Clause 90 - Climate change levy: main rates for 2015-16

Finance Bill – in a Public Bill Committee at 2:00 pm on 10 June 2014.

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Question (this day) again proposed, That the clause stand part of the Bill.

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

I remind the Committee that with this we are discussing the following:

Clause 91 stand part.

Amendment 25, in clause 92, page 84, line 16, at end insert—

‘(3) The section shall not come into force except as specified in subsection (2) below.

(1) The Chancellor of the Exchequer shall bring the section into force by order within six months of the passing of this Act.

(2) A statutory instrument containing an order under subsection (3) shall be accompanied by a report which details—

(a) the impact of the provisions in the section on consumers and on fuel poverty;

(b) the impact of the provisions in the section on energy-intensive industries and on employment in those industries;

(c) the level of carbon leakage in the energy-intensive industry as a result of the provisions in this section;

(d) the effect of the provisions in the section on investment in new renewable power generation and on investment in new nuclear power generation;

(e) any effective subsidy provided to, or additional profits accruing to, operators of existing and new nuclear power stations as a result of the provisions in the section;

(f) what additional package of measures will be enacted to mitigate the impact of the section on energy-intensive industries;

(g) the impact on business investment of—

(i) changes to Schedule 6 to the Finance Act 2000 made by Finance Act 2011;

(ii) changes to Schedule 6 to the Finance Act 2000 made by this Act.”

Clauses 92 and 93 stand part.

That schedule 16 be the Sixteenth schedule to the Bill.

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury

It is a pleasure to serve under your chairmanship, Mr Streeter. We have had an interesting debate on this grouping, and I thank all hon. Members for their contributions.

Clauses 90 to 93 and schedule 16 make changes to the main rates and carbon price support rates of the climate change levy. They provide for exemptions from the levy for energy used in metallurgical and mineralogical processes.

The climate change levy is designed to encourage the efficient use of energy and to reduce emissions by creating an incentive to use less energy and to source electricity from renewable sources. Clause 90 increases the main rates of the levy in line with the retail prices index from 1 April 2015, as has been standard practice since 2007. The new rates will apply to supplies of taxable commodities made to business and the public sector on or after that date. That will ensure that the main rates of levy remain constant in real terms and that the levy maintains its environmental impact by encouraging businesses to reduce their energy use. Consistent with previous increases, the rates are being announced a year before they come into effect to enable business to prepare and to give time for energy suppliers to get their billing systems ready.

On clause 91, the carbon price floor that came into effect on 1 April 2013 has two components: the market price for carbon under the EU emissions trading system; and a UK-only element, which is the carbon price support rate per tonne of carbon dioxide. Legislation sets out the carbon price support rates for the individual taxable commodities and, to provide certainty, those rates are announced two years in advance.

An ambiguity in published data affected the calculation of the solid fossil fuel rates included in the Finance Act 2013. The clause corrects the carbon price support rates of climate change levy for coal and other solid fuels for 2014-15 and 2015-16 to ensure that they are consistent with how the rates for other commodities have been set.

As I go through the clauses, I will try to answer the questions asked by the hon. Member for Newcastle upon Tyne North. On the error in the calculation, carbon price support rates per taxable commodity are calculated by applying the carbon emission factor for each commodity to the underlying rate per tonne of carbon. In the case of solid fossil fuels, the carbon price support rate of the climate change levy is set in pounds per gigajoule of energy content. The previous legislated rates were calculated using Department of Energy and Climate Change data on the calorific value of coal used in power stations and Department for Environment, Food and Rural Affairs data on carbon dioxide released from coal used in electricity generation.

Unfortunately, the ambiguity in the published data affected the calculation of the solid fossil fuel rates in the 2013 Act. The calorific value of coal burned by generators was found to reflect the energy content of only UK-produced coal, but imported coal is consumed in UK power stations, and that often has a higher calorific content per tonne than UK coal, and therefore a lower carbon emission factor per gigajoule. As a result, the carbon price support rates for the two years I mentioned were set too high, resulting in coal-fired power stations being taxed more per tonne of carbon emitted than other forms of electricity generation, which was contrary to the Government’s intention. I stress  that the methodology is sound and has not been altered as a result of identifying the ambiguity. The ambiguity in the published data has now been corrected by officials.

