TaxPersonal TaxGreen taxation – the red-tape monster

Green taxation - the red-tape monster

The Climate Change Levy is the government's flagship environmental tax and it will be a key feature of this year's Budget and Finance Bill. The objective is to encourage businesses to substantially reduce their carbon emissions. It still remains to be seen if this strategy will be successful, but one thing is certain it is going to significantly increase red tape and business costs.

When the government published its Statement of Intent on environmental taxation in 1997 one of the key criteria was that it “must keep dead-weight compliance costs to a minimum”. However, to date there has been little focus on the compliance costs involved and the sheer amount of red tape that will be generated.

To get an idea of the scales involved you need to look at the proposed legislation. The Finance Bill draft clauses, published last year, cover 93 pages and this did not include numerous regulations that have yet to be published. If past history is anything to go by, the legislation and regulations will have doubled in length when it finally becomes law. So much for keeping the red tape to a minimum!

The Climate Change Levy is to be collected largely by the energy suppliers – the gas and electricity companies. So far no estimate has yet been published by the government of the likely costs of collection and administering the levy by these energy suppliers. However, the set-up costs in terms of billing and administration systems will be significant and there will be the on-going costs of collection. Who will be picking up these costs? Businesses.

There is more bad news. There is a double whammy in trying to alleviate the levy. To qualify for the 80% discount of the levy there have been numerous negotiated agreements between the Department of the Environment (DETR) and various trade bodies. By committing to reducing carbon emissions, companies in certain industry sectors will get the discount. The DETR have already concluded heads of agreement with ten energy intensive sectors, and are now in discussions with a further sixty “second-wave” industry associations. The double whammy is that with each agreement being negotiated at an industry association level, the association will have to pay to administer the agreement. Who will pay for the association’s costs? It will be the members of the association. Evidence given to the Select Committee on Agriculture by the National Farmers’ Union suggested that these costs could be as much as £2000 to £3000 per year per business.

Added to this are the administration costs of monitoring the agreed exemptions for good quality Combined Heat and Power and the planned energy efficiency schemes. And there will be further regulatory changes to allow for an emissions trading scheme to operate. The red tape mountain continues to grow.

To add further misery you need to look at the number of government departments involved in the Climate Change Levy. First, there is HM Customs & Excise, who deal with the energy suppliers on the collection of the levy. The DETR will manage the agreements with all the different industry associations. The Department of Trade and Industry are also involved. And, in due course, the Inland Revenue will be involved on the capital allowances for energy efficiency measures on which the DETR are currently leading the consultation process. To make matters worse, there is the small matter of the European Union, who are assessing whether the levy (or rather the 80% discount) passes the state aid tests. No wonder nobody has added up the dead-weight compliance costs.

So all in all a lot of bureaucracy. The Jury is still out as to whether the Climate Change Levy meets the government’s own tests of good taxation in the red tape department.

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