Inside Track

Within all the myriad of speculation of what will be in the Budget later today, I hear that government might use compliance with the revised Energy Taxation Directive, which is due to enter into force from 2013, as an excuse for introducing the Carbon Price Floor tax on the generation of electricity in the same year.

Surely the Chancellor can’t use this as justification of introducing a unilateral UK carbon tax as they are mutually exclusive.

The Energy Taxation Directive proposes an EU wide minimum tax of €20 per tonne of CO2 on direct emissions, levied at the end user. But crucially emissions covered under the EU Emissions Trading Scheme are excluded from this tax. Yet it is these emissions that are targeted by the proposed Carbon Price Floor. The Treasury proposed to levy this tax upstream on the electricity generators on the fuels they use to generate electricity. These emissions are also caught by the EU Emissions Trading Scheme and therefore excluded from the Energy Taxation Directive.

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.