Britain moves to simplify carbon tax and reporting framework

Over last weekend, around 60,000 cyclists attended a climate justice festival in Paris, part of preparations by climate activists to try and ensure a decent result from the UN Climate Summit in early December.

They have friends in what might have seemed previously unlikely places. This week Mark Carney, the Governor of the Bank of England, and chair of the Financial Stability Board, told the world that climate change is the biggest issue of the future and poses a huge risk to global stability, that fossil fuel stranded assets are substantial, and that investors must be given the data they need to “invest accordingly”.

And Shell wrote off a staggering $7 billion worth of investment by deciding to abandon drilling for oil and gas in the Alaskan Arctic, while last week Goldman Sachs put out a report saying that “coal is in terminal decline”.

The Conservative British government response to the climate crisis in the lead up to the Paris Summit is to argue in public that it's the market that should lead the changes required.

But its new consultation about overhauling the UK's corporate carbon reporting and taxation landscape implicitly recognises the necessity of rigging the market to achieve the policy goals of reducing emissions – albeit under pressure from the European Commission. Its strategy, though, is to try and reduce the administrative burden on industry.

The government's attitude, as expressed in a number of recent much criticised attacks on renewable energy and energy efficiency [link please to my recent article on this], is emboldening climate sceptics in the country such as Benny Peiser, who runs the cunningly named Global Warming Policy Foundation, and who issued a statement this week calling for energy-intensive industries such as iron and steel to be relieved of carbon taxes.

This is an effort by him to influence the new consultation. This proposes changes to the Climate Change Levy (CCL), Carbon Reduction Commitment Energy Efficiency Scheme (CRC) taxes, the Climate Change Agreements (CCA), the Energy Saving Opportunity Scheme (ESOS) reporting schemes, and the Electricity Demand Reduction (EDR) pilot incentive scheme, all of which energy-using industry has to respond to. (For an explanation of some of these, see below.)

The consultation seeks to develop a single reporting framework and a single tax in order to improve the uptake of energy efficiency measures. Writing in the foreword to the document, Exchequer to the Treasury Damian Hinds stresses that the proposals would not compromise the UK's decarbonisation efforts.

The government acknowledges some parties believe mandatory board-level reporting "creates a standardised framework that can provide information on energy and carbon consumption to investors and other stakeholders to inform investment decisions", while also leading to a reputational driver than incentivises decarbonisation. This is not just a belief but is backed up by independent research and evidence.

Consequently, it is proposing developing a "single effective reporting framework which incorporates the most effective elements from the existing range of reporting schemes and delivers a net reduction in compliance costs associated with reporting schemes".

The Energy Saving Opportunity Scheme (ESOS) will be the basis for the new reporting system. This is the EU-backed scheme that requires around 10,000 of the UK's largest firms to undertake energy efficiency audits and report on their results every four years with the first audits due by December 5th this year.

The government is consulting on whether the new reporting requirements should have board level sign off (well of course) and whether the data should be made publicly available (why not?).

The CRC scheme would be scrapped to be replaced by a new version of the Climate Change Levy (CCL) that would aim to impose a more consistent carbon price on different businesses and industries, but elements of it would also be incorporated into an improved ESOS the tax system.

It would seek to rectify the current imbalance in the rate of carbon tax imposed on electricity and gas under the CCL, which some believe has under-incentivised investment in improving heat efficiency, and is asking for opinions on whether the CCL should be set at the same level for all businesses with tax breaks then offered to sectors at risk from international competition or designed to be set at variable levels for different industries.

Climate Change Agreements (CCAs) are voluntary agreements set up alongside the Climate Change Levy (CCL) that give eligible sectors a discount on the main rates of CCL in exchange for agreeing to energy efficiency targets. CCAs cover 53 sectors, ranging from primary industries through to manufacturing and service sector processes. This relief provides a 90% CCL discount on electricity and 65% discount on gas and other taxable fuels but the government acknowledges that views on the effectiveness of CCAs have been "mixed".

"A number of stakeholders have suggested that CCAs are effective in mitigating the impact of the CCL and delivering energy efficiency improvements," the report states. "When asked if all sectors currently covered by a CCA were at risk of being put at a significant competitive disadvantage due to the CCL, some stakeholders said that they were not."

Many environmental groups have said for a long time that companies are receiving tax breaks after making only marginal improvements to their energy efficiency.

