On Monday, EEF published a new wide ranging report setting out the reform manufacturers believe is necessary in order to best meet the decarbonisation challenge in the years to come. Monday’s blog post provides an over view of the key messages, but here I wish to explore a few of our ideas on energy efficiency and taxation in more detail. With the government having recently announced a review of the UK’s energy efficiency landscape and the official consultation period kicking off next month here are three of our key recommendations;
1. End the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) – Ever since government decided to keep scheme revenues that were originally meant to be recycled back to the best performing participants, industry has largely viewed the CRC as an overly complicated tax. The overwhelming view from our members is that the scheme does little, if anything, to incentivise energy efficiency investment.
DECC’s own research indicates that there was only a minimal additional reduction in emissions (3-5%) amongst CRC participants, compared to similar non-participating companies, and that this benefit started to disappear after the first year of the scheme’s operation. Arguably the benefits of the administrative elements of the CRC are now provided by the Energy Saving Opportunity Scheme (ESOS). Indeed, our members are far more positive about the potential of ESOS to deliver improvements then the CRC. Now is the right time to get rid of this unpopular scheme.
2. Recover CRC Revenues via the Climate Change Levy (CCL) – Whilst we would prefer government relinquish this revenue stream as promised back in 2010, we recognise that the deficit reduction drive currently makes this difficult. With these restraints in mind, we would recommend the CRC revenue stream is collected via an increase in the CCL. This could be done either through a higher rate CCL for current CRC participants or through a smaller increase in CCL for all businesses exposed to it.
Importantly, however government chooses to recover the revenue it is important it takes into account the projected decrease in annual CRC revenue in the coming years (37% between 2014 and 2020). To attempt to lock in a static annual revenue stream, at current levels, would represent a significant increase in costs for business energy consumers then would have otherwise been the case.
3. The energy efficiency investment discount – If government wants to start improving energy efficiency outcomes it needs to look beyond the blunt use of energy taxes as price signals. Basic economics may imply that companies should all be grasping the cost effective options available as energy prices increase, but in reality organisations cannot be expected to behave in such a straight forward manner. It is clear that the current policy approach is not doing enough to bridge the so-called ‘energy efficiency gap’. We believe it is possible to address this is a manner that actually reduces costs to business.
We propose the introduction of a new tax discount. Companies would be offered a tax break on the CCL in exchange for investing in energy efficiency measures. They would not have an energy efficiency target, like the Climate Change Agreements, but would instead be required to demonstrate that they had invested a sum equivalent to the value of their tax break in energy efficiency measures. The tax discount would in effect create a ring-fenced budget for within organisations. This would overcome some of the core barriers to energy efficiency; namely payback periods, competition for finance and lack of prioritisation within organisations. Our analysis indicates that this approach could deliver significantly greater rates of investment then the CRC scheme is expected to.
For further information on these recommendations, please see chapter four of our report.