July 2015 Budget: key environmental announcements | Practical Law

July 2015 Budget: key environmental announcements | Practical Law

A summary of the main environmental announcements in the July 2015 Budget, delivered by the Chancellor of the Exchequer on 8 July 2015. (Free access.)

July 2015 Budget: key environmental announcements

Practical Law UK Legal Update 8-617-1968 (Approx. 9 pages)

July 2015 Budget: key environmental announcements

by Practical Law Environment
Published on 08 Jul 2015 • England, Wales
A summary of the main environmental announcements in the July 2015 Budget, delivered by the Chancellor of the Exchequer on 8 July 2015. (Free access.)
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This update summarises the main environmental announcements in the July 2015 Budget, delivered by the Chancellor of the Exchequer, George Osborne, on 8 July 2015.
Highlights include announcements that the government will:
  • Review the "business energy efficiency tax landscape" (including the CRC Energy Efficiency Scheme and climate change levy (CCL)) with a view to simplifying the overall regime. The consultation is expected in autumn 2015. It is not yet clear whether this will also involve a review of the Energy Savings Opportunity Scheme (ESOS), the EU Emissions Trading Scheme (EU ETS), the duty to report on greenhouse gas emissions under the Companies Act 2006 and the Levy Control Framework (LCF). This has come as a surprise to some as the government was not expected to review the CRC until 2016.
  • Remove the CCL exemption for electricity from renewable sources from 1 August 2015, to ensure UK taxpayers are not subsidising overseas renewable energy generators whose electricity does not contribute to UK climate change and renewable energy targets, and who often already receive subsidies from their own country. RenewableUK and other industry associations have expressed serious concern over this proposal.
  • Reinstate the exemptions from the aggregates levy that the European Commission recently approved following its state aid investigation. This was already expected so it has not come as a surprise.

Overall environmental tax policy

The government has said that it:
  • Will continue to use the tax system to encourage positive environmental outcomes where tax is an effective instrument to do so (for example, by reviewing business energy efficiency taxes). However, it will not be extending the previous Coalition government's commitment to increase the proportion of revenue from environmental taxes as it believes this does not always reflect the success of environmental policies.
  • Will continue to promote the low carbon investment needed to support global action on climate change and that it will be focussing on the best value for money policies to keep costs down for consumers. It has also reaffirmed its commitment to push for an international climate change deal in Paris at the end of 2015 to limit global warming to 2 degrees (see Legal update, Queen's Speech 2015: environmental implications: Climate change).
  • Aims to develop a "simple, fair and more efficient energy environment for business that minimises administrative burdens and improves incentives for business to invest and grow".
For more information on the new Conservative government's overall environmental policy, see Legal update, General election 2015: Conservative government environmental and energy policies and ministerial appointments.
(July Budget Report, paragraphs 1.257-1.258 and 2.152.)

Energy

Review of business energy efficiency taxes

The government has announced that it will review the "business energy efficiency tax landscape", with a view to simplifying and improving the overall regime. A consultation will be published in autumn 2015.
The review will cover the:
It will also look at how these schemes interact with other energy efficiency policies and regulations that apply to businesses. Presumably (although this is not expressly stated in the July Budget Report), the review could involve looking at the overlaps with the following other energy efficiency related schemes and obligations:
(July Budget Report, paragraphs 1.258 and 2.153.)

Climate change levy (CCL)

The government has announced that it will remove the climate change levy (CCL) exemption for electricity from renewable sources, from 1 August 2015. During summer and autumn 2015, the government will discuss with stakeholders the details and length of a transitional period during which electricity suppliers will be able to claim the CCL exemption on any renewable electricity that was generated before that date.
The government's reason for removing the exemption is to ensure UK taxpayers are not subsidising overseas renewable energy generators whose electricity does not contribute to UK climate change and renewable energy targets, and who often already receive subsidies from their own country.
The changes will be made by the Finance No.2 Bill 2015 and the Finance Bill 2016.
For more information on the exemption, see Practice note, Climate change levy (CCL) and climate change agreements (CCAs): Exemption for electricity supplies generated from renewable sources.
(July Budget Report, paragraphs 1.262 and 2.150, Summer Budget 2015: policy costings, page 28 and HMRC: Tax Information and Impact Note: Climate Change Levy: removal of exemption for electricity from renewable sources.)