The government also wants to know which industries should be able to use the tax breaks to incentivise energy efficiency improvements, whether it should be extended to the public sector and charities, and whether further incentives are required to stimulate investor confidence in corporate energy efficiency, given the assumption that energy efficiency investment "pays for itself" but has failed to deliver optimised use of energy across the private sector.

"The government is open to considering options for new incentives," it says, but any new incentives would have to be funded by tax increases in order to "support fiscal consolidation objectives". "Proposals would also need to be simple, meet strict value for money criteria and be more effective than other options".

Any changes to the current regime are unlikely to come into effect until 2017.

What are The Carbon Reduction Commitment and the Energy Savings Opportunity Scheme?

In Britain the CRC Energy Efficiency Scheme is a mandatory reporting and pricing scheme to improve energy efficiency in large public and private organisations, which are together responsible for around 10% of the UK’s greenhouse gas emissions. (ESOS, described below, applies only to the private sector.)

The scheme is designed to target emissions not already covered by Climate Change Agreements (CCAs) and the EU Emissions Trading System (EU ETS). It features a range of drivers to encourage organisations to develop energy management strategies that promote a better understanding of energy usage and to take up cost-effective energy efficiency opportunities.

Organisations that meet the qualification criteria of consuming over 6000MWh per year through half-hourly metering, must buy allowances for every tonne of carbon they emit, so have to measure and report upon their emissions. The scheme is expected to reduce non-traded carbon emissions by 16 million tonnes by 2027, supporting an objective to achieve an 80% reduction in UK carbon emissions by 2050.

Evaluation of phase 1 of the scheme, which ran from April 2010 to the end of March 2014, by the Department of Energy and Climate Change (DECC) indicated that it succeeded in driving energy efficiency investments in more than half of obligated businesses. Almost all of them were taking some form of action to address energy efficiency, with over 70% of energy managers reporting that their organisation’s level of action on energy efficiency had increased since the scheme was introduced in 2010.

The research also showed that rising energy prices were the main driver for organisations investing in measures to improve energy efficiency (80.5%), followed by an increase in board-level priority (67.4%) and a desire to improve or protect reputation (64.2%).

The CRC scheme was ranked fourth, with 56% citing it as a key factor. The most common forms of energy efficiency measures taken included the installation of energy efficient technologies, improved energy monitoring, energy audits and increasing staff awareness through training and education.

However, from a policy design angle, many participants questioned felt that it imposed a significant administrative burden, especially at the beginning, although it was later simplified.

At the start, revenues from the scheme were recycled into rewards for companies to improve energy efficiency, perceived as a good thing, but later the government turned it into a general tax, which was either felt to be unfair or it was felt that the administrative burden should in turn have been lightened. Others felt that the process of reporting energy consumption and approving purchase of CRC allowances helped to make energy efficiency more visible within their organisations.

ESOS is a new mandatory energy assessment scheme that was only established in 2014 by the UK government to implement Article 8 (4-6) of the EU Energy Efficiency Directive (2012/27/EU). It is aimed at large organisations employing 250 or more staff and with an annual turnover greater than €50 million, and, as with the CRC, the UK Environment Agencies are responsible for compliance and enforcement. These agencies hold a list of approved assessors. Establishments owned overseas are included.

These organisations must either implement ISO 50001 or carry out their own audits of their energy use in buildings, industrial processes and transport every four years, to identify cost-effective energy saving measures, and notify the Environment Agency by a set deadline that they have done so.

This involves calculating the total energy consumption, identifying the areas of significant energy consumption and appointing a lead assessor to be responsible for the whole process. Audits are based on 12 months' verifiable data and use energy consumption profiling. Energy saving opportunities must be evaluated for cost effectiveness based on the entire life cycle of the opportunity including cost of purchase, installation, maintenance and depreciation.

However, there is no regulatory requirement for participants to implement the energy-saving opportunities identified: that is that up to the organisations themselves to decide upon. Penalties for non-compliance include financial penalties.

Mandatory or voluntary?

Mandatory energy management agreements are considered to be far more effective than voluntary agreements. Anywhere in the world where process plants are facing environmental regulations, compliance almost universally requires the mandatory measurement and documentation of energy use and emissions. This is frequently linked to energy efficiency.

