Levy exemptions leave climate change agreements in confusion

A move by the chancellor to abolish the climate change levy in sectors hard-hit by energy costs and foreign competition could have unintended consequences for CCAs

Proposed exemptions from the climate change levy for hard-pressed key energy-intensive sectors such as ceramics, steel and aluminium have cast doubt on the future of their respective carbon-cutting climate change agreements (CCAs).

Chancellor George Osborne announced in his Budget speech on 20 March that the government “will exempt from next year the industrial processes for [the ceramics] industry and some others from the climate change levy”.

The proposals follow a long campaign by these sectors to cut the cost of climate policies. But the announcement has already raised more questions than it answers, leaving the sectors affected in confusion over CCA obligations.

The energy and climate department (DECC), which leads on CCAs, denies that the Treasury, leading on the climate change levy, took it by surprise. Both point to continuing consultations between each other, the business department (BIS) and sectors involved. However, the proposals still have a raw feel about them.

The sectors concerned are classed as energy intensive. Many are subject to state aid compensation packages for higher energy costs. Together, they are significant emitters and constitute at least 12% of emissions from the parallel EU emissions trading scheme (EU ETS).

The Treasury Red Book revealed that a 100% exemption from the levy will apply to energy used in metallurgical and mineralogical processes from 1 April 2014. It added: “The government will seek views from industry on these exemptions and will publish draft legislation at the time of Autumn Statement 2013. (Finance Bill 2014).”

The announcement has been greeted with relief by the sectors affected. Most are at high risk of carbon leakage due to foreign competition and rising energy costs. The most extreme example is the ceramics industry in the Midlands.

Existing CCAs

But there was no clarification on what would happen to the CCAs already negotiated with the energy and climate department (DECC) and their targets for these sectors if they were 100% exempted from the levy. These new targets run from 1 April 2013 to 2023, but are yet to be announced by DECC.

From 2014, sectors in CCAs will be eligible for 90% relief on electricity usage and 65% for gas if they meet agreed targets for 2020.  

A spokesperson for HM Treasury told ENDS it “will be consulting on the precise nature of the relief”, including details of processes covered and design of the exemptions. But she confirmed the exemptions proposed aim to cover a wide range of metallurgical processes, including “smelting, refining, and alloying of metals such as steel, aluminium and copper as well as basic metal forming processes such as the casting and rolling of hot metal”.

The other key area for exemptions covers “use of gas in ovens and kilns to make glass and ceramic products and the production of goods such as cement”, she confirmed.

But while cement and lime are included, involving chemical change, the position of gypsum, also covered by a CCA, remains unclear. The potash sector is in a similar position.

Crispin Dunn-Meynell, general secretary to the Gypsum Products Development Association, noted production of gypsum could be covered as it is also a mineralogical process involving chemical change through heating.

Overlap

The Treasury spokeswoman pointed out the government recognised many of the sectors concerned already held CCAs. This raises issues of overlap: “We will look very closely at the impact of the proposed exemptions on this scheme and carefully consider retaining a link with CCA energy efficiency targets, as some in industry have suggested.” She added that “the link with energy efficiency targets is one aspect of the design we are consulting on”.

What is far from clear is why Treasury did not jointly propose with DECC raising relief to 100% for these sectors if they meet their CCA targets. This would have given them both potential cost savings and an even stronger incentive to cut emissions.

For its part DECC said it fully supports the move. A spokesperson said: “The UK is exempting mineralogical and metallurgical processes from the climate change levy as allowed for under the Energy Taxation Directive.”

“As many EU member states already exempt their mineralogical and metallurgical sectors from energy taxation, this measure will mitigate any competitive disadvantage that UK mineralogical and metallurgical sectors face in this regard by helping them move towards a more level playing field with their EU competitors.”

She added the measure supports the government’s growth agenda, maintaining competitiveness of energy-intensive industries while shifting to a low-carbon economy.

But DECC’s position on overlap between the proposed CCL exemption and CCAs is ambiguous. A spokesperson told ENDS “the CCA targets for all sectors for 2020 shall remain intact”. But at the same time, she also appeared to imply there was uncertainty: “Over autumn 2013, HMRC and HMT shall discuss the option of retaining a link with CCA energy efficiency targets, as some in industry have suggested.”

Neither department could confirm yet whether the 100% exemption would still apply if CCA targets are not met or participants opt to leave a CCA. Nor is it clear whether the long process of getting EU state aid approval for preferential levy rates in these sectors would need to be repeated. 

Among sectors definitely included, there has been unanimous approval of the exemption proposal, but this has been tempered by confusion and concern over possible unintended consequences.

Jenni Staves, environmental manager for the British Glass Manufacturers’ Confederation, said the glass sector preferred to retain CCA targets, but with 100% levy exemption. A large amount of work had already gone into new simplified CCAs. But she also pointed to concerns among several sectors that dropping out of the climate change levy or CCAs could mean defaulting into the even more expensive CRC Energy Efficiency Scheme (ENDS Report 458, April 2013, pp 29-35).

Complications

But there are also other potential complications with the proposals. A change to the level of preferential levy relief could trigger the need for a further lengthy EU state aid approval process, only shortly after the latest CCAs have been cleared. ENDS also understands that tying the new 100% exemption to meeting CCA targets could also trigger the requirement.

In response, Treasury told ENDS: “We’re aware of state aid considerations – this will be factored into the work we’re doing with DECC and industry on this policy.” One sector suggested a voluntary undertaking to meet the targets in exchange for the exemption as a possible work-around.

Gareth Stace, head of environment and climate policy at manufacturers’ association EEF, pointed out that for steel “the CCL exemption will not cover all of the processes”, nor all energy used onsite outside electricity and gas, while CCAs still cover all energy use. He stressed the sector still supports CCAs which are widely regarded as a success. “It makes no difference to ambition in sectors that might get this exemption.”

Stace added that emissions outside both the EU emissions trading scheme and exemptions would still need to get standard CCA relief to cut liability.

Laura Cohen, chief executive of the British Ceramics Confederation, pointed out the sector looks forward to consultation on the exemption but adds it has “already been very clear we want to keep the CCA” as the responsible approach. “We would still have to meet our new targets or buy carbon if we don’t meet those.” Its new targets were agreed only in November.

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