Shale gas

The government plans to introduce a sovereign wealth fund for communities that host shale gas development, to encourage the extraction of the UK's shale gas resources.
For more information on other measures to encourage the exploration of shale gas in the UK, see Practice note, Shale gas in the UK: environmental issues: Measures to encourage exploration of shale gas in the UK.
(July Budget Report, paragraph 1.261.)

Green Investment Bank (GIB)

The government confirmed that it will explore options to move the Green Investment Bank (GIB) into the private sector, subject to achieving value for money. The proceeds of the sale will be used to reduce debt.
The government had announced in June 2015 that it would bring private capital into the GIB (see Legal update, Government announces plans to privatise Green Investment Bank (GIB)). The government has not announced details of the timing or details of any transaction, but it is likely to involve selling some of the 100% equity in the GIB that it currently holds.
For more information on the GIB, see Practice note, Renewable energy: overview: Green Investment Bank (GIB).
(July Budget Report, paragraph 2.13.)

Venture capital schemes for renewable energy

From 6 April 2015, companies benefiting substantially from subsidies for the generation of renewable energy were excluded from also benefiting from the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs). This was with the exception of community energy generation undertaken by qualifying organisations, which are eligible for the Social Investment Tax Relief (SITR) (see Legal update, March 2015 Budget: key environmental announcements: Venture capital schemes for renewable energy: EIS, SEIS, VCTs and SITR).
The government has indicated in the July Budget Report that it will continue to monitor the use of the SEIS, EIS and VCTs for investments in community energy organisations benefiting from subsidies for the generation of renewable energy, to ensure that support for community energy through venture capital schemes provides good value for money for the taxpayer and is not subject to misuse.
For more information on EIS, SEIS, VCTs and SITR for community renewable energy, see Practice note, Renewable energy: overview: Venture capital tax reliefs for investment in community energy.
(July Budget Report, paragraph 2.73.)

Other energy announcements

There were a number of other announcements relating to energy in the July 2015 Budget that are not covered in this legal update as they are not within the scope of Practical Law Environment's coverage.
For more information on the other energy-related announcements in the July 2015 Budget, see:
Practical Law currently focuses on the overlaps between energy law and environmental and competition law (see Energy toolkit). However, we are planning to expand our coverage of energy law more widely and would welcome your views on what topics and materials you would find helpful. To contact us, please use the Ask question form.

Aggregates levy

The government has announced that it will fully reinstate the exemptions from the aggregates levy that the European Commission recently confirmed were lawful following its state aid investigation. The government had suspended the exemptions pending the conclusion of the Commission's state aid investigation. The Commission only found the exemption for shale partially to amount to state aid so this will not be fully reinstated.
From 1 August 2015, businesses will be able to stop paying tax on the exempted materials and reclaim tax paid (plus interest) on these materials during the suspension of the exemptions since 1 April 2014. Implementing provisions will be included in the Finance No.2 Bill 2015.
For more information on the Commission's state aid investigation, see Practice note, Aggregates levy: Suspension of exemptions: impact of ECJ judgment in British Aggregates Association and Commission investigation.
(July Budget Report, paragraph 2.151 and HMRC: Tax Information and Impact Note: Aggregates Levy: reinstatement of exemptions.)

Planning

There was very little in the July Budget Report on the planning regime as the government is expected to announce a number of planning reforms on 10 July 2015 (see Legal update, July 2015 Budget: key planning announcements).

