During the count-down to George Osborne’s emergency budget of June 22 (ENDS Report, June 2010) a real sense of expectation grew that the chancellor would announce concrete new policies on energy and climate change. In the event, nothing of the sort happened.
Yes there were fleeting references to new policies. But in each case there was no advance on details already set out in the coalition’s sketchy programme for government (ENDS Report May, 2010). The further delays are doing little for investor confidence.
Especially frustrating is the lack of progress on the most radical policy – replacement of the electricity component of the Climate Change Levy (CCL) by a “top-up” carbon tax on power generators.
The tax would kick in whenever emission allowances in the EU Emissions Trading Scheme drop below an as yet unspecified threshold. This would effectively set a carbon floor price, providing a more consistent signal in favour of low carbon investment.
The plan remains on the table, but now looks set to be seriously delayed.
Instead of including the carbon floor price measures in the Energy Security and Green Economy Bill announced in the Queen’s Speech (ENDS Report, June 2010) as had been expected, the chancellor confirmed we will now have to wait for the Finance Bill in spring 2011.
Moreover there are major political and legal issues to resolve. And the loss of direction in European discussions about a possible carbon tax doesn’t help either. Lack of action at EU level will make it harder for the UK to move unilaterally.
A key policy conundrum is this. How can the government switch the electricity component of the CCL to a tax on generators without undermining climate change agreements? – a key feature of the CCL under which participants can win large discounts on the levy by signing agreements to reduce their emissions.
Many CCAs have only just been renegotiated (ENDS Report, April 2010). These could end up needing to be fundamentally rewritten again before the ink is even dry on the page. Far from assuring the future of CCAs, the reforms could plunge them into a serious identity crisis.
Electricity accounts for the majority of CCL revenue, which can also cover coal and gas consumption, and actions to reduce power consumption is the key element in many CCAs. Why would such organisations seek to continue with CCAs if electricity is stripped out?
A second issue is how the government would continue to provide rebate, perhaps through recycling, once generators rather than their major energy consuming customers are paying additional tax. Before the election the Conservatives promised to make the carbon tax revenue neutral.
The coalition recognises that most or all of the costs of the top-up tax would be passed through to energy consumers. That’s what utilities have done in the EU Emissions Trading Scheme. And that’s why recycling revenues via rebates is seen as vital for the tax to be politically acceptable.
But again, it’s far from clear what rebates would achieve. Unless they are made conditional on committed change towards less carbon-intensive and more energy efficient behaviour – as is currently the case with CCAs – then the whole exercise would be utterly pointless.
If the government were instead to selectively channel rebates just to organisations that have deliberately taken steps to only buy in low-carbon electricity then the main effect would likely be to favour greater nuclear generation and could look dangerously like a nuclear subsidy.
Alternatively, carbon tax revenues could be recycled into the proposed Green Investment Bank, which could choose to channel this money into initiatives and ventures that will boost industrial energy efficiency. But in this case there would be no guarantee that funds would flow back to organisations that currently benefit from CCL discounts through having signed climate change agreements. And if these revenues funded new nuclear plants it would again look like a subsidy, and could rob energy consumers of large parts of their rebate.
There are other ways funds could be recycled, for example through enhanced capital allowances. It is even conceivable that the role of CCAs could be enhanced and that they could ultimately be scaled up and extended to cover additional swathes of UK business. And the EU Emissions Trading Scheme and Carbon Reduction Commitment Energy Efficiency Scheme both offer a means of rewarding good practice, through benchmarking and league tables for example, though this could be complex.
For now, though, huge questions hang over what the carbon tax proposal will mean for agreements. The coalition needs to work out what it wants from CCAs, and how these may need to be rewritten – again.
All of which means it looks as if George Osborne is going to have his work cut out if he is to make environmental sense of CCL reforms and avoid a policy conundrum at the heart of the Coalition’s climate policy. The policy needs to be thought through far better – is it meant to boost new generating capacity or energy efficient industry? Or both? We wish him well in this venture – but get ready for a bumpy ride.