Mandatory standards in Russia

The Standards and Labels for Promoting Energy Efficiency in Russia pilot program is executed by the Ministry of Education and Science of the Russian Federation in partnership with the United Nations Development Programme, using:
energy efficiency standard and label (S&L) schemes and public procurement models;
local verification and enforcement capacity building;
establishment of compliance checking and certification systems;
infrastructure construction in accordance with international best practices;
awareness-raising about energy efficient appliances and systems.

Federal Law No. 261-FZ established standards for regulating energy consumption and requires energy audits and metering for all public buildings. It required public agencies to reduce their energy and water consumption by 15% from 2009-2014, restricted the sale of incandescent light bulbs, required energy efficiency information on product labels, provided guidelines on mandatory commercial inventories of energy resources, and created standards on the energy efficiency of new buildings.

Mandatory standards in Tokyo

In Tokyo, over 21,000 small and medium facilities are covered by a mandatory reporting program, and their emissions data is publicly available online. An additional 11,000 facilities submit and disclose their data voluntarily. In January 2010, the Energy Performance Certificate Program established a framework for non-residential buildings, requiring owners to present their buildings’ energy efficiency performance data with rated results.

Mandatory standards in the USA

The U.S. Environmental Protection Agency (EPA)'s Greenhouse Gas Reporting Program, begun in 2009, established rules for the mandatory reporting of emissions from major sources and continues to enforce more recent and more stringent national environmental legislation. Some plants opt to pursue ISO 50001 to introduce a level of formal commitment to continuous process improvement.

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David Thorpe is the author of:

• The One Planet Life;
• Energy Management in Buildings;
• Energy Management in Industry;
• Solar Technology;
• Sustainable Home Refurbishment;
• Sustainable Transport Fuels;
• Solar Photovoltaics Business Briefing;
• Passive Solar Architecture Reference Book (due in 2015);
• Solar Energy Reference Book (due in 2015).

Europe must adopt a 30% emissions reduction target

With any luck we are about to see a shift in action on curbing carbon emissions.

It's not just that the annual United Nations climate change talks, COP-18, begin at the end of this month at Doha in Qatar. Nor is it that with the re-election of Barack Obama there will be a renewed impetus in the American Senate to get a climate change bill passed.

Over on the other side of the world, Australia's Climate Change Minister Greg Combet has said his country will sign up to a second round of the Kyoto Protocol, joining the European Union and just a handful of other major greenhouse gas emitters in recommitting to the world's only climate treaty.

The Kyoto Protocol, negotiated in 1997, required wealthy nations to limit their emission of greenhouse gases by 5.2% on average for the period 2008-2012 from 1990 levels. It is due to expire at the end of this year.

Through the UN climate change negotiations, countries are attempting to thrash out a replacement treaty. If successful, it would be agreed by 2015 and take effect in 2020, and it would include emissions targets for developing nations such as China and India as well as developed countries.

To date, only the European Union and a handful of other small developed nations have signed up to Kyoto 2, which is intended to start in 2013 and continue until such time as when a new agreement comes into effect.

Japan, Russia, Canada and, currently, the US are among the countries refusing to sign up to Kyoto 2. They want a non-binding agreement.

New Zealand has already said it will not follow Australia.

But Kyoto 1 and 2 has been widely criticised. The main candidates for alternative action are a carbon tax activated at national levels, and a network of regional emission trading schemes.

Already, a carbon tax is back on the agenda in the US and the UK.

Republicans are not expected to be enthusiastic; they dislike taxes. The main American proponent of a carbon tax is prominent NASA climate scientist James Hansen. His proposal is to tax carbon at source, whether oil, gas or coal, with a 100% dividend returned to citizens in equal shares, under the principle of the “commons", that every citizen has an equal right to a portion of the sky.

It is estimated that citizens would each get $3,000 to spend as compensation for the tax.

A similar tax has been in place in Canada's British Columbia for four years and is currently under review. The income from the tax is spent on public works.

But how high would a carbon tax need to be to make a significant difference in the consumption of fossil fuels? Consider the amount of tax (60%) already on a litre of petrol. Does it deter us from driving?

Would it make a difference if the price of a barrel of oil was doubled with a $100 tax? That would put up the cost of a litre of petrol to almost £2.

You can imagine the public reaction, even with a cash dividend. The thing is, it’s a blunt instrument. It affects some people more than others.

British Columbia's tax has been introduced gradually and reaches about 5% of the price of fuel. The review will tell us whether or not it has made any difference at all to consumption levels. The jury is yet out.

