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Commercial Angles' Newsletter - April 2001

UK Climate Change Levy

Whilst President Bush's rejection of the Kyoto Treaty on global warming was no real surprise, the Treaty was after all a fudge, the UK Climate Change Levy was introduced on 1 April and will affect every business.

The environmental movement reacted angrily to President Bush's announcement and called for sanctions on the US. Economic sanctions could lead to another round of "banana war" retaliations by the US and it is difficult to see who, if anybody, would lose the most. In fact, because the US has a big trade deficit with the rest of the world and exports large quantities of primary products, sanctions might hurt those manufacturing countries imposing them more than they would hurt USA. There is a growing fear of a recession in Europe, particularly in Germany where the Purchasing Managers' Index dropped sharply, and the calls for sanctions are now diminishing in favour of continued discussions with USA.

What is really worrying is President Bush's rapid change of mind - he supported the Kyoto Treaty during his presidential campaign. Are the US government's internal economic forecasts really so bad or are there other factors? The power problems in California are surely not the reason. And would introducing the changes required by the Kyoto Treaty really have affected the US economy so badly? Americans produce 25% of the annual global carbon dioxide output, emitting twice as much per head as the average developed country, so a reduction of 7% by 2010 from its 1990 level did not seem much. Why the change of mind?

If the reason is simply political posturing by a new president, which it may be in the light of the dispute with China over the US spy 'plane affair, then what will President Bush do next? - a loose cannon in the White House or a president swayed by the lobbying of vested interests could cause real problems to a fragile global economy. Alternatively if the reason is the costs of implementing the Kyoto Treaty, then what impact will the Climate Change Levy have on the British economy?

The Levy

All businesses and public sector organisations in UK will pay more for their energy from 1 April. The full increased charges are:

£0.0043 per kWh for electricity,
£0.0015 per kWh for gas,
£0.0117 per Kg for coal, and
£0.0096 per Kg for LPG.

Energy-intensive consumers who sign up to energy-saving targets agreed between the government and trade associations will be eligible for a discount of up to 80% of the levy. Some industries such as combined heat and power plants, electrolytic chlor-alkali processes, primary aluminium smelting and renewable energy resources are exempt from the levy. The charges will be added to businesses' energy bills by the utility companies.

The UK Climate Change Levy is intended to be fiscally neutral: the increase in energy costs being off-set by a reduction of 0.3% in the employers' national insurance contributions. Service industries with large numbers of employees and which consume little energy will benefit as a result of it. Other industries will not be so fortunate. But these industries may be able to improve their use of energy - it is a fact that good housekeeping measures can reduce energy costs by 10% or more. A free Effective Energy Management Guide is available for download from the Government Office for the South West website. The UK Energy Efficiency Best Practice programme is available here.

Enhanced Capital Allowances

UK businesses investing in selected plant and machinery that meet energy efficiency criteria will be entitled to claim 100% first-year allowances against tax. This significant cash flow benefit may make many more capital appraisals yield acceptable returns on investment and encourage businesses to consume less energy. The DETR and Inland Revenue has further information on enhanced capital allowances on their website.

Emissions Trading

The UK government has allocated £30 million to an Emissions Trading Incentive Scheme. Under this scheme, companies will be able to volunteer for challenging targets to cut emissions and deliver genuine environmental improvements.

Effects on UK Businesses

The UK government's Energy Efficiency Best Practice website indicates that many businesses will face an increase in energy costs of 10% whilst reducing carbon emissions by 5 million tonnes per year. The Engineering Employers' Federation is calling for an early re-design of the levy. The EEF's main complaint, apart from the Climate Change Levy increasing manufacturing costs at a time when the high level of the pound is causing British industry huge problems, is that over 2000 large manufacturers, employing 1.3 million people, are excluded from negotiated agreements to reduce their levy. The EEF is asking that if the levy can not be re-designed then it be scrapped in favour of alternative policies to directly reduce carbon emissions.

A quick calculation using an average annual wage of £20,000 shows that a reduction of 0.3% in the employers' national insurance will yield a saving of £60 per employee per year. Therefore to break even the current cost of energy per employee must be less than about £600 if energy costs will rise by 10%. Only the lightest of manufacturing industries will escape facing higher fuel costs but most service industries will not fare too badly. The real losers will probably be the traditional industries which are already under ever-increasing pressure from the high value of the pound and low labour-cost countries.

Articles from previous newsletters