Inside Track

Since its launch in 2009, the CRC has faced much criticism, not least by ourselves.  Many have long argued that the CRC is too complex, that this goes against the coalition’s commitments to simplify taxation and reduce regulatory burden. 

And last year, when the Government announced that revenue from CRC will not be recycled to companies, many accused the Government of introducing a ‘stealth tax’ and removing one of the only incentives in CRC.

Earlier this year DECC published a series of informal discussion papers for priority areas for CRC reform following complaints from stakeholders.  These focussed on simplification, overlap with other climate change schemes, and unnatural grouping of companies.

And so, finally, yesterday DECC announced the simplification of the CRC Energy Efficiency Scheme.  This long awaited announcement did go some way to simplification and although EEF are happy to see there are attempts to simplify the scheme, DECC could have gone further.

Yes, we are happy to see that some of the most complicated parts of the CRC have been removed, for example the qualification rules, which will now focus on only half hourly electricity meters and the flexibility of how you disaggregate.

We are happy to see that there will be two sales of allowances per year and that they will be fixed price and not cap and trade.

The blanket CCA exemption is welcomed as making it easier for companies to understand whether they are in or out.  However, read on a little further and you read ‘…there may be a requirement for the level of the threshold…to be revisited to ensure the bulk of the coverage of the scheme is retained’.  EEF are concerned this is a signal to lower the threshold of CRC in future meaning more companies who are not au fait with the complexities (that yes still exist) will be caught under the scheme meaning a new generation of participants who will struggle to get their heads around the scheme.

CRC is now essentially a tax, but could do without the League Tables that add no value whatsoever and provide no comparable data.  Gareth Stace, EEF Head of Climate and Environment stated in ENDS yesterday:

“The CRC is now essentially a straightforward tax and government must ensure that the only reporting requirements on employers are those that are needed to ensure that the correct amount of tax is paid.” 

There will be a consultation in 2012 on these proposals, until then there is a call for feedback on today’s announcements by September.  EEF will be responding to this to push DECC to go that bit further and truly provide something that is simplified.

With the current Defra consultation on Greenhouse Gas (GHG) emissions reporting soon to close; EEF has discussed our initial thoughts with government on the options put forward within the consultation.

Defra has made it clear that it does not have a preferred option for GHG reporting that it wants to ‘gather views from businesses and other interested parties prior to taking that decision’.  It was also made clear that reducing regulation is a ‘key priority for the government’.

It is encouraging to hear that other stakeholders share the same view expressed previously by EEF - that government should look at the bigger picture and consider reporting alongside the crowded suite of climate change policies that are already in place, namely the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme.  This is the perfect opportunity to conduct such a review – when government is seeking ways to simplify the CRC Energy Efficiency Scheme, and will be consulting on the future of Climate Change Agreements (CCAs) some time in July.

However, is anyone in government capitalising on this timing?  EEF argue this is an opportunity for government to act on its key priority and reduce some regulation, by replacing the CRC Energy Efficiency Scheme with mandatory reporting that follows it previously published reporting guidelines.  This option would use the current CRC energy threshold, of targeting organisation that are supplied with more than 6,000 MWh, as its criteria.

Keeping this flexible, by allowing companies to choose the approach that is best for them - and using Defra’s already well received guidance for reporting on GHGs - it will tick a number of boxes: reduced regulatory burden; reduced costs (both for companies and government); evolution of best practice through flexibility in approach; increased investor confidence; transparency in measurement; and increased competitiveness.

EEF will continue to lobby this point of view at further meetings with Defra officials over the coming weeks – ahead of the 5^th July close of the consultation.

Ahead of a HM Treasury consultation on carbon price support, that is anticipated in the coming weeks, EEF has set out its position. 

The expected consultation will set out how government intends to reform the Climate Change Levy and possibly introduce a carbon price support mechanism that sits on top of the EU Emissions Trading Scheme cost of carbon, in order to provide a long term price signal to low carbon investors. This mechanism will affect all purchasers of electricity, through the pass through of costs by the generators subject to the mechanism.

Media release – 19 November 2010:

Ahead of a series of major announcements expected on carbon pricing and energy market reform, manufacturers have challenged the government to act in the best interests of both consumers and investors by consolidating the growing tangle of schemes that put a price on carbon emissions.  

Manufacturers were dismayed last month when the government turned the CRC Efficiency Scheme into a £1 billion tax without any warning or consultation of affected parties. In an instant the policy moved from a being a revenue neutral scheme that rewarded investments in energy efficiency to become yet another tax on energy.  

Rationalising the confusing tangle of policies that set different carbon prices for different parts of the economy is essential. Not only will it give would-be investors in the low-carbon economy greater clarity; it will also go some way to helping restore the trust of the thousands of companies on the sharp end of the CRC decision.

There is ample scope to consolidate overlapping schemes like the CRC, the Climate Change Levy and the planned Carbon Price Support Mechanism into a more coherent and effective climate policy.

Commenting, EEF’s Head of Climate and Environment, Gareth Stace, said:

“We are fast reaching a tipping point. The government has a choice to make between creating further confusion or opting for consolidation that will unleash the potential of the low-carbon economy as well as easing the burden on business.