The hon. Lady asked about the amendment of the rate. The error was not identified in time to correct the rate for 2013-14, and the Government do not intend to amend it retrospectively, because generators sold their output in 2013-14 at prices reflecting the tax rate that was then in force, so any rebate would effectively constitute a straight windfall to the generators.

The Committee will be aware that the Government announced in the Budget their intention to cap the carbon price support rate per tonne of carbon dioxide at a maximum of £18 from 2016-17 until 2019-20. Clause 92 achieves that by setting carbon price support rates for individual taxable commodities with effect from 1 April 2016. Effective carbon pricing, including through the carbon price floor, remains an important part of the Government’s energy policy. Establishing a minimum carbon price sends a credible signal to help to drive billions of pounds of investment in low-carbon electricity generation. Investment in the energy market will help to ensure that the UK meets its legally binding carbon dioxide emissions reduction targets and to safeguard the country’s long-term energy security.

However, as we heard from my hon. Friend the Member for Redcar, ensuring that UK industry remains competitive in the world is a priority, and the Government acknowledge that rising energy costs are a key issue for many businesses. The failure of the EU to agree to substantial reform of the emissions trading system has meant that the European carbon price has remained far lower than previously expected. Without action on the carbon price floor, the drop in the price of carbon will mean that, in a few years, British firms will be at an unacceptable competitive disadvantage compared with their competitors in the EU. In 2018-19, the Government forecast a European carbon price of around £6 which, under the carbon price floor trajectory, would see the Government setting a UK-only carbon tax of around £30 per tonne of carbon dioxide for that year. The Government are therefore limiting the disparity with the EU on carbon prices by capping the carbon price support rate per tonne of carbon dioxide at £18 from 2016-17 to the end of the decade.

Photo of Nicholas Dakin Nicholas Dakin Opposition Whip (Commons)

Why not introduce the cap a year earlier and therefore bring more timely relief to those industries that are challenged?

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury

My understanding is that, because the rates are set two years in advance, unfortunately this is not as easy as just changing the rate, as people have started pricing and purchasing energy on the basis of the rate set two years ago. Though such a change might seem easy to us as politicians, the process is more complicated for those companies in the sector.

The £18 cap will be achieved by setting in clause 92 the carbon price support rates of climate change levy for gas, solid fuels and liquefied petroleum gas from 1 April 2016.

The Opposition’s amendment 25 would require the Chancellor of the Exchequer, six months after the passing of the Bill, to publish a report detailing the impact of clause 92. I am pleased to say that capping the carbon  price support rates will reduce electricity bills for all businesses. By 2018-19, businesses will have saved around £4 billion, and a typical uncompensated energy-intensive firm will save around £800,000 in 2018-19. In 2018-19, capping the carbon price floor should take £15 off the average household bill, which will be in addition to the £50 on average that the Government have saved for households through the changes they announced at the autumn statement. That demonstrates that the Government continue to take decisive action to reduce people’s energy bills. That is on top of other measures announced at Budget 2014 to help to reduce businesses’ electricity bills, including the introduction of compensation to electricity-intensive industries for the costs of the renewables obligation and feed-in tariffs in 2016-17, and the extension of compensation for the costs of the carbon price floor until the end of the decade. That is why the CBI said that the Budget

“will put wind in the sails of business investment, especially for manufacturers.”

This is all without compromising the Government’s commitment to developing renewable energy. The established levy control framework arrangements and budget provide the flexibility to achieve the investment in growth that is needed to tackle climate change and meet the Government’s renewable energy target.