Comment

General

The general feeling is that the July 2015 Budget is not particularly supportive of the low carbon economy and contains many short-term environmental measures, such as changes to the CCL and the sale of the GIB (see Summer Budget 2015: the green reaction, BusinessGreen.com, 8 July 2015). Despite the government's commitment to signing up for a new climate agreement in Paris in December 2015, it appears to lack credible long-term support for renewable energy generation, while at the same time boosting road improvements and fossil fuel extraction. Friends of the Earth called it "another dirty Budget" (see Friends of the Earth press release, Osborne's Budget: Full speed in the wrong direction, 8 July 2015).
The Chancellor said in his speech that Britain is "back in the black". It's a shame it's not back in "green" as well.

Levy Control Framework

One of the biggest surprises in the July 2015 Budget is its silence on the Levy Control Framework (LCF). The LCF allows the government to control public expenditure paid for through consumers' energy bills. The Department of Energy and Climate Change (DECC) has a responsibility to ensure that the levies raised to support low-carbon energy generation comply with the requirements of the LCF. For more information on the LCF, see Practice note, Electricity Market Reform (EMR): Levy Control Framework and annual statements and updates.
According to recent press reports, it was widely expected that the Chancellor would announce a review of the LCF in the July 2015 Budget (see Green energy industry slams Chancellor over planned subsidy review, BusinessGreen.com, 6 July 2015).
The absence of a LCF review will no doubt be welcomed by renewable companies and investors, who feared that it would cause months of uncertainty in the market. However, the Chancellor has announced a review of energy efficiency taxes on businesses (see Review of business energy efficiency taxes above), so it remains to be seen whether this will include a review of the LCF.

Review of CRC and other energy efficiency business taxes

The Chancellor has committed to reviewing energy efficiency taxes for businesses in autumn 2015 (see Review of business energy efficiency taxes above).
However, the government had already announced reviews (which were scheduled for 2016) for both:
Some might argue that making changes to these schemes prior to the scheduled 2016 reviews could actually increase the regulatory burden on businesses as they will have to get to grips with the changes (or possibly a new scheme) ahead of the published review dates.
However, the review also provides an opportunity to simplify existing complex and overlapping energy efficiency and GHG emissions reporting regimes. According to the employers' organisation, the EEF:
"Industry will welcome a review of energy taxation and levies. Fifteen years of layering and tinkering with policy has left us with a vast patchwork of expensive, inefficient and incoherent policy drivers for decarbonisation. We urgently need to revisit the policy landscape to reduce costs, improve the business environment and better deliver on our policy objective of reducing emissions."
(See EEF press release, Chancellor serves some aces but double faults on training levy, 8 July 2015.)

Changes to the CCL

The Renewable Energy Association (REA) has expressed concern that the government's decision to remove the CCL exemption for renewable energy from 1 August 2015 (see Climate change levy (CCL) above) will affect all renewable and low carbon generation. The REA acknowledges that there was a problem with foreign generators benefiting from the CCL, but notes that it has also "driven investment and has been factored into both original project finance decisions and current business plans". In the REA's view, such "snap changes" undermine confidence in the UK from the finance community, as well as making renewables less attractive compared to fossil fuel generation. The REA will be calling on HM Treasury to rethink this proposal (see REA press release, Renewables industry react to Budget, 8 July 2015).
Ronan O'Regan, director of PwC energy and utilities, has said that the change will "also impact existing UK renewable energy generators reducing their revenues today (5% for an onshore wind project), although the value of this revenue stream was expected to reduce over time" (see PwC press release, Budget: PwC comments on Climate Change Levy Exemption, 8 July 2015).
RenewableUK has also expressed serious concerns about the proposal:
"We're suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected. For example, Levy Exemption Certificates account for just over 6% on onshore wind generators' revenues. The Government had already announced an end to future financial support for onshore wind – even though it's the most cost-effective form of clean energy we have. Now they're imposing retrospective cuts on projects already up and running across the entire clean energy sector."
(See RenewableUK press release, RenewableUK slams Chancellor's retrogressive budget announcement, 8 July 2015.)

Sources

Further reading

For further analysis from Practical Law on other aspects of the July 2015 Budget (including property, construction and other aspects), see Practical Law: July 2015 Budget.