Environmental Audit Committee Press Notice

10 March 2008

Flagship climate change policy shows carbon reductions require "carrots" as well as "sticks"

One of the Government's flagship policies, a tax designed to curb carbon emissions from industry, commerce and public sector, has not worked in the way intended. The Environmental Audit Committee found that most of the carbon savings made were not a result of the impact of the tax, the Climate Change Levy (CCL), on energy prices but due to the knock-on effect of raising awareness about energy efficiency and through offering associated incentives.

In its report published today, Reducing Carbon Emissions from UK Business: The Role of the Climate Change Levy and Agreements, the Committee says the fact the tax has not worked as the Treasury predicted could have implications for the whole suite of Government policies on climate change, including those aimed at private households and small businesses.

The Levy's 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 accompanying Climate Change Agreements energy-intensive sectors receive an 80% discount on the Levy, in return for entering into agreements to meet energy efficient targets. In addition, at the time the Levy was introduced organisations subject to the Levy were given a 0.3% reduction in their National Insurance contributions, to help shift their tax burden from labour to energy costs.

The CCL package, including Climate Change Agreements negotiated with major emitters, is forecast to cut UK CO2 emissions by 20 million tonnes a year by 2010, making it the second biggest source of carbon reductions in the UK Climate Change Programme.

However the Committee found that most of the carbon savings from this package have not come in response to the actual impact of the Levy on energy prices. Instead, the policy has mainly worked by engaging firms at boardroom level in other ways. First, the involvement of businesses in a two year consultation process before the Levy came into operation raised awareness of energy efficiency among senior management. Since then management attention at energy-intensive firms has been captured by offering tax discounts alongside the Levy in return for meeting efficiency targets.

The Committee concluded there is a clear gap between economic theory and the actions of businesses in the real world. Businesses should have acted rationally by seeking to reduce their costs through increased energy efficiency. In practice, they appear to have needed an extra stimulus to change their approach to energy use.

The Government is already responding to this with the new Carbon Reduction Commitment, aimed at less energy-intensive firms. But in order to deliver the pace of progress demanded by the Stern Review, the Committee says the Government must also expand the work of the Carbon Trust and increase the funding available for low carbon investments.

The Chairman of the Committee, Tim Yeo MP, said:

"What we found was that the impact this tax has had on energy prices has had a minimal effect on emissions.

"Indeed, most of the carbon savings from the Levy itself were established before it actually came into operation. It was the effect that the two year consultation process had on business awareness of energy efficiency that had the biggest impact. The rest of the savings have mainly come from the agreements, established alongside the Levy, that offer industrial firms a tax discount in return for meeting energy efficiency targets.

"The wider lesson is that if large industrial firms require extra assistance to become more energy efficient, then this must be even more true for small businesses, public bodies, and private households. If the Government wants to reduce the nation's carbon footprint, it should not rely simply on "sticks" by adding a tax to the activities it wants to discourage. It must also motivate people to act by raising their awareness and offering "carrots" in the form of positive financial incentives."

The Committee also concludes that:

  • Climate Change Agreement targets have not been tightened since the first set of performance results (2004) revealed they were too weak. They should be made more stringent in the 2008 review period.
  • The Government says that it recycles all Climate Change Levy revenues to business in the form of a 0.3% reduction in employers' National Insurance Contributions (NICs), dating from 2001, and through funding for the Carbon Trust and related programmes. But this cannot be right, since the value of the cut in NICs is bigger than the total in receipts from the Levy. The Government should be clearer about how the revenue raised from the Levy is used.
  • The exemptions on the Climate Change Levy for 'green electricity' and combined heat and power have had minimal effect on the construction of new renewables and CHP capacity, essentially because they are worth too little money.
  • The CCL package does not impose a damaging economic burden on UK business overall, and may in many cases be positive, through encouraging greater resource productivity and stimulating energy efficient industries.
  • Despite the range of different business-oriented climate change policies, there is still a shortfall in policy for small businesses.
  • The scope for basing the Climate Change Levy on carbon rather than energy is small and its benefits questionable. But Climate Change Agreements should be reformed so that their targets are in the form of absolute reductions in carbon emissions, rather than relative improvements in energy efficiency.

Notes for Editors:

The report published today by the Environmental Audit Committee (EAC) is its Second Report of Session 2007-08, Reducing Carbon Emissions from UK Business: The role of the Climate Change Levy and Agreements, HC 354. Details of all the Committee's press releases together with its Reports, oral evidence and other publications, are available on the Committee's website at: www.parliament.uk/eacom

The Climate Change Levy and Agreements 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 receive an 80% discount on the Levy, in return for entering into agreements to meet energy efficient targets. In addition, at the time the Levy was introduced 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.

This report draws on a study carried out by the National Audit Office (NAO) on the request of the Environmental Audit Committee. The NAO's report, The Climate Change Levy and Climate Change Agreements (August 2007), is available from the NAO website: www.nao.org.uk.

Copies of the EAC report will be available in hard copy from 11am on 5 March 2008; and can be obtained from TSO outlets and from the Parliamentary Bookshop, 12 Bridge Street, Parliament Square, London SW1A 2JX (020 7219 3890) by quoting House of Commons No 354. The text of the Report will also be available from approximately 3.30pm onwards on its publication date, on the Committee's Internet homepage: www.parliament.uk/eacom

For further information on the report, or to bid to interview the Chairman, journalists may phone the Committee's press officer, Laura Kibby, on 020 7219 0718.

FURTHER INFORMATION:

Membership:

Chairman: Mr Tim Yeo, MP

Mr Gregory Barker MP Mr Nick Hurd MP Mrs Linda Riordan MP
Mr Martin Caton MP Mr Mark Lazarowicz MP Mr Graham Stuart MP
Mr Colin Challen MP Ian Liddell-Grainger MP Jo Swinson MP
Mr David Chaytor MP Shahid Malik MP Dr Desmond Turner MP
Martin Horwood MP Phil Woolas* Joan Walley MP

* The Minister for the Environment has ex-officio membership of the Committee in like manner to the Financial Secretary's membership of the Committee of Public Accounts.