Climate Change Levy: renewable energy & the carbon reduction commitment
In the July 2015 Budget the Government proposed scrapping the Climate Change Levy exemption which applies to electricity generated by renewable sources. Subsequently in the March 2016 Budget it announced that the rates of the levy would be increased in 2019, following the abolition of the Carbon Reduction Commitment energy efficiency scheme. This paper discusses the background to these measures.
The Climate Change Levy (CCL) is a tax on business energy use, introduced in April 2001. The rates of tax vary according to the type of fuel supplied, though not directly with the carbon content of different fuels.[1] The levy is forecast to raise £1.8bn in 2015/16.[2]
General guidance on the operation of the CCL, as well as statistical data on its yield, is published by HM Revenue & Customs.[3]
Summer Budget 2015
Supplies of electricity generated from qualifying renewable sources have always been exempt from the levy. For these purposes, electricity is ‘renewable source electricity’ if it is generated from sources of energy other than peat, fossil fuel and nuclear fuel.[4]
In his first Budget after the 2015 General Election, the Chancellor, George Osborne, announced the exemption for renewable electricity would be scrapped: “Now that we have a long-term framework for investment in renewable energy in place, we will remove the outdated climate change levy exemption for renewable electricity that has seen taxpayer money benefiting electricity generation abroad.“[5]
The Budget report stated that the exemption would be removed from 1 August 2015; in addition, “there will be a transitional period for suppliers, from 1 August 2015, to claim the CCL exemption on any renewable electricity that was generated before that date. The government will discuss the details of this transitional period with stakeholders over the summer and autumn, to determine an appropriate length for it.”[6] HM Revenue & Customs launched a consultation on the duration of these arrangements the next month.[7]
It was estimated removing the exemption would raise £450m in 2015/16, rising to £910m by 2020/21.[8] In their impact assessment HM Revenue & Customs stated that they did not expect this measure to affect wholesale electricity prices: “as the business energy market is highly competitive, removing the exemption is not expected to significantly increase business energy bills.” On the separate question of its environmental impact, HMRC stated, “the measure will have no direct impact on the achievement of UK Carbon Budget targets, as emissions from electricity generation are capped through the EU Emissions Trading System. The measure is not expected to impact on the UK's renewable energy target. The government is on track to meet its ambition for at least 30% of electricity demand to be met by renewable sources.”[9]
Budget 2016
The CRC Energy Efficiency Scheme (also referred to as the ‘CRC scheme’ or ‘CRC’) is a mandatory carbon emissions reporting and pricing scheme to cover large public and private sector organisations in the UK (excluding state funded schools in England from April 2013), that use more than 6,000MWh per year of electricity and have at least one half-hourly meter settled on the half-hourly electricity market.[10]
In the Summer 2015 Budget the Government had announced it would consult on how it might simplify and improve the business energy efficiency tax landscape,[11] and a formal consultation was launched in September.[12] The paper noted that “the UK currently has an energy tax system where tax costs and implicit carbon prices vary significantly across different groups of businesses and within organisations”, and argued that there was “potential to streamline taxes in a way that reduces variations in tax rates faced by different users, simplifies the tax system and strengthens the price signal”, possibly by “replacing the CRC and CCL with a new energy consumption tax based on the CCL.”[13]
In his Budget statement on 16 March the Chancellor announced that the Government would abolish the CRC scheme, and increase the rates of the levy rates to compensate for the lost revenue:” Many retailers have complained bitterly to me about the complexity of the carbon reduction commitment. It is not a commitment; it is a tax. I can tell the House that we are not going to reform it. Instead, I have decided to abolish it altogether. To make good the lost revenue, the climate change levy will rise from 2019. The most energy intensive industries, such as steel, remain completely protected, and I am extending the climate change agreements that help many others.”[14]
In its summary of the responses it had received to the 2015 consultation, the Government has stated, “the majority of respondents agreed with the proposed move towards a single tax. There was broad support from respondents for abolishing the CRC in favour of a new tax based on the CCL. Respondents cited several benefits including simplicity, reduction in collection errors and a reduction in administrative burdens.”[15] It is estimated that these changes will result in a one-off gain to the Exchequer of £425m in 2019/20.[16] HM Revenue & Customs’ impact assessment of this measure states that as the levy “is not levied on the supply of energy to individuals and households so the measure is not expected to impact on their energy bills, family formation, stability or breakdown”, while the replacement of the CRC scheme with higher CCL rates “is expected to lower inflation [and] we expect reduced costs to be passed on to consumers.”[17]
Notes :
[1] The main provisions for the CCL tax are set out in s30 & schedule 6 of the Finance Act 2000, as amended
[2] Office for Budget Responsibility, Economic & Fiscal Outlook, Cm 9212, March 2016 (Table 4.6).
[3] HMRC, Excise Notice CCL1: a general guide to Climate Change Levy, April 2016 & Climate Change Levy & Carbon Price Floor Statistical Bulletin, January 2016. Other guidance for businesses is collated on Gov.uk.
[4] HMRC, Excise Notice CCL1/4: electricity from renewable sources, October 2015 para 2.1. Provision to this effect was made by para 19-20 to schedule 6 of FA2000 & SI 2001/838 (regs 46-51).
[6] Summer Budget 2015, HC 264, July 2015 para 2.150
[7] HMRC, Informal consultation on the transitional period following withdrawal of the Climate Change Levy (CCL) exemption for renewable source energy, 7 August 2015
[8] Budget 2015, HC 264, July 2015 p73 (Table 2.1 – item 23). See also, HM Treasury, Summer Budget 2015: Policy Costings, July 2015 p28.
[9] HMRC, CCL: removal of exemption for electricity from renewable sources, 8 July 2015
[10] Carbon Trust, CRC Energy Efficiency Scheme, ret’d 13/4/2016
[11] Summer Budget 2015, HC 264, July 2015 para 1.258
[12] Details are collated on Gov.uk. Responses were invited up to 9 November 2015.
[13] Reforming the business energy efficiency tax landscape, September 2015 para 4.7-8
[14] HC Deb 16 March 2016 c959
[15] Reforming the business energy efficiency tax landscape: response to the consultation, March 2016 para 2.11
[16] Budget 2016, HC901, March 2016 p85 (Table 2.1 – item 36). The Budget costing shows that the change will raise £25m in 2020/21. See also, HM Treasury, Budget 2016 Policy Costings, March 2016 p34
[17] HMRC, Climate Change Levy: main and reduced rates – tax information & impact note, 16 March 2016