31 March 2016

  |  CBI Updates Team

Update

A taxing issue: Business energy efficiency policy

Government’s reforms to business energy efficiency tax landscape is broadly positive – however reforms look unlikely to be revenue neutral in the longer term.

A taxing issue: Business energy efficiency policy

The budget saw government make some key announcements on its reforms to the business energy efficiency tax and policy regime. Government will abolish the Carbon Reduction Commitment (CRC) scheme with effect from the end of the 2018/19 compliance year. The Climate Change Levy (CCL) will rise to offset lost tax revenues from the CRC, and CCL main rates will increase in line with RPI (from 2018).  Government also announced that it will maintain existing Climate Change Agreement Scheme eligibility criteria in place until 2023 with energy efficiency goals set through DECC-led target reviews starting in 2016. Finally, a consultation was announced for later in 2016 on a simplified energy and carbon reporting framework (for introduction by April 2019).

The work planned on a new reporting framework will undoubtedly be a challenge to get right but it is positive to note that Treasury appreciate the need for nuance and flexibility to ensure that reporting works for all businesses. The announcement of the scrapping of the CRC was also positive – the CBI and member companies have, for several years, called for this measure to be replaced, as it has become a highly complex and burdensome tax raising measure.

The CRC reforms are not without their down-sides however.  The CBI, and many others, argued strongly that a CRC/CCL merger should be revenue neutral over the life of the policy.  That is to say that the CRC portion of the higher CCL rate should decline over time in line with the CRC forecasted trajectory.  Government rightly highlights that the reforms here are revenue neutral in the short term (in the first year of the new scheme).  The additional £425 million that accrues to government in 2019/20 is an accounting quirk that results from merging the two taxes.  However the link to RPI over the long term is more worrying as the CCL level will continue to rise.  While the new system is certainly better, there is work to do to ensure that the trajectory of CCL costs does reflect diminishing carbon intensity (and emissions) over time.   

Finally, the retention of CCAs is very positive and the CBI welcomed government’s recognition of the important role they play in supporting decarbonisation within many energy intensive sectors. 

For more information please contact Ross Gurdin (Ross.Gurdin@cbi.org.uk)