“If we keep adding to the hotchpotch of existing schemes, we will only muddy the waters for investors and make life unnecessarily difficult for the companies shouldering the burden of climate policy.

“The smart option is to take a more strategic approach based creating a transparent, consistent and predictable carbon price. Consolidation is a win-win approach to climate policy – it will encourage more investment in low-carbon technologies and reduce the cost for compliance for hard-pressed businesses.” 

EEF welcomes the government consultation on changing certain aspects of the CRC Energy Efficiency Scheme, as a first step in unravelling the complex, confusing and costly, broader climate change policy landscape.

Commenting, Gareth Stace, Head of Climate & Environment said “this extended window in the run up to the second phase will allow government to make more strategic changes to the wider climate change policy landscape, rather than tinkering around the edges in a piecemeal fashion. If government doesn’t address the issue from a more macro level, then we are in danger of increasing complexity, not reducing it, both for CRC and other climate change policy measures.

“Government now has the chance to get it right and act upon its rhetoric of certainty, simplicity and transparency in order to accelerate the move to a low carbon economy, by sending the right signals to manufacturers and to the market. To this end, government should look to the forthcoming consultation for reform of the Climate Change Levy as inestimably linked to any changes made to CRC.

“Manufacturers believe that government must view any new climate change measures and taxes in the totality of the many costs pressures on business and must not be seen in isolation.”

EEF previously expressed concern that allowance revenues from the CRC Energy Efficiency Scheme, projected to be up to £1 billion a year, will be used to support the public finances rather than recycled to CRC participants. We said in the strongest terms that it sent a worrying signal about how the government intends to engage with the private sector going forward.

EEF welcomes the government decision on the dropping the requirement for organisations who are not required to register as participants to make information disclosures. Saying, “This is a logical step towards simplification. Companies have wasted valuable time and thousands of pounds, just proving to the Environment Agency that they are not caught by CRC. This was bureaucracy gone mad.

“Overall, this consultation should be seen as the start of CRC simplification, not the end.”

Manufacturers met with HM Treasury this week to again express concerns that allowance revenues from the CRC Energy Efficiency Scheme, projected to be up to £1 billion a year, will be used to support the public finances rather than recycled to CRC participants. We said in the strongest terms that it sent a worrying signal about how the government intends to engage with the private sector going forward.

We called on Treasury to significantly improve engagement in the run up to the forthcoming major consultation on reform of the Climate Change Levy (CCL) and proposals for a carbon tax, which are due to be published mid November.

A key message to Treasury was that any new carbon tax must be seen in the totality of the many costs pressures on business and should not be seen in isolation.

The changes to CRC present government with a choice at a pivotal moment, as if we see a proposal to introduce an ‘upstream’ carbon tax, levied on the electricity generators, regardless of the price of the EU carbon price, then we may end up with triple taxation on the same tonne of carbon. There will be the CCL levied on the end user, the CRC paid by the end user and then the up stream carbon tax, levied on the electricity generator, with full pass through to the end user.

Government now has the chance to get it right and action its rhetoric of certainty, simplicity and transparency in order to accelerate the move to a low carbon economy, by sending the right signal to the market.

If an upstream carbon tax is to be introduced, then surely now is an ideal time to consider rolling up the CRC carbon tax into this new tax, without increasing the financial burden on manufacturers and to virtually scrap the CRC and take a fresh look again at mandatory reporting to sit alongside this broader carbon tax.

Government must stop tinkering around the edges in a piecemeal fashion and look more strategically, as we are in danger of increasing complexity, not reducing it.

I read in the ENDS Daily yesterday, something that I can’t see happening here. The German government changed its policy on energy taxation in order to “secure jobs”.

Instead of taxing energy intensive sectors, emerging from the worst recession in decades, the coalition government is proposing an increase in tobacco duty.

Plans to introduce a five fold increase of the energy tax were significantly scaled back, along with keeping a reduced rate of the tax to a minimum for the most energy intensive sectors.

Do you think that HM Treasury were thinking about “securing jobs”, when it decided to keep the CRC revenue, rather than recycle it back to businesses and schools, or indeed increase the amount of Climate Change Levy that businesses will pay from April 2012.

When I meet my German, or for that matter, Japanese colleagues, they are astonished how little, compared to their governments, the UK supports industries making primary materials.

Of course, there is a despaired need for global GHG emissions to be cut and cut soon, but governments must acknowledge that in order to achieve this, we need a strong, vibrant and investing manufacturing sector here in the UK.

I think most business caught by the CRC are still in shock that government will, from 2012, take nearly £1bn from them in what can be seen as a carbon tax.

In the absence of recycling revenues, should government be confident that the performance league table, which provides a publically comparative index of participant’s energy efficiency, is a strong enough driver to affect substantial change within the sector.

I believe that these sort of schemes work much better if there is both a ‘carrot and stick’, rather than just the ‘stick’. This heavy stick approach will do little to engage organisations, but more importantly, as I said last Wednesday, seriously damages the trust between manufacturers and government.

