Cut in VAT on domestic energy increases pressure on CO2 policy

The go-ahead given to the Chancellor by the European Commission to cut VAT on domestic energy will increase the UK's annual carbon dioxide emissions by almost one million tonnes, according to a parliamentary answer from Environment Minister Michael Meacher. The Government will have the first international test of its climate change policy at the EC Environment Council in June, when greenhouse gas targets for 2005 are due to be agreed.

The Chancellor, Gordon Brown, promised in the run-up to the general election to cut the rate of VAT on domestic fuel and power from 8% to 5%, but there were doubts whether this would be compatible with EC tax law. However, at his first meeting with EC Finance Ministers in May he secured clearance for the move, although the Commission pointed out that it was contrary to the spirit of EC policy of a progressive harmonisation of VAT rates.

The Liberal Democrats' environment spokesman, Matthew Taylor, was quick to table a parliamentary question about the implications for carbon dioxide emissions. According to Mr Meacher, emissions will rise as a consequence of the VAT reduction by about 0.9 million tonnes by 2010 - about 245,000 tonnes as carbon, or 0.15% of the UK's current emissions.1The projected increase is relatively small beer, but will add to the effects of other recent and impending changes in energy prices. The non-fossil fuel levy on electricity bills was reduced from 10% to 3.7% last year, and to 2.2% in April. Further price cuts are expected when the gas and electricity markets are fully liberalised next year.

The Government is under pressure to explain how it intends to meet its target of a 20% reduction in CO2 emissions by 2010 from the 1990 level. On the policies inherited from the previous Government, emissions were officially projected to rise slightly above the 1990 level to reach 169 million tonnes (as carbon) by 2010.

However, an early explanation of how the target will be met appears unlikely. Mr Meacher said that the UK's climate change programme, last updated in February (ENDS Report 265, pp 3-4 ), will be reviewed in the light of the international meeting in Kyoto, Japan, in December at which decisions will be taken on greenhouse gas targets beyond 2000.

All that the Minister was prepared to say was that the Government will be "looking for improvements in such areas as domestic and industrial energy efficiency, an integrated transport strategy to tackle the projected growth in emissions from road transport, and a large increase in the amount of electricity generated from renewable sources and combined heat and power."

The measures required of the Government will also be influenced by a decision due at EC level in June to set a target for emissions of the three main greenhouse gases - CO2, nitrous oxide and methane - for 2005.

Environment Ministers agreed in March that the EC's emissions should be cut by 15% from the 1990 level by 2010, although the initial "burden sharing" of this target will achieve only a 10% reduction (ENDS Report 266, pp 47-48 ). Member States will be looking over the next few months at how to close the gap. The UK, which secured a relatively light target to cut its emissions by 10% by 2010, may be asked to contribute more now that the new Government is committed to such a large reduction in CO2 emissions.

However, the discussion on the 2010 target is not expected to be reopened at the Environment Council on 19-20 June. The debate will focus on a target for 2005. Austria, Germany and Denmark, which have the toughest domestic commitments, have signalled that they want the target to be close to or even at the 15% target already set for 2010. The UK's negotiating position had not been decided by the end of May.

It remains to be seen whether an agreement on how the burden of an EC target for 2005 should be shared among Member States will be settled at the Council. One or two countries - notably Italy, which agreed reluctantly to cut its greenhouse gas emissions by 7% by 2010 at the March meeting - dislike the idea. And Austria, Denmark and Germany are also wary of contributing all of their expected emission reductions to an EC burden share for fear of letting other Member States off the hook.

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