Hansen distrusts "cap and trade" agreements such as the Kyoto Protocol, and says why in chapter 9 of his book Storms of My Grandchildren.

But that isn't stopping Korea and China from going ahead with their own local schemes emissions trading schemes. On November 15 a presidential decree in Korea will see a mandatory ETS introduced from 2015 for 60% of South Korea’s total greenhouse gas emissions.

The purpose of an ETS is to minimise the cost of meeting a set emissions target. The Korean ETS and most of the Chinese pilot schemes have watched the European Union's ETS become swamped with excess credits and the price of carbon bomb to an ineffectual level.

To prevent this happening in their schemes, they plan to include the use of market stabilising checks and balances to enable them to adjust to external factors such as significant and sustained changes in gross domestic product. These are said to include: a strategic reserve, limitations on banking and borrowing and a ceiling and/or floor price.

Japan has its own scheme, as do Switzerland, New Zealand, California and a number of other American and Canadian states linked together in the Regional Greenhouse Gas Initiative and the Western Climate Initiative.

If such schemes become more common and the European scheme can overcome its current problems, international trading in permits is an attractive way of achieving reductions at the lowest possible cost. This is because it is cheaper to abate or eliminate a ton of carbon dioxide in some countries than in others, and the market automatically gravitates towards the cheapest solution.

In other words, is not such a blunt instrument. On the other hand, a huge amount of money gets wasted and goes into the wrong pockets.

The question is, whether any of these proposals will get us where we want to be fast enough. The answer depends upon the level of political ambition for the level at which an overall target for, or cap on carbon emissions is set, which in turn depends on the amount of public concern.

European environment ministers met at the end of October to discuss the European Union negotiating position at Doha, and what to do about the EU ETS' glut of allowances.

It emerged from their talks that Europe has already beaten its target of 20% emission reductions by 2020 with eight years to spare.

A leaked draft of the Commission's report on the EU ETS says that there will be a surplus of at least two billion allowances next year, rising in the following years. Removing just 1.4 billion of these would be sufficient to let Europe reach a 30% target by 2020.

This would align the scheme with Europe's 2050 climate goal of reducing emissions up to 95% below 1990 levels.

It's this kind of ambition, at least, which is necessary.

The British government supports a 30% target. It should do, it is already ahead of the game. Officials have been arguing for it for some time.

Europe should immediately adopt such a position and, in three weeks time, take it to Doha and challenge the world to follow suit.

Everyone on the planet helps subsidise fossil fuels by £45 per year

NASA's James Hansen

Fossil fuel companies get between $400 and $500 billion in subsidies per year. This must end.

The first major scientist to alert the world to the dangers of climate change, NASA's James Hansen, has issued a new challenge to the world based on the latest science surrounding the issue.

In a new paper published on the NASA website, Scientific Case for Avoiding Dangerous Climate Change to Protect Young People and Nature, he calls for governments around the world to stop using public funds to subsidise fossil fuels.

If anything is holding back investment in clean tech to save the planet, this is.

Fossil fuel subsidies

The paper uses scientific analysis to calculate the world’s total subsidies to oil, coal and gas companies at between $400 and $500 billion per year.

That's about £45 for each man woman and child on the planet.

This hardly seems possible, but this is a peer-reviewed paper.

Moreover, these companies are not required to pay their costs to society.

The paper notes that air and water pollution from the extraction and burning of fossil fuels kills over one million people a year and affects the health of many more.

But its greatest costs are likely to be the impact of climate change.

The greenhouse gas emissions from our use of fossil fuels up to now are only a fraction of the potential emissions from known reserves and potentially recoverable resources.

With shale gas, tar sands and other technologies we are seeing more and more of these reserves become economically recoverable.

Without legislation from governments to the contrary, and with these subsidies, there is no doubt that they will be recovered.

Hanson and his co-writers place the blame for the lack of action by the world's political leaders on the “undue sway of special financial interests on government policies aided by pervasive public relations efforts by organisations that profit from the public's addiction to fossil fuels".

In other words by overt and covert lobbying of politicians and political parties by the fossil fuel industry and those that benefit from it.

It is understandable, if not scientifically acceptable, that the UK government wants to continue to exploit the fossil fuel reserves within its waters and under its soil, such as shale gas. After all, other countries are doing.

But it must, morally, resist the temptation.

The scientific imperative is undeniable, and the longer we wait, the harder it will be.

