, how?

Written evidence should be sent to the Committee by 28 September 2007. For printing purposes we require submissions via e-mail to [email protected] in Word format. We are unable to accept PDFs except for supporting documentation already in the public domain which will not be printed by us. Although we no longer require a hard copy, it is your responsibility to check that we have received your submission if no email acknowledgement has been received by you. A brief guidance note on the preparation and submission of evidence is available on the Committee's web pages. For further information on the this inquiry, please telephone 020-7219-2878.

Notes for Editors

1. The CCL and CCA were announced in 1999 and introduced in 2001, following recommendations in the 1998 Marshall Report. The Levy is a tax on energy use in industry, commerce and the public sector. Its aim is to encourage businesses to use energy more efficiently, and therefore to reduce carbon emissions below the levels that they would otherwise have been under "Business As Usual" growth. Under Climate Change Agreements energy-intensive sectors may receive an 80% discount on the Levy, in return for entering into agreements to meet energy efficient targets. In addition, at the time the CCL was brought in, organisations subject to the Levy were given a 0.3% reduction in their National Insurance contributions, to help to shift their tax burden from labour to energy costs.

2. The NAO study, The Climate Change Levy and Climate Change Agreements (August 2007, available from www.nao.org.uk), found that:

Climate Change Levy
The announcement of the Levy contributed to a significant refocusing of attention on energy use in the years after 1999. This has driven energy efficiencies and emissions reductions relative to business as usual in both energy intensive and less intensive industries.

The extent to which the Levy has continued to drive further energy efficiencies in more recent years is harder to discern, especially as it has been joined by other policies and drivers since its introduction. Econometric analysis suggests the Levy has permanently raised managerial awareness. However, its impact on energy prices has been limited. Results of the NAO's survey, conducted in early 2007, suggest it is no longer seen as a major driver of new energy efficiencies.

The cumulative carbon savings achieved by the Levy across the economy cannot be measured; only estimated. The balance of qualitative evidence broadly supports the major assumption which underlies the most recent estimate of annual savings of 3.5MtC in 2010.

Climate Change Agreements
Sectors subject to Agreements have made energy efficiencies and emissions reductions. The negotiation of Agreements and the development of monitoring regimes to measure progress against Agreement targets raised awareness of the potential for energy efficiencies. These efficiencies were then made.

Not all Agreement targets were stringent, but early overachievement against them was the result of genuinely significant improvements in efficiency as much as weak targets.

As with the Levy, the effect of the Agreements in terms of emissions savings can only be estimated. The NAO found no evidence which would undermine the most recent estimate of 1.9MtC.

3. Details of all the Committee's press releases and inquiries, together with its Reports, oral evidence and other publications, are available on the Committee's Internet home page, which can be found at: www.parliament.uk/parliamentary_committees/environmental_audit_committee.cfm.