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Reforming the business energy tax landscape

Posted by Alex Barrett on 1 June 2016 at 9:30 am

In the summer budget of 2015 the government announced a review to examine the energy efficiency taxes currently levied on businesses. The proposed changes were centred on streamlining the various taxes related to energy efficiency and climate change. Different businesses had previously been subject to different taxes, with potential for confusion and overlap. These include the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), and the Climate Change Levy (CCL). The government now plans to streamline these into a single tax, reducing administrative costs, and removing barriers to compliance.

The consultation closed on 19 November 2015 and the government has since released their decisions [1].

The key change is that the CRC scheme will end following the 2018-19 compliance year. The businesses which were included in the CRC will now be covered by the Climate Change Levy.

The first phase of the CRC began in 2010 [2]. It served to tax large organisations which use more than 6,000 MWh of electricity per year. Companies report their energy usage and the associated carbon emissions and then buy allowances to cover their emissions. The carbon trust report that “The sectors targeted by the Carbon Reduction Commitment Energy Efficiency scheme generate over 10% of UK CO2 emissions, around 55 MtCO2[3]. This charge ensures that these buisnesses are financially accountable for their emissions is thus very important.

The CCL is a pre-existing tax which was introduced in 2001 as part of the UK’s climate change policies [4]. It has functioned alongside the CRC since that scheme came into effect.

The main CCL rates will increase from April 2019, to account for the revenue that would have been generated through the CRC. The rates for different fuel types will initially reflect the mix used in energy generation, an electricity to gas ratio of 2.5:1.  This will change over time with the government hoping to achieve a 1:1 ratio by 2025. They hope that this change in the balance will encourage businesses to reduce their gas usage over time, thus reducing the UK’s carbon emissions.

During the consultation phase concerns were raised as to how these changes would impact small businesses and charities. The review confirms that: “The smallest businesses – who do not pay CCL – will remain fully protected from CCL increases. CCL-paying businesses will have three years to make energy savings before CCL increases take effect, with RPI increases only from 2016 to 2018.”

The government will also increase the discount available for businesses which participate in the Climate Change Agreement (CCA). This is a voluntary scheme that encourages businesses to reduce their energy use and carbon dioxide emissions in exchange for reductions in the CCL [5]. This is intended to ensure that “Energy Intensive Industries” are protected from the changes to the CCL rates, and will not lose their international competitiveness as a result.

The government state that they will make every effort to make reporting as efficient as possible. Further consultations on the reporting framework, and how the scheme is to be implemented across the UK’s devolved regions will follow.

The government states that the proposed changes should help the UK to “decarbonise cost effectively”, which they stated was “vital for the government’s action on climate change.” To what extent this ambition succeeds remains to be seen over the coming years as these changes come into effect.

  1. The government’s response to the consultation
  2. The CRC Energy Efficiency Scheme
  3. The Carbon Trust: Overview of the CRC scheme.
  4. The Climate Change Levy
  5. Climate Change Agreements

Image Credit: Alex Barrett 2010

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