If emission reductions began this year the required rate of decline is 6% to restore the energy balance of the Earth and stabilise the climate by the end of the century.

If reductions are delayed until 2020 the required level of reduction is 15% per year.

If we had begun in 2005 it would have been just 3% per year.

That is the rate of acceleration of the problem.

This transition to a post-fossil fuel world of clean energy will not occur as long as fossil fuels remain so cheap and the market does not incorporate their full cost.

After discussing the current consensus level of scientific understanding of the issues, and outlining all of the possible implications for humanity and the planet, Hanson argues that the initiation of the phase-out of fossil fuel emissions is urgent and that it is necessary to garner public support to fight such influence.

This depends upon persuading the majority that a prompt, orderly transition to a post-fossil fuel world is technically feasible and economically beneficial, aside from its benefits to the climate.

A matter of morality

The costs of climate change, loss of biodiversity, acidification of the ocean, loss of food supply, international conflict, refugee problems and so on will all be borne by young people and future generations.

This makes the issue “a matter of morality; a matter of intergenerational justice".

Hansen and his co-writers conclude their paper by comparing the moral challenge of climate change to that of slavery, “an injustice done by one race of humans to another", so “the injustice of one generation to all those to come must stir the public's conscience to the point of action".

Hanson expresses surprise that more young people are not shouting for change. Perhaps they are disillusioned with politics or unaware of the threats and possibilities.

But he does put his faith in the judicial system. He says that in some nations it may be possible to apply legal pressure to governments to develop realistic plans to protect the rights of young people and those yet to be born.

“Such a legal case the young people should demand plans for emission reductions", the paper argues.

Carbon tax

It then discusses what economic levers might be employed to engage the transition to a post-carbon future, plumping for a carbon tax.

It quotes economic analysis that indicates that a tax beginning at $15 per tonne of carbon dioxide per year and rising by $10 per ton each year would reduce U.S. emissions by 30% within 10 years.

He is not a supporter of-and-trade because politically it has not found favour.

But a rising price for carbon emissions would not be sufficient on its own. The writers advocate considerably more investments in clean energy and carbon efficiency standards for buildings, vehicles and other products; global climate monitoring systems including and climate mitigation and adaptation in undeveloped countries the planting of forests.

I will let James Hansen and his co-writers finish this piece in their own, eloquent, words:

"The era of doubts, delays and denial, of ineffectual half-measures, must end. The period of consequences is beginning.

"If we fail to stand up now and demand a change of course, the blame will fall on us, the current generation of adults.

"Our parents did not know that their actions could harm future generations.

"We will only be able to pretend that we did not know. And that is unforgiveable."

High energy users to get support to cut bills by up to 10%

Amongst the Christmas presents the Chancellor George Osborne is expected to give to the British economy today in his Autumn Statement, is one high on the wish list of energy-intensive businesses: relief on their carbon taxes.

But critics say that many of the have already been given a free ride, and have plenty of opportunity to reduce their energy costs.

It's expected that the combined effect of the compensations offered by Osborne will be to reduce energy bills for such firms by 5-10%.

The rebate will be worth a total of about £212 million for the period 2012-2016 to those affected by the EU Emissions Trading Scheme (EU-ETS) tax and the Climate Change Levy (CCL), and £250 million in the form of rebates and compensation for those affected by the upcoming carbon price floor.

High energy users, backed by free-market Conservatives, have been complaining that these taxes harm their international competitiveness, citing the fact that their German competitors, for instance, benefit from carbon tax rebates worth more than €5 billion a year, paying only €0.5 of a €35 tax.

For example, medium-sized cement manufacturer CEMEX faces an alleged £20 million bill for complying with carbon legislation, and the multinational Tata Steel has claimed that the tax proposals are making it think twice about a £1.2 billion investment in the UK.

Critics argue that a rebate will reduce the incentive on firms to save energy, saying that the Climate Change Agreements (CCA), which thousands of such firms have signed up to and which entitle them to reductions on the Levy in return for saving energy, are creating real savings in energy bills and carbon emissions.

The Department for Business will consult on the proposals soon.

Carbon price controversy

The EU-ETS sets a cap on companies’ carbon emissions. If they want to emit more, they must buy credits that each represent one tonne of CO2.

The Treasury's planned compensation for the effect of the EU-ETS on big emitters will total £12 million in 2012/13 and £50 million in each of the following tax years.

