Clause 116

Finance Bill – in a Public Bill Committee at 1:00 pm on 25th June 2009.

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Taxable commodities ineligible for reduced-rate supply

Question proposed, That the clause stand part of the Bill.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I must say that I am a little surprised that the Minister has not risen to introduce clause 116, which, like clause 117, is on the climate change levy. However, I will try to explain what clause 116 is all about. I will briefly explain the climate change levy, because when we come to discuss exactly what has been changed we must understand the context for that change.

Normally the Government love to talk about and defend the climate change levy, so, as I say, I was slightly surprised by the Minister’s reluctance to talk about it.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

The Minister says, from a sedentary position, that she will be talking about the clause, but I was under the impression that, when we are debating a clause, normally a Minister would first seek to defend what the Government are proposing.

The climate change levy, as we know, is a tax based on the quantity of a commodity supplied. The levy is charged on taxable supplies, which are supplies of what is called a “taxable commodity”, as defined in the legislation and on which climate change levy is due to be paid. The definition of a taxable commodity is also found in paragraph 3 of schedule 6 to the Finance Act 2000. According to that measure, the following are taxable commodities:

“(a) electricity;

(b) any gas in a gaseous state that is of a kind supplied by a gas utility;

(c) any petroleum gas, or other gaseous hydrocarbon, in a liquid state;

(d) coal and lignite;

(e) coke, and semi-coke, of coal or lignite;

(f) petroleum coke.”

Paragraph 3(3) of that schedule says:

“The Treasury may by regulations provide that a commodity of a description specified in the regulations is, or is not, a taxable commodity for the purposes of this Schedule.”

We will come on to discuss the reduced rate. It is a relief that is intended to operate for a 10-year transitional period, to allow businesses to make energy efficiency savings. The 10-year period is a condition of being given approval by the European Commission under the state aid rules; there must be a 10-year transitional period for these energy efficiency savings. Paragraph 44 of schedule 6 to the 2000 Act makes provision for an 80 per cent. reduction in the levy for energy-intensive industries that have entered into a negotiated energy efficiency climate change agreement. Those CCAs will be referred to in the course of our debates on clauses 116 and 117 and the relevant schedule.

Energy-intensive users are those who operate a part A process listed in schedule 1 to the Pollution Prevention and Control (England and Wales) Regulations 2000, which is Statutory Instrument 2000 No. 1973. In return for the reduced rate, targets for energy efficiency or emissions reduction are set. In other words, because of the state aid rules, so long as a company states over the 10-year period how it will become more energy efficient, as part of the CCA, at the end of that period it gets a reduced rate.

Until now, the Department for Environment, Food and Rural Affairs has been responsible for classifying a facility as being eligible for the reduced rate under a CCA. I am assuming that the Department of Energy and Climate Change is now responsible for making such classifications, but it would be helpful if the Minister could clarify that. At the same time, however, HMRC is given access to the variation certificates, to enable verification of the legitimacy of any claims that are made under the relief. Examples of industries included are: energy industries; production and processing of metals; the mineral industry; the chemical industry, and waste management.

Paragraph 44 of schedule 6 refers to paragraph 45 of the same schedule, which deals with variations in terms of notices and establishes the power of the commissioners to make regulations covering whether or not a supply of a taxable commodity is made to a facility covered by a notice, including specific provision to determine whether a supply is delivered to a facility.

A variation certificate may be issued, which either removes or adds to the entitlement of a facility covered by a CCA, or amends the period to which a CCA applies. That is my understanding of the background to clause 116. It would be helpful if the Minister could confirm that my understanding is correct.

I turn to clause 116 itself, which is entitled “Taxable commodities ineligible for reduced-rate supply.” As I have mentioned, the reduced rate provided by CCAs is classified as state aid. New community guidelines on state aid for environmental protection were issued in 2008, and, as I understand it, provide the background to the clause. The energy product directive 2000/96/EC provides minimum rates unless the European Commission can be satisfied that additional relief is proportionate and necessary. It would be helpful if the Minister could confirm whether the issue under discussion is solely due to that directive.

The climate change levy reduced rates for gas and solid fuel are below those minimum rates, hence the need for the clause. The clause ensures that the Secretary of State can vary existing certificates to make eligible taxable commodities ineligible, and vice versa, with the consent of HM Treasury, and provided that the provision is in line with the Commission’s state aid rules. Sectors that do not meet the necessity and proportionality test entitlement to claim the reduced rate on gas and electricity will be denied relief, thus ensuring compliance with the state aid rules.

Thus, sectors can still be within the rules on a CCA, but can only get the reduced rate on other taxable commodities, such as electricity. That is my understanding of the issue, and it would be helpful if the Minister could confirm that that is the case, and that the issue arises solely as a result of the European Union directive that became live last year.

Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Parliamentary Secretary, HM Treasury

The new state aid guidelines on environmental protection were introduced in 2008, as the hon. Gentleman has said. The guidelines stipulate that if, after the tax reduction, the tax payable on any taxable commodity is above the minima set out in the directive on the taxation of energy products, a notification can be approved without considering new and challenging necessity and proportionality tests set out in the guidelines. The rates of levy for all taxable commodities are comfortably above the directive minima, as are the reduced rates of levy for electricity and liquefied petroleum gas. However, the reduced rates of levy for solid fuel and gas are below the minima.

The British Plastics Federation represents a new sector wishing to join the scheme, but it has been unable to satisfy the Commission that the reduced rate is necessary to its members. The Department of Energy and Climate Change estimates that the plastics sector’s entry to the scheme would provide annual savings of 32,000 tonnes of CO2 against the 2006 baseline. We have therefore looked at alternative methods of admitting the sector to the scheme.

During discussions of the plastics sector’s application to join the climate change agreement scheme, the Commission indicated that the UK could limit aid given through the scheme to those commodities for which the UK’s reduced rate is above the minimum set out in the directive on the taxation of energy products. In those circumstances, the aid would fall within the provisions of a block exemption and could be introduced without first being subject to scrutiny by the Commission. The Government therefore intend to limit the sector’s entitlement to claim the reduced rate of levy to its use of electricity and liquefied petroleum gas.

Since electricity use accounts for around 80 per cent. of the sector’s energy use, the restriction will still make a significant difference to the sector’s energy costs. Moreover, despite the restricted entitlement to the reduced rate, the DECC will not alter the targets originally negotiated with the plastics sector, which were based on entitlement to the reduced rate for all taxable commodities. There will therefore be no weakening of the environmental benefits accruing from the sector’s membership of the scheme.

The clause enables entitlement to claim the reduced rate of climate change levy to be restricted to certain taxable commodities. The restriction will be given in certificates issued by the Secretary of State for Energy and Climate Change with the agreement of HM Treasury, which I think answers one of the hon. Gentleman’s questions. Where no such restriction is specified, businesses participating in the scheme will be able to claim the reduced rate on all taxable commodities used in processes covered by their agreements. Limited entitlement to claim the reduced rate will therefore be focused on members of the British Plastics Federation who would otherwise be unable to comply fully with the state aid rules. The entitlement of other sectors already within the scheme will be unaffected.

The clause will allow businesses in the plastics sector to enter into climate change agreements, providing relief from the climate change levy to energy-intensive industry, while at the same time delivering significant environmental benefits.

Question put and agreed to.

Clause 116 accordingly ordered to stand part of the Bill.