Our members are so dismayed at the announcement that we have today written to Gregory Barker to outline our concerns. The letter, backed by many manufacturing companies and manufacturing Trade Associations, will outline that the decision to push through this change to CRC without consultation seriously calls into question the way in which government intends to work with the private sector, as a trusted partner, to tackle the national deficit. The decision also does nothing to simplify an already complex policy landscape and calls into question the government’s desire to deliver a low carbon economy at least cost to industry.

We will hear further details of proposed changes to CRC in the next month or so and I am sure we are all left wandering whether those proposed changes will be as damaging as this one.

So we learnt today from the CSR that government will shortly consult on the reform of the Climate Change Levy. We also learnt that “The CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses, with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011”. This is good news, yes government has been saying for a couple of months now that it wants to make the CRC “More business friendly”.

So it is an understatement therefore that I am completely shocked that on CRC, the CSR also says “Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants.”

How does this measure – that is purely designed to increase revenue to the general Treasury coffers – reduce the burden on businesses and CRC more business friendly? To me it is a tax take to the tune of £1bn in business and very little else.

This government had made it clear that there should be a rebalancing of the economy, with the private sector playing a more central role, whilst reducing the influence of government. It has promised more certainty, more transparency and a more consultative approach.

This measure flies in the face of this brave new world and will damage the trust that government aims to build with manufacturers. Manufacturers have over the last couple of years, put in place significant and costly strategies to comply with the agreed rules of CRC and aim to work with the recycling of revenue regime. They have signed up to the Carbon Trust Standard, at a cost of £15,000 each. They have helped CEOs understand where their organisation will sit in terms of recycling payments and invested in capital equipment on a return on investment basis linked to the CRC rules.

The scheme has started and now government turns the rule book on its head and shatters any strategies organisations have in place. I know that for some manufacturing companies this policy change will cost them over £1m per year.

So what happened since this government said it wanted to achieve emissions reduction targets at least cost. Yes recently a Treasury minister really said this. Is the honeymoon over for believing that government really was going to improve this policy landscape?

I would be very interested in your views. Is this a much needed measure, or a significant mistake that will only serve to limit low carbon investments.

So another voice has been added to the many that are calling for the CRC Energy Efficiency Scheme to be simplified. However, this is not just any voice, but the influential voice of the Committee on Climate Change (CCC). Its report published today, echoes what various groups, including EEF, have been saying for sometime now, that the scheme is "very complex". The first casualty could be the intended ‘cap and trade’ element, which the CCC recommends should be scrapped. This is music to my ears, as I believe this part of CRC will merely add unnecessary costs and complexity burden onto businesses without significant reductions of carbon emissions. Indeed increased costs to manufacturing companies that are still struggling out of a deep recession.

Government must not under estimate the importance of combining a carbon tax with Greenhouse Gas reporting, in driving change within organisations. There should be a greater focus on the reporting element of the scheme, centred on Defra’s carbon reporting guidelines, published last year. This should not be a wasted opportunity for Defra to promote a uniformed reporting methodology across sectors.

The CCC calls for a splitting the League Table into public and private sectors. Of course this is a step in the right direction, but doesn’t go far enough. The government must enable companies to highlight the positive steps they are taking to reduce emissions. This good news narrative must be positioned at the forefront of the table, rather than a focus on absolute emissions. The current narrow focus of the League Table will lead to false results and will not acted as a driver for organisations to become more carbon efficient throughout their operations.

A simple change that government must make as soon as possible, one that would reduce the administrative burden significantly, would be to remove the requirement for organisations not caught by the scheme, to positively prove that they are exempt.

This is certainly one to keep watching and I am pleased to see that the voice of manufacturing is being heard within this debate in today’s Telegraph.

We had a meeting this week with Gregory Barker, the Minister of State for Climate Change within DECC. It was a refreshing meeting and a welcome change from the last administration. I am coming round to believing my earlier view that this government seems to accept that the climate change policy landscape is crowded, confused and overlapping. This is something that we highlighted in our recent report on UK climate change policy. The report called on the coalition government to reduce the burden of climate change policy by simplifying the mismatch landscape that has grown over the last ten years.

Simplification was high on the Minister’s agenda and in line with the recommendations set out in our report. Again in line with the EEF position, the Minister was receptive to the concerns of manufacturers on competitiveness and carbon leakage. There was a real acceptance that industry, even carbon intensive industry, is vital to the UK economy and particularly to the emerging low carbon manufacturing sector.

However, all my positive views might change come 20 October, when government publishes its Comprehensive Spending Review and with it, detailed climate change policy intension. Of importance will be how it intends to reform the Climate Change Levy into a potential carbon tax. During our meeting with Gregory Barker, we were at pains to point out that although we support moves for a carbon tax, we do not wish to see an increase in the overall climate change policy cost burden to manufacturers resulting from such a move.

Finally, the Minister stated he wanted his department to work closely with industry rather than at length, via consultations. The test here will be whether government consults with us ahead of any formal announcement in October. I know that we would be keen to work with his department on how to change the CRC Energy Efficiency Scheme into something more workable and business friendly. This will be high on the agenda when we meet with DECC later today.