It’s bombs away with George (again)

Here are a few random (and very late I’m afraid) reflections on some aspects of the budget as they relate to energy, and green energy in particular. I’m not sure these thoughts suffer particularly from being a little late, because as far as I can see from the scant entries in the budget relating to energy in any way, these are mostly time bombs ticking away rather than announcements that are going to have an immediate impact. So we’ll get to see some of these effects realised for better or worse over the coming period, and rather more slowly than the more immediate dredging of more upfront measures such as the unannounced ‘granny tax’, pastygate and just recently, the limitation on people trying to give their money away, allegedly for the benefit of the ‘big society’.

So here we go: bombs away…

  1. The ending of Climate Change Levy Exemption Certificates on Combined Heat and Power Plants from 2013 is just centrally misconceived, and may well lead to a desperate downsizing of the sector.  International Power announced the day before the budget that their Shotton CHP plant was ‘ no longer competitive’ and will close it by the end of the year. Maybe they had an advance budget leak. It sits ill with the increasingly la-la land style ‘targets’ for CHP development that continue to be put forward by DECC.
  2. The Chancellor says he’s going to consult on further proposals to simplify the Carbon Reduction Commitment  – the scheme that introduced proxy carbon trading among companies not in the national allocation scheme for EU carbon trading. Except of course it didn’t, since those with even short memories will recall that in the 2010 Autumn Statement the same Chancellor previously ‘simplified’ the CRC by continuing to collect the income from allowance sales but ending the redistribution of the proceeds  to overperformers as originally intended.  So now he’s railing against his own ‘simplification’ and saying that if ‘very significant administrative savings’ are not deliverable then he might introduce an alternative environmental tax.  This is itself amusing to the extent that Treasury still hasn’t published its new version of what it is going to define a green tax as, instead of the present widely adopted and internationally recognised definitions (see my post from November last year for more on this).  So, when we know what a green tax is, there might be one instead of CRC.  Watch this space.
  3. The biggest bomb (I think) is the almost entirely unreported announcement relating to the fancifully entitled ‘Carbon Floor Price’. This is of course, no such thing and is a lumpy tax sitting above whatever the EU ETS price is whenever it is collected.  Well, the EU ETS price, in a recession, is unsurprisingly not doing as well as had been predicted at the time the Carbon Tax was first declared.  So now the ‘top up’ rate of tax exemption removal from fossil power stations to mimic a carbon price of £16 per tonne, rising to £30 in 2020  will, in year two of the programme, now be not £7.28 a tonne tax on top of EU ETS, but £9.55 per tonne.  This works out as a 31% increase on previous plans and  an extra pot of cash coming the treasury’s way of perhaps £300 million per year.  Justified of course on the current low price of ETS carbon at 6.50 euros early this year. But whether it will be trading at that price in 2014 to keep the overall shape of the trajectory up from £16 to £30 per tonne ‘all in’ is anyone’s guess right now. I would imagine that, just as with the CRC, the Treasury will not be minded to give any of its loot back if the EU ETS  price advances by then.

Smoke, Mirrors and the Changing Definition of “Green Taxes”

My colleague Owen Smith MP received a straight bat response to a Parliamentary Question he put in last week on environmental taxes.

‘What estimate he has made’ he asked ‘of the proportion of taxation gathered from environmental taxes in (a) 2010-11 and (b) each financial year to April 2015’.  The Governments reply was, shall we say, inconclusive. They say they are:

‘currently finalising their definition of environmental taxes… This will establish a baseline against which the Government’s commitment to increase the proportion of revenue from environmental taxes can be measured’.

Well, yes. They did, in the Coalition Agreement pledge to ‘increase the proportion of tax revenue accounted for by environmental taxes’.  And that’ll be up to 2015, the term of the Coalition Agreement. But that all got me thinking: why is the government doing this? After all, there’s a perfectly good definition laid down by the Office for National Statistics, and adopted across Europe and the OECD. An environmental tax is, according to ONS ‘a tax whose base is a physical unit….that has a proven specific negative impact on the environment.’ Landfill tax, renewable energy obligations, vehicle excise duty, the climate change levy, EU emissions trading and a number of other taxes fall within this definition and have been used as the basis for calculating the proportion of ‘green taxes’ making up the overall tax take.

