Government consults on reforming energy efficiency taxes and reporting, including CRC and CCL

Practical Law UK Legal Update 7-619-0745 (Approx. 7 pages)

Government consults on reforming energy efficiency taxes and reporting, including CRC and CCL

by Practical Law Environment

Background

CRC Energy Efficiency Scheme

The CRC Energy Efficiency Scheme (CRC) is a mandatory emissions trading scheme that applies to large businesses and public sector organisations in the UK whose electricity consumption is over specified thresholds. Participants have to measure and report on their energy consumption and buy allowances from the Environment Agency for the amount of carbon dioxide emissions associated with their energy consumption. The government simplified the CRC considerably in 2013.

For more information, see:

Climate change levy

The climate change levy (CCL) is a carbon tax on non-domestic consumers of certain energy supplies (for example, electricity, gas, solid fuel and liquefied gas). It is levied by energy suppliers when they bill energy consumers. The energy suppliers pass the sums collected onto HM Revenue & Customs (HMRC).

For more information, see Practice note, Climate change levy (CCL) and climate change agreements (CCAs).

Energy Savings Opportunity Scheme

The Energy Savings Opportunity Scheme (ESOS) requires larger companies and non-public sector organisations in the UK to carry out mandatory energy saving assessments. It requires participants to calculate their total energy consumption, carry out energy audits and identify where energy savings can be made.

For more information, see Practice note, Energy Savings Opportunity Scheme (ESOS).

Review of business energy efficiency taxes

In the July 2015 Budget, the government announced that it would review the "business energy efficiency tax landscape", with a view to simplifying and improving the overall regime (see Legal update, July 2015 Budget: key environmental announcements: Review of business energy efficiency taxes).

During the summer, the government has been reviewing business energy efficiency and carbon reduction policies and schemes and how they interact, including the:

CCL and climate change agreements (CCAs).
CRC.
Mandatory greenhouse gas (GHG) reporting requirements under the Companies Act 2006 (see Practice note, Narrative reporting: duties to report on environmental matters and greenhouse gas emissions in annual company reports).
ESOS.
Enhanced capital allowances (see Practice note, Enhanced capital allowances (ECAs) for investment in environmental technologies).

The government recognises that there are a number of barriers for business in these policies, including the:

Administrative burden of having a number of complex overlapping policies.
Challenge of making the business case for energy efficiency with decision-makers.
Access to finance and lack of skills.

Government consults on energy efficiency tax reform (including CRC)

On 28 September 2015, HM Treasury and the Department of Energy and Climate Change (DECC) published a consultation on reforming the business energy efficiency tax landscape. The consultation closes on 9 November 2015.

The consultation sets out policy proposals to simplify the business energy tax and reporting landscape, while recognising the complexity of business energy policy and the different barriers faced by different businesses.

The key proposals set out in the consultation are:

A single energy efficiency tax and reporting scheme. The consultation invites views on its overall proposal to replace the current system of overlapping energy efficiency policies with a system where an organisation is subject to one energy efficiency tax and one reporting scheme.
A single, streamlined reporting framework based on ESOS. This would bring together the most effective elements from the existing range of reporting schemes. The government is considering using the ESOS reporting framework to design this single reporting framework, which would apply to all ESOS participants and potentially the public sector. The consultation asks:
- what data should be collected through reporting (for example, GHG emissions, energy from renewable sources and actions taken to meet audit recommendations);
- should reporting be mandatory;
- should reporting require board level sign-off;
- should reported data be made publicly available;
- how can a streamlined report best ensure that market actors have access to transparent, reliable and comparable information to support financing and investment in energy efficiency and low carbon measures; and
- to what extent should reporting obligations apply to large companies (as defined in the Companies Act 2006) that are not listed companies?
A single new energy consumption tax for businesses based on the CCL. The government is proposing that it would abolish the CRC and the CCL and replace them with a new tax based on the CCL. The consultation asks:
- how to design a single tax that is more effective in incentivising energy efficiency and carbon reduction;
- whether all participants should pay the same rates or rates should vary for different types of business (for example, should smaller consumers or energy intensive industries (EIIs) pay lower rates); and
- whether the current balance between gas and electricity tax rates is right or whether it should be rebalanced? Currently there is a significant difference between the tax rates for different taxable fuels, but the Institute for Fiscal Studies, Committee on Climate Change and other stakeholders have suggested that a more even implicit carbon price (including taxes and direct and indirect carbon costs) would assist businesses in improving their energy efficiency and decarbonisation at a lower cost.

The consultation also invites views on reform of:

CCAs and any new scheme giving a discount on the CCL or on any new tax based on the model of the CCL. The consultation invites views on:
- how should eligibility be determined? Should it focus on industries that face competitive disadvantage or on EIIs at risk of carbon leakage, and how should these risks be assessed;
- does the current CCA scheme incentivise energy efficiency effectively; and
- how could CCAs be improved or would a different mechanism be more effective?
Energy efficiency and carbon reduction incentives. The government says it will consider options for additional financial incentives for energy efficiency and carbon reduction. However, any incentives will need to be funded through increases in tax and would need to meet strict value for money criteria. The consultation invites suggestions for mechanisms to incentivise energy efficiency and carbon reduction (for example, tax reliefs, supplier obligations, grants and funding based on competitive bidding).
Public sector and third sector. The consultation invites views on the impact on the public sector and charities of replacing the CRC and CCL with a single tax. For example, charities are currently excluded from paying the CCL on energy consumption associated with non-business activities, but are not excluded from the CRC. The consultation also asks:
- how the proposed new tax could best drive energy and carbon savings from the public sector and charities; and
- whether the new reporting framework should require the public sector to report?

Next steps

The government says it is likely to publish its formal response to the consultation in the 2016 Budget. It may also carry out more detailed consultations on policy design and implementation.

Comment

The consultation proposals are disappointingly high level and very light on detail. Perhaps this is unsurprising given the broad sweep of the proposed reforms. At this stage, the government has done little more than indicate the general direction of reform, and invite stakeholders to help it form more detailed policy proposals.

Industry speculation in anticipation of the consultation predicted that the government would seek to merge the CRC and the CCL, but how this will work in practice is still not clear. The consultation’s proposals on reporting create further uncertainty. Mandatory GHG reporting under the Companies Act 2006 has only been in place for a couple of years (the duty applies to financial years ending on or after 30 September 2013) and the first ESOS compliance period closes in December 2015. It seems inevitable that the government’s proposals will require significant changes to both of these schemes, although this is not clearly stated.

The CRC has undergone a number of significant reforms since it was introduced in 2010. Although the scheme is unquestionably complex and administratively burdensome, repeated tinkering has added to the regulatory burden faced by participants. The current consultation acknowledges that uncertainty over the policy landscape or carbon tax levels can undermine investor confidence. A fuller consultation that clearly explained more detailed policy proposals (that is, specifically what sectors the government plans to tax and their future reporting obligations) would have improved matters. As it is, a number of business and public sector organisations face a long period of uncertainty regarding their obligations and this will certainly not meet the government’s stated objectives of improving incentives to invest in energy efficiency and reducing administrative costs.

The government’s thinking on how to simplify the overlapping schemes seems to be at a very early stage. Although this consultation may create uncertainty for organisations affected by these schemes, this may give a real opportunity for stakeholders to shape the detail of the new regimes in such a complex area.

Government consults on reforming energy efficiency taxes and reporting, including CRC and CCL | Practical Law