The new carbon price floor, to be introduced in 2013, will artificially increase the price of these credits from that set by the market to that set by the government; the Treasury's proposal is for this to be almost double the current, lowest-ever, market price: £16 per tonne of CO2 in 18 months' time, rising to £30 per tonne by 2020.

The effect of the price floor is therefore likely to be keenly felt, since the price of carbon is rock bottom now.

The compensation amount suggested to cushion this effect is £40 million in 2013 and £60 million in 2014.

The purpose of the price floor is to provide funding for investment in green technology; whereas the CCL revenue disappears into the Treasury's general accounts. (The Labour government had originally intended the CCL also to fund green investment, but Osborne grabbed it to pay off the defecit.)

The Treasury has also signalled that the discount on the CCL for those signed up to the CCA will rise to 90% from April 1, 2013, instead of the 80% already scheduled. This follows Osborne's reduction of it from 80% (set by Labour) to 65% earlier this year - another U-turn by Osborne.

This change will cost the taxpayer £40m over 2013-2015.

Furthermore, the energy-guzzling industries, which include the glass, paper, cement, chemicals, oil, metals, plastics and food sectors, will also receive protection from any price changes resulting from the measures to reform the electricity market currently being discussed.

"(The measures) will help make sure energy intensive industries are internationally competitive, but the government remains committed to the green agenda and to cutting carbon emissions by 80 percent by 2050," a Treasury source said.

Greenpeace was quick to criticise the proposals. “Energy intensive users already received a huge windfall when they were handed free pollution permits under the emissions trading scheme," said Doug Parr, its policy director.

"Now is not the time for George Osborne to be caving in to the special pleading of vested interests.”

I believe that several companies, such as Rio Tinto, are blaming carbon taxes simply because they want any burden reduced, whereas in fact it is the general reduction in demand for commodities and the higher price of fossil fuels that is the main cause of any economic woes. 

Proposed EU carbon tax to be blocked by Britain

A draft directive obliging European member states to set minimum rates of CO2 taxes at Euros 20 per tonne for diesel and coal used for transport and heating from 2013 is likely to be blocked by Britain, where fuel prices are already high.

The draft revision of the Energy Tax Directive, which includes a carbon tax and is to be presented today, proposes separate carbon dioxide and consumption taxes on the fuels, linked to inflation which would be adjusted every three years.

It would compel EU states by 2020 to institute taxation of fuels based on their energy content and CO2 emissions, rather than the volume-based system currently used.

This would create higher taxes for energy-intensive fuel such as coal and diesel, adding around 8% to a litre of diesel and encouraging a switch to diesel.

But "the aim is not to increase rates for diesel," Commission spokesman David Boublil told journalists on Monday. "The plan is that we should put all fuels on the same footing ... It will mean an adjustment to make sure they are taxed in the same way."

The Commission argues that big prices hikes are not likely as many national governments like the UK already set diesel taxes above the EU minimum of Euros 330 per 1000 litres, and therefore they do not have to pass the tax on to consumers.

Diesel currently attracts lower taxation rates than petrol. Consequently, much of Europe's commercial fleets use the cheaper fuel, including most hauliers. A switch to petrol would not only improve CO2 emissions but local air quality as well, improving people's health.

The aims of the tax

According to Algirdas Šemeta, the EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud, the proposals are not so much to do with creating a new tax as about restructuring existing taxation (with a CO2-tax element) to meet the EU痴 climate change, energy efficiency and fair competition goals, shifting taxation from labour. They have three objectives:

1. to introduce two elements in the rate structure: one based on CO2 emissions and another based on the energy contents of each product. These objective criteria for taxation will provide for a consistent treatment of the energy sources and energy consumers


2. the CO2 element will provide a framework for Member States to apply CO2 taxation in areas currently missed by the EU Emission Trading System


3. it will create an appropriate framework for taxing renewable energies, in particular biofuels, reflecting their lower CO2 emissions and energy content.

British opposition

But British MEPs are known to be sympathetic to the motor lobby in the UK, which is strongly opposed to the proposed tax. The Automobile Association has said it would be "madness" to introduce it at the current time of high fuel prices - even though it would not take affect for a few years.

Under European Commission voting rules, opposition from any single state can kill the move.

"We're not going to support new measures in this area," a British EU diplomat said. "Taking into account the opposition of other states as well, it is certainly one we would oppose and that therefore points you towards what we might do in the Council."