I don’t know the answer to my question, but I do recall that the Environmental Audit Committee had a go at finding out what was on the Government’s mind on this in the summer (Sixth report 2010-12 ‘Budget 2011 and environmental taxes’.) ‘Well’, the Government said at the time, we’re ‘working on a definition that will be based on… the tax being explicitly linked to [our] environmental objectives: its primary objective is to encourage environmentally positive behaviour change: and the tax is structured in relation to environmental objectives.’

So far, so worthy. Still no reason why, of course.  But what is interesting, especially in the context of recent debates in Parliament is what is included in and out of the two definitions, and what the consequence is.

  • The Carbon Floor Price and the Carbon Reduction Commitment come in under the new definition whilst not being covered by ONS.
  • Fuel duty, VAT on fuel duty, and Air Passenger Duty are covered by the ONS definition but now go out under the new definition being drafted.

And, according to a very obscure table on page 10 of the EAC report, here’s the effect of those comings and goings post-budget 2011 in the trajectory of ‘environmental taxes’ over the period to 2015 on both definitions. On present arrangements (i.e. the widely used and agreed upon ONS definition) environmental taxes rise a little but fall back to their present level by 2015. On the new definition – would you believe it – they go up steadily and substantially over the period to 2015.

There you are then. On the new definition the Coalition Agreement is saved, just as long as that pesky ONS definition is buried. Oh, and, of course it still shoots up whatever you do on fuel duty or air passenger taxes. You can put them down to zero now and it makes no difference at all.

So that’s all right then – another promise kept, and maybe some motorists mollified into the bargain. But that can’t really be the answer to the question, can it?

Some pension funds are doing well…..

I spoke in the House last week in the report stage of the finance bill. Report stages of bills are a little disjointed – you can wander into the chamber (if you have timed it right), say your piece on a particular clause or amendment that is up for final examination before the third reading and vote, and clear off. Not at all like the bum-numbing five hour endurance test of trying to say something in, say, a Second Reading debate.

This disjointed debate concerned the Carbon floor Price, about which I posted a while ago [here] – specifically about the difference imposed on the floor price as a ‘float’ above whatever the European Emissions Trading price might be between the consultation period and the budget. It was suggested to be not more than an initial one pound difference: now it is to be a starter for five pounds and rising rather rapidly afterwards, and confirmed in the finance bill. It rather knocks sincere supporters of a floor price sideways in its cynicism, to be frank.

I can’t quite get over the ease and lack of reporting that has accompanied this lurch in policy. For it does two things: it nets exchequer about £800 million per year because it effectively extends the climate Change Levy (which the government said was a bad, bad thing when in opposition) for upstream energy production. A tax, pure and simple. But it also, by relating the tax to averaged out carbon emission levels,  effectively hands free money (in this instance five times as much as originally proposed) to low carbon producers. Not a subsidy for nuclear, you understand, because wind will get it as well. But compare the output last year from all renewables and nuclear – something like 70% of the free money goes to nuclear.  Estimates of what that free money might be worth – for doing nothing more than turning up for work and keeping your power station going for that day (I can’t even say ‘just for switching it on’ in the case of nuclear) – vary from an official Government line of at least £50 million per year  for the next ten years to over a billion pounds over the next twenty years.  And, in case you hadn’t noticed, this free money goes not to nuclear in general, but to one company; EDF. For after the closure of the last two Magnox reactors in 2012, EDF will own ALL of the remaining UK nuclear power stations.  I called it a ‘gold plated pension fund for old nuclear’ in my contribution to the debate. One of the few commentators to pick its implications up, Geoffrey Lean in the Telegraph opined that ‘You don’t have to be against new reactors to see that this is outrageous’. Quite so Geoffrey. There should be windfall tax on this outrageousness at the very least.

But of course, it’s not a subsidy. Oh no. Just mildly helpful to EDF as they advance their plans to build four new reactors on the four sites set aside for them in the Nuclear National Planning Statement. And since it is becoming apparent that they are likely to be the only new nuclear developer, it will probably be more than mildly helpful. But no, it’s not a subsidy.