UK's Carbon Tax Bombshell Takes Business by Surprise

UK's Carbon Tax Bombshell Takes Business by Surprise

Businesses are coming to terms with the full implications of government plans to keep revenue raised by the Carbon Reduction Commitment (CRC) scheme, rather than recycle it to participants in the scheme.

The government now expects to raise around £3.5B (US$5.5B) over the next four fiscal years from the scheme in a move that means the CRC will effectively act as a carbon tax mechanism.

John Alker, director of policy and communications at the UK Green Business Council, spoke for many across the low carbon economy when he said he was surprised by the decision.

"The announcement that government is keeping the money from Carbon Reduction Commitment allowance sales has come out of the blue," he said. "It may make the scheme simpler but this is something you've got to consult with industry on before plunging into."

Speaking to BusinessGreen.com, Climate Minister Greg Barker said the decision had not been taken lightly and had been made as a result of the " catastrophic" deficit inherited from the labour government.

He admitted that the changes would increase costs for businesses, but argued that the structure of the CRC meant that "progressive businesses that act to improve energy efficiency will be able to minimise their exposure".

Harry Manisty, environmental tax specialist at PwC, said businesses would effectively view the change as an additional tax, which may cause carbon price discrepancies with the EU emissions trading scheme.

"Discrepancies between [the CRC] price of carbon and the price paid for carbon emissions covered by the EU Emissions Trading Scheme are likely to emerge, undermining the search for a consistent carbon price signal throughout the UK economy," he warned.

Henry Le Fleming, carbon policy specialist at PwC, added that the scheme would undoubtedly drive up costs for registered companies, but would also be simpler to administer and would more effectively convey the message that businesses had to get serious about energy efficiency.

"The positive aspect of this change is that it provides a strong and clear incentive for companies covered by the scheme to invest in energy efficiency," he said.

His comments were echoed by investment management group Climate Change Capital, which signalled that the change could unlock large quantities of green building investment.

"40 per cent of emissions come from the built environment. This is a bold move by the government to rein this in and put the emphasis on businesses," said Daniel Cremin, marketing communications manager at Climate Change Capital. "There are going to be winners and losers, but it's a double whammy for the environment – encouraging industry to improve the energy efficiency of buildings and getting those that don't to fund it."

The Chancellor also confirmed £1B for the government's proposed Green Investment Bank, and promised that additional funds would be raised through asset sales and other financing mechanisms.

However, there was widespread disappointment that more up-front funds were not allocated to the bank.

Richard Gledhill, partner in sustainability and climate change at PwC, said energy companies in particular would be disappointed by the initial funding round for the Green Investment Bank.

"The £1B is a tiny sum compared to the annual level of investment required in new energy infrastructure, so they will be looking more to the promised energy market reform to drive new investment," he said.

Dr Jim Fitzgerald, assistant director in Ernst & Young's renewable energy practice, said private investment would be needed to increase the bank's capitalisation.

"The £1B capitalisation of the Green Investment Bank plus proceeds from sales of assets, although below the commitment levels hoped for, nevertheless has the potential to unlock private sector investment to fund the £350B funding gap," he said. "A number of institutional capital providers should be engaged to implement the next phase of GIB product and structure design, policies and governance framework, which needs to be undertaken in conjunction with the relevant UK government departments."

He added that the £1B funding to support a carbon capture and storage (CCS) demonstration project would "jump-start" the technology in the UK, although he was concerned that delaying the decision on whether to impose a CCS levy to fund more than one plant did not improve long term investment signals.

Maria McCaffery, chief executive of trade body RenewableUK, said the £200m promised for redeveloping ports to support the offshore wind industry was critical for British industry

"Retaining the Ports Fund will give the industry a huge boost and establish the UK as a major force in renewable energy manufacturing," she said.

Refusing to alter feed-in tariffs until 2013 and confirming the introduction of the renewable heat incentive (RHI) was also credited with providing some much needed certainty for the solar market.

Gaynor Hartnell, chief executive of the Renewable Energy Association (REA) said: "We are grateful that Ministers have understood our concerns and we look forward to working together with them to ensure that our shared objective – that of steady growth, rather than boom and bust – is realised."

CBI director-general Richard Lambert offered a mixed assessment of the spending review's green commitments.

"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," he said. "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."

This article originally appeared on BusinessGreen, and is reprinted with permission.

Photo CC-licensed by JohnnyAlive.