2003-03-28 - The Climate Change Levy has been in force for over a year, but has it yet to achieve its desired impact? Energy audits often show that great savings can be made with modest investment and quick payback achieved. However, such initiatives have failed to change the way industry as a whole thinks about energy, as the information rarely reaches beyond the engineers. It is time to look at new solutions, argues James Haigh, Senior Vice President - Drive Products, ABB Limited. A lower levy, ploughed back into energy efficient technology in its entirety, might be a better solution.
Trumpeted as the government’s answer to the need to reduce carbon dioxide emissions, the Climate Change Levy is not viewed as a total success in every quarter.
One of its aims was to make companies sit up and take notice of the energy saving message, through both increasing their electricity bills and encouraging them to reduce these bills through a scheme of Enhanced Capital Allowances (ECAs). The levy is designed to be revenue neutral to business as a whole, with money returned to industry through reduced employers' National Insurance Contribution.
Has it worked? A recent survey (Energy in Buildings and Industry, November/December 2001), found that 79 percent of respondents said that the CCL had not altered the priority given to energy efficiency in their organisation. Furthermore, 62 percent of respondents said they were not taking any further energy efficiency measures as a result of the levy. Yet improved efficiency in drive solutions is often easy to achieve and frequently gives quick payback. But in spite of this, most energy users seem to be biting the bullet and putting up with the increased bills, seeing the CCL as a tax on energy use rather than a tax on emissions.
The levy’s aim to reduce greenhouse gas emission has also been met with scepticism. In the same survey, 23 per cent of energy managers believed that the CCL would have no effect on reducing the UK’s greenhouse gases - only 39 per cent said that it would have some effect.
One problem could be the way the CCL has been promoted - the government has largely left it up to manufacturers to sing the praises of energy efficiency and how it can be increased though greater use of products such as variable speed drives and energy efficient motors.
However, manufacturers admit that they have not necessarily been getting the message across to the right people. Manufacturers have convinced engineers of the benefits of using energy efficient motors and drives, but this message is not getting through to the people who sign the cheques for new equipment. Yet, when the engineering staff and accountants work together, the results can be spectacular. An energy appraisal at Mayflower Vehicle Systems in Coventry, by ABB Drives Alliance partner Sentridge Control, showed that the company could save £98,000 per year by installing variable speed drives on the pumps for the pre-treatment system for body panels. A loan drive was brought in to test the findings, which convinced the facilities manager, Pat O’Sullivan. "Sentridge had one compelling phrase," O’Sullivan says. 'Do you want to save £98,000 off your electricity bill?' "Can you afford not to?"
Motor running hours were reduced by 50%, which cut the energy bill by over 85% as well as increased the overhaul periods. Mayflower realised that other pumps in the area would give similar savings, and an investment plan was developed and presented internally to Mayflower’s engineering director and senior accountant. While the initial plan following the audit had encompassed the installation of 7 variable speed drives, the final proposal put to the board was for 17 units. As a result, Mayflower is reducing its CO2 emissions by 360 tonnes per year.
This is an illustration of how well things can work when the engineering and accountancy disciplines work together. Unfortunately, it happens in far too few companies.
ECA’s confusing effect
Another problem is the ECA scheme, which is also not as clear cut as it could be. There is confusion over what qualifies and the procedure for claiming.
Others have also voiced their concern at the way the CCL is structured. Among them is the CBI, which has called for an early review of the scheme. A major plank of the CCL is the Climate Change Levy Agreements, which give an 80 per cent rebate on the levy to energy intensive industries in return for a binding commitment to improve energy management. Yet 2,300 companies with energy bills of more than more than £100,000 are not entitled to these rebates, because they do not have a high potential to pollute, even though they are energy intensive users.
Michael Roberts, director of Business Environment for the CBI, says: "We support the Government's environmental objectives, but we are deeply disappointed that a way has not yet been found to widen the eligibility criteria. Too many anomalies result from the decision to exclude some sectors from the right to a discount in return for cutting energy use.
"Many companies will find these costs hard to take when manufacturing is under so much pressure and there are fears of a slowdown in the global economy. Different approaches elsewhere in Europe will leave many parts of UK industry at a significant disadvantage. In Germany, for example, all manufacturers can get generous discounts."
The Engineering Employers’ Federation (EEF) is also unhappy with the CCL as it stands. In a survey of its members, it uncovered the following unwelcome facts:
- Engineering is paying a 17% share of the £1bn to be raised by the levy, well above its 8% share of the economy.
- Rubber and plastics is also hit particularly severely, suffering an increase of £53m in energy costs and a net rise of £49m in operating costs.
- On an annual basis, the net effect of the levy is to raise operating costs in engineering by just under £90m.
- The net impact of the levy is to raise employers’ operating costs in each main industrial sector in engineering.
Most companies in the EEF survey indicated that they would not be able to pass on any of the increased costs to their customers and the levy is therefore making investments harder to make.
Overall, the CCL is hitting manufacturing industry harder than the service sector when manufacturing is already suffering from a slowdown in external demand and an overvalued exchange rate.
Again, there are exceptions. Large numbers of end users have placed orders for variable speed drives and high efficiency motors, when they have clearly understood the penalties of not being energy efficient and how easy it is to improve. But as a whole, industry is far from fulfilling its energy saving potential.
Making it right
There is a need to simplify things - users are undoubtedly put off by the complexity of the ECAs, working as they do through the mechanism of the tax bill.
A more direct approach would be through grants for energy saving equipment.
The EEF has investigated the options for amending the CCL to make it fairer to manufacturing companies while still achieving the government’s aims.
It looked at four possible options:
1. Keep the CCL as it is where climate change levy agreements are limited to companies that meet Integrated Pollution Prevention and Control criteria.
2. Extend climate change levy agreements to all manufacturing sectors.
3. Widen access to climate change levy agreements to all manufacturers with energy bills of £100,000 or more.
4. Scale down the size of the levy, abolish the national insurance reduction and channel the revenue raised into increased incentives to invest in energy-saving equipment.
Scenario 4 abolishes the system of reduced NICs and imposes the CCL at a lower level across the board, at about 60 percent of its current figure. It also introduces incentives, such as grants, to stimulate extra investment for all industry sectors, in proportion with the energy intensity of production in that sector. Since the lower rate of the levy is applied to all industries equally, without relief, the revenue raised in the first year remains the same - about £1bn. The investment incentives are themselves worth an extra £1bn in tax relief.
This gives a much more even impact across all sectors, with the service sector hit nearly as hard as manufacturing in terms of output and profits. This scenario also achieves a big reduction in energy usage both because of the CCL, and also because of the increased investment in energy saving technology by the manufacturing sector.
The CCL is a good idea in principle, particularly as many companies can make significant savings just by using existing technology efficiently. The government now needs to learn from the first year and make it fairer and more workable.