The UK motor lobby's position is contradicted by the facts. The UK has always had the highest diesel taxes in Europe - the same level as petrol. But, largely due to the fall of the pound against the euro, UK fuel taxes have dropped by a 32% since their high point in 2000.

But UK MEP Jacqueline Foster, the Conservative transport spokesperson in the European Parliament, still disagrees with the move: "We all want to reduce CO2 emissions from vehicles but it should be done by placing incentives on people, not by clobbering them," she said. "With so many goods transported by road, further increases in fuel costs will send inflation soaring."

Geoff Dunning, chief executive of Britain's Road Haulage Association, agreed: "the price of fuel has already gone through the roof. To add to that would be madness. It would cripple the British economy."

The draft law also calls for the abolition of special low rate for 'red' diesel, used by the farming and fishery industries. This has brought howls of outrage from the National Farmers Union.

Supporters of the move argue that since any price increases would not enter into force until 2018, by which time it should have encouraged the shift to less polluting petrol, it will not affect the current economic situation.

Taxes are lower now

A new report from the think-tank Transport and Environment (T&E) adds weight to those who see a need for change. It claims that "the average fuel tax levied on road fuels in the old EU15 is in real terms 10 Euro cents per litre lower today than it was in 1999".

This means that "had governments not let fuel taxes slip but kept them constant, CO2 emissions of EU27 road transport would have been some 6%, or 60 Mtonnes, lower, and today's oil imports would have been Euro 11bn lower. If the additional Euro 32bn revenues had been spent on lowering labour taxes, roughly 350,000 jobs could have been created."

The report adds, "Compared with other regions in the world like the US, China or Japan, the EU has relatively high fuel taxes. In many ways this is a major strength for the EU's economic and environmental performance as (among other things) it lowers CO2 emissions and oil demand because, contrary to popular belief, taxing fuel brings down consumption. In the long run, 10% higher fuel prices reduce the overall fuel consumption of cars by 6 to 8%, and of lorries by 2 to 6%."

T&E's director, Jos Dings, does think the Directive is wrong on biofuels, which it wants to exempt completely from taxation. "Biofuels are not zero carbon. Their performance varies widely and we would like to see their taxes reflect their actual performance and not by default a zero rating."

Also, "on the air and maritime transport side, it is very disappointing that the Commission has not had the guts to end the prohibition on fuel taxation in those sectors."

Carbon tax to hit electricity generators

A second effective 'carbon tax' is to be levied - in addition to the Carbon Reduction Commitment for large electricity users - this time targeting all companies that import fossil fuels into the economy.

The proposal, together with various ideas as to the level of the tax, comes in two linked consultations being conducted by the Treasury and DECC in a search for policies that will stimulate the investment necessary to meet the targets set by the Climate Change Committee (CCC) and others for de-carbonising the economy and reducing overall greenhouse gas emissions.

The specific CCC target is a reduction in carbon-intensity of power generation to below 100gCO2/kWh by 2030. In 2009 this figure was around 490gCO2/kWh.

Ofgem has estimated that to achieve such a drastic reduction in nineteen years implies the investment of around £200bn in new generation, electricity networks and gas infrastructure.

Only reform of the electricity market can deliver this, DECC says. The consultation argues that such reform must include support for the price of carbon - the creation of a floor price - to provide long-term certainty for investors around the additional cost of running polluting plant.

This is an admission of the failure of the EU-ETS (Emissions Trading Scheme) to deliver this support so far. Currently the price of carbon is remaining stubbornly below 15 Euros, and needs to be at least double this to stimulate investment. It is also volatile and unpredictable.

Supporting the price of carbon

The proposals state that from 1 April 2013 a 'carbon price support mechanism' will be introduced by applying the climate change levy (CCL) to all fossil fuels used in electricity generation and taxing their use and, in the case of oil, removing rebates.

According to HM Revenue and Customs, there are 255 of these companies, which break down as follows:

Energy product No. of registered suppliers
Electricity: 117
Gas: 71
Solid fuels: 36
LPG: 31

The Treasury says that the exact rates for the tax will take account of the commodities’ average carbon content and will be known as the ‘CCL carbon price support rates’. The consultations discuss different levels - from £20/tCO2 to £50/tCO2, with the preferred rate being £30/tCO2.