I can therefore reassure Labour Members that their amendment is not necessary. The Budget’s energy package clearly shows that the Government are taking decisive action to mitigate the impact of energy policies on households and businesses. Furthermore, the Government keep all tax policy under review, with Her Majesty’s Revenue and Customs and HM Treasury routinely monitoring the impact of such changes. The review under the amendment would start six months after the Bill received Royal Assent, but clause 92 does not come into effect until 18 months later, so the amendment would provide a review of something that had not come into effect. Capping the carbon price support rate at £18 per tonne of CO2 from 2016-17 to the end of the decade will limit any competitive disadvantage that British companies face in the global race and save billions of pounds for British industry.

The hon. Member for Newcastle upon Tyne North asked about the price of carbon under the EU ETS in 2020. It is not expected to be much higher than at present—about €5—but in 2013, the price of carbon was predicted to be €70, which shows the differential between what was expected to happen and what has actually happened. On the relationship and the discussions that we are having about the ETS scheme, the UK supports the cancellation of surplus allowances within the EU ETS to raise the ETS price, and our negotiations in Europe to achieve that are ongoing.

The hon. Member for Scunthorpe asked about the carbon price floor compensation, when it would start and whether it would be backdated. The UK received state aid clearance for the CPF compensation scheme at the end of May. We are finalising the administration of the scheme and will begin making payments as soon as possible. I am sure that he will chase me if that does not happen for the companies in his constituency. The UK is still considering the feasibility of pursuing backdating in light of the newly published Commission energy and environment aid guidelines. Compensation is being paid for the EU ETS as well.

The hon. Member for Newcastle upon Tyne North asked about what estimate has been made of the impact of the carbon price floor on fuel poverty. I do not have the answers to hand, so I will have to write to her about that, but it was a good question to ask.

Clause 93 introduces schedule 16, which provides for exemptions from the climate change levy for energy used in metallurgical and mineralogical processes. The exemptions came into force on 1 April 2014 under a resolution passed by the House at the end of the Budget debate. To ensure that the benefit of the measure is widely felt and to avoid potential state aid problems that could result from selectivity, energy used by all mineralogical and metallurgical businesses qualifies for the exemptions.

In the 2013 Budget, the Chancellor announced that the Government would introduce new exemptions for energy used in metallurgical and mineralogical processes. Exemptions for those purposes are permitted under the energy taxation directive and have long been in place in some other member states giving full relief rather than the partial relief available to those processes under the climate change agreement scheme. Since that announcement was made, officials have worked closely with trade bodies on the design of the exemptions. As a result of that consultation, the Government announced in the 2014 Budget that they would allow businesses that benefit from the exemptions to retain climate change agreements, which will ensure that businesses undertaking mineralogical and metallurgical processes will be able to benefit from reduced climate change levy rates on any energy they use that does not qualify for the new exemptions, rather than paying the climate change levy at the full rates on that energy. In addition, legislation has been amended to ensure that businesses that opt to terminate their climate change agreements do not become subject to the carbon reduction commitment energy efficiency scheme. The new exemptions will support UK manufacturing by reducing the burden of energy taxation on some of the most highly energy-intensive processes and helping such businesses to remain competitive with their counterparts in the EU and further abroad.

The hon. Lady asked about other member states’ exemption of energy used in these processes. Member states such as France and Germany that have a comparable industrial base have similar exemptions in their energy taxation systems. She asked why the Government were introducing the exemptions now. When the European Commission declined in 2011 to renew the state aid approval for full exemption from the climate change levy for energy used in metal recycling processes—the Commission would agree only to a lower rate—the Government decided to review the whole climate change levy treatment in that area. Following representations from other energy-intensive industries, it decided to extend the review beyond metal recycling.

Commercial energy prices have increased markedly since the climate change levy was introduced, putting greater financial pressure on highly energy-intensive sectors. The Government believe that the time has come to align our treatment of those industries with that of competitors in other member states.

I hope that I have explained the clauses and addressed the points that have been raised. I commend the clauses  and schedule to the Committee, and ask the hon. Member for Newcastle upon Tyne North not to press amendment 25 to a Division.

Question put and agreed to.

Clause 90 accordingly ordered to stand part of the Bill.

Clause 91 ordered to stand part of the Bill.