Further refinements to the design of the climate change levy were announced today. These measures will further increase its environmental effectiveness, while protecting the competitiveness of UK firms.

These measures will include:
– introducing a lower rate of levy for Liquid Petroleum Gas (LPG) in recognition of its use in rural areas, and to discourage fuel switching from LPG to more environmentally damaging fuels;
– adding pipe insulation, refrigeration equipment, and thermal screens to the proposed list of technologies qualifying for the enhanced capital allowances for firms making energy saving investments;
– setting aside part of the #50 million ‘energy efficiency’ fund to finance a special package of measures for the horticulture sector to improve further the sector’s energy efficiency;
– introducing a transitional 50 per cent discount on the levy for horticulture firms (for a period of up to 5 years), to help protect their competitiveness whilst these energy efficiency measures take effect;
– seeking a temporary exemption for natural gas in Northern Ireland (for a period of up to 5 years) to encourage the development of its fledgling gas market and to help avoid fuel switching to more environmentally damaging fuels.

The climate change levy and its negotiated agreements are now estimated to reduce carbon emissions by at least 5 million tonnes a year by 2010. The levy will therefore form an integral part of the Government’s climate change programme, helping put the UK on track to meet its Kyoto target and moving beyond that towards the Government’s domestic goal of a 20 per cent cut in carbon dioxide emissions.

All the revenue raised by the levy will be recycled to business through a 0.3 percentage point cut in employers’ National Insurance Contributions and additional Government support for energy efficiency measures. The levy package is therefore designed to be revenue neutral for the private sector as a whole and, moreover, is expected to be broadly revenue neutral overall for both the manufacturing and service sectors.

The lower National Insurance Contributions will act to promote employment opportunities, consistent with the Government’s Statement of Intent on environmental taxation, which set out the aim of shifting the burden of taxation from ‘goods’, like labour, to ‘bads’, like pollution.

Businesses will benefit not only from the cut in employers’ National Insurance Contributions, and the 80 per cent levy discounts for energy intensive sectors that agree energy efficiency targets with the Government; but also from the exemptions for electricity generated from ‘new’ forms of renewable energy and in ‘good quality’ combined heat and power plants; and the planned introduction of a system of 100 per cent first year capital allowances for firms making energy saving investments and the new #50 million ‘energy efficiency’ fund. The Budget also includes further encouragement for firms taking on board binding emissions targets as part of a domestic emissions trading scheme.


1. The climate change levy will come into effect in April 2001. Legislation implementing the climate change levy will be included in Finance Bill 2000. The levy will apply to sales of electricity, coal, natural gas, and Liquid Petroleum Gas to the business and public sectors at the equivalent of the following rates:

Energy Product Rate (2001-02) p/kWh
Electricity* 0.43
Coal 0.15
Natural Gas 0.15
Liquid Petroleum Gas 0.07
* Electricity generated from ‘new’ renewable sources of energy (excluding large scale hydro) and in good quality combined heat and power plants will be exempt from the levy.

2. The levy is forecast to raise around #1 billion in 2001/02, all of which will be returned to business through a 0.3 percentage point cut in employers’ NICs and #150m of additional support for energy efficiency measures.

3. The #150m comprises two elements: – a #50m energy efficiency fund (providing energy efficiency advice and audits to businesses, and stimulating the development and take up of renewable sources of energy and other low carbon technologies); and – a system of 100 per cent first year capital allowances for energy saving investments which is estimated to have an Exchequer cost of around 100 million pounds in 2001-02. (It is proposed that investments in combined heat and power plant, boilers, motors, variable speed drives, lighting systems, refrigeration equipment, pipe insulation and thermal screens will qualify for the enhanced allowances.) Firms making qualifying investments will be able to deduct the full costs of those investments in arriving at their corporation tax or income tax bills. The 100 per cent first year capital allowances will be legislated for in Finance Bill 2001. 3. Ten of the largest energy intensive trade associations (representing sectors such as cement, food and drink, glass, non-ferrous metals, aluminium, paper, chemicals, foundries, steel and ceramics) have already signed Memoranda of Understanding on energy efficiency targets with the Government. These sectors, and a number of smaller energy intensive sectors, are expected to sign full negotiated agreements in the coming months. All those sectors agreeing energy efficiency targets will qualify for an 80% discount on the levy.

4. Energy intensive sites are eligible for inclusion in a negotiated agreement if they are covered by the EU’s Integrated Pollution Prevention and Control (IPPC) Directive, defined in the UK by Parts A1 and A2 of the Pollution Prevention and Control (PPC) Regulations. A final consultation paper on the PPC Regulations will be issued shortly by the DETR, with the objective of laying the Regulations in Parliament before the summer recess. As part of these wider consultations, on the PPC Regulations and, as will be set out in the forthcoming consulation paper, the Government will consider which processes currently covered by Part B of the PPC Regulations should, given their environmental effects, be more appropriately regulated under Part A2.

5. Reliefs from the levy, including the proposed reliefs for horticulture and natural gas in Northern Ireland, and the enhanced capital allowances scheme will be subject to obtaining EU State Aids clearance form the European Commission.

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