According to the Treasury's own reckoning, the only scenario that leads to the required carbon-intensity of power generation by 2030 is a carbon price support starting at £3/tCO2 on top of the prevailing EU ETS price in 2013, rising to target a combined carbon price (support plus EU ETS) of £40/tCO2 in 2020 and £70/tCO2 in 2030.

However this scenario also results in the highest rise in domestic energy bills. A single pensioner's bill would rise by 35% in 2020, compared to 16% if the starting support price was £1/tCO2, rising to £30/tCO2 in 2020. Adopting that scenario, however, leads to a carbon-intensity drop to only about 120gmCO2/kWh.

Other policies

DECC, in a linked consultation about the best policy context for the tax, offers four scenarios, of which it prefers a combined set of policy tools that include contracts for difference and carbon price support plus Emissions Performance Standards and a capacity mechanism. One reason for this is that "the [cash] flows from government to generators would be lower than without carbon price support."

An Emissions Performance Standard (EPS) would limit how much carbon the most carbon intensive power stations - coal - can emit, and encourage carbon capture and storage.

Long-term contracts for feed-in tariffs, a revised Renewables Obligation, much more low-carbon generation, and demand-management strategies also figure in the consultation as collectively being necessary to secure the targets.

Capacity payments would be introduced to encourage security of supply through the construction of flexible reserve plants, a policy which acknowledges the intermittent and inflexible nature of much low-carbon generation.

"The key factor in the effectiveness of the policy is the reaction of potential investors, and whether the mechanism is “bankable” for the purposes of raising finance for new low-carbon generation investments," says DECC.

Osborne attacked for turning CRC into a carbon tax

Revenue from the Carbon Reduction Commitment, instead of being used to reward good environmental stewardship by those participants, will instead go to fill the hole that is the budget deficit.

This has come as a big surprise for participating organisations, especially as it was not even mentioned in Chancellor George Osborne's speech on the spending review.

This means that, for the first time, the UK has been introduced to a carbon tax by the back door.

It will hit all organisations that use large amounts of electricity, from supermarket and banking chains to hospitals, counsel and universities.

There was no consultation before the announcement of the measure. It is currently uncertain how participants are going to respond, and whether they will be so willing to participate.

The Treasury statement says that it expects to receive about £3.5 billion over the next four fiscal years.

British Retail Consortium director general Stephen Robertson said: "We are surprised and dismayed that the £1bn per year that businesses will put in to the CRC scheme is to be pocketed by the Exchequer.

"This is a stealth tax on business... a tax of this size surely merits a mention in the Chancellor's speech. It is appalling the Government is sneaking this in."

Richard Lambert, CBI DG, said: "Businesses that have just signed up to the flagship Carbon Reduction Commitment energy efficiency scheme will be very let down by the Government's unexpected announcement that it will remove the cash-back incentive. A scheme that was meant to change behaviour by encouraging energy efficiency has now become another stealth tax.

"By contrast, the commitment to clean coal technology, manufacturing off-shore wind turbines, and renewable heat and flood defences will boost private sector confidence in investing in low-carbon technology. Plans for a Green Investment Bank are also welcome, but the Government must get the design right to make it attractive to private investors."


Climate Minister Greg Barker said that the decision had not been taken lightly. It will increase costs for businesses but he argued that it made the structure simpler to administrate, and that “progressive businesses that act to improve energy efficiency will be able to minimise their exposure".

"This is a fundamental change to the scheme, with major consequences for the bottom line of those companies that are in the CRC," Craig Lowrey, an energy consultant at J.C. Rathbone Associates Ltd., said. This "is now another tax on industry in all but name."

The CRC was designed to cover about 10% of UK climate gas emissions and include up to 5000 companies, many of whom are not covered by the European Union Emissions Trading Scheme. They will have to buy credits equal to their emissions from April next year.

Allowances will cost £12 per tonne of carbon dioxide in the first place, but according to Treasury calculations the assumption is that it will rise to £16 in the tax year ending 2014.

This 'stick' is meant to act as an incentive for them to reduce emissions and increase efficiency. Those who fail to do so will pay more, and participating companies, when they signed up, were told they would receive this money as a 'carrot' to reward successful efforts.

The government was advised last month by its Climate Change Committee to simplify the programme by dividing it into public and private sector participants.

“This is effectively a tax on companies taking part," said Harry Manisty, environmental tax specialist in London at the accountancy firm PricewaterhouseCoopers.

Greg Barker added:“ I want to hear from business on how we can simplify and improve the scheme."