CBI wants voluntary action in place of EC carbon tax

Implementation of the proposed EC energy/carbon tax should be deferred at least until measures have been taken to remove the market barriers which inhibit energy efficiency, the Confederation of British Industry (CBI) told a House of Lords inquiry on 5 March. And it would be "absolutely vital" to exempt energy-intensive industries from the tax.

The CBI's evidence was presented in the last session of the Select Committee on the European Communities' inquiry into the European Commission's proposal for a carbon/energy tax, one of the main planks in its strategy for controlling the EC's carbon dioxide emissions.

The Committee is expected to report within the next few weeks, around the time the Commission itself is due to submit more detailed proposals for the tax together with a fuller analysis of its economic, industrial and environmental effects. Commission officials told the inquiry in February that their original proposal for a tax building up to $10 per barrel of oil by 2000 and split 50:50 between the carbon and energy content of fuels may well be modified significantly in the forthcoming proposals (ENDS Report 205, pp 23-4 ).

Officials from Government Departments told the inquiry that a great deal of work remains to be done on the tax, and that it is unrealistic to assume that it could be introduced, as the Commission had proposed, in January 1993. This theme was echoed by the CBI, which said that at least two years' discussion will be needed before the tax could be ready for implementation.

The CBI's basic contention, spelled out in its written evidence, is that "while the risk of accelerating climate change from carbon dioxide emissions and the costs of adapting to any such change remain uncertain, precautionary action should at this stage be taken only a 'no regrets' basis. That is to say, policy measures should demonstrably benefit the environment and the economy even if the threat from climate change turns out to be less than has been suggested."

However, evidence of the economic impacts of the proposed tax is "at best, inconclusive," according to the CBI, while the unilateral introduction of an EC tax "offers no guarantee of any significant benefit to the global environment."

The CBI's preferred policy would be a "determined attempt to tackle the many and often complex market failures which currently inhibit energy efficiency." Official estimates suggest that the UK's fuel bill could be cut by 20% by means of proven and cost-effective measures. "Concerted action at EC and national level should be directed at realising these savings as a matter of priority before any new tax is introduced," the CBI contended.

One issue particularly exercising the CBI is the Commission's suggestion that energy-intensive sectors such as iron and steel, chemicals, pulp and paper and cement could be wholly or partly exempted from the tax. This was put forward because these industries could be placed at a competitive disadvantage in international markets if other countries failed to introduce their own version of an energy tax. Without such an exemption, a CBI representative told the inquiry, "some of the industries involved would tend to move out of the Community."

However, it will not be easy to establish who should qualify for an exemption, the CBI argues. "Within the process industries, energy intensity can vary enormously between particular industrial processes. Such matters will need to be negotiated in detail at sectoral level. The sectors concerned stand ready to negotiate voluntary agreements with the Commission to limit emissions in return for reduced exposure to the proposed tax" - but if the idea of exemptions is retained it will be yet another reason for anticipating a long delay in the introduction of the tax.

The CBI's witnesses conceded that no authority had yet analysed what cuts in CO2 emissions could be achieved by means of voluntary agreements, although in the UK the issue is being addressed by the Advisory Committee on Business and the Environment. But they were nevertheless to be preferred to the Commission's "very risky" tax proposals, and many of the industries involved are preparing proposals for such agreements for submission to Brussels.

The CBI also acknowledged that it may be possible to offset some of the loss of competitiveness caused by higher energy prices within the EC if the revenues from the tax were used to offset the corporate tax burden. However, one of the fears voiced by the Committee throughout the inquiry is that the tax revenues could be recycled in such a way as to negate the effects of the tax - although Commission officials insisted that this could be prevented by an accord among Member States on permissible uses of the revenues.

An important issue not raised by other witnesses is the consequence of superimposing the carbon/energy tax on national energy taxes. Effective tax rates could vary markedly unless a parallel process of removing existing market distortions caused by differential taxes and subsidies is set in train, the CBI argued. "If the new tax is now conceived as an add-on, this will compound the present distortions in final prices both between fuels and between Member States."

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