Carbon tax 'may not reduce CO2'

Image caption The government estimated the CRC will raise £715m this year

When the government changed the terms of a new tax on the carbon emissions of large companies in last year's Spending Review, it was accused of hitting firms with a "green stealth tax".

Money raised through the Carbon Reduction Commitment (CRC) will now go to the government, rather than to those firms who cut their bills the most, as had been originally planned.

The business group, the CBI, is calling on the government to turn the tax back into an incentive-based scheme or scrap it altogether.

And a report by Carbon Retirement has said that the tax, which is due to come into force next month, may fail to reduce overall pollution levels.

The report draws on data from the government and its independent committee on climate change which suggests overlap between this and other emission reduction schemes may limit its effectiveness.

The report forms part of responses to the government's consultations on the measures.


The CRC applies to large companies which are not currently covered by the European emissions trading scheme.

It forces firms to measure and report their emissions - mostly the result of gas and electricity use - and then pay £12 per tonne of carbon dioxide they emit.

The problem is the number of schemes. Companies buy their electricity from power providers who themselves hold permits under the European carbon trading scheme for every tonne of carbon they release.

These permits are limited - if someone needs more permits in the UK, someone else, somewhere else, must pollute less. As demand for them varies, so does the price.

If companies reduce their electricity demand it could simply free utilities to give their permits to someone else, perhaps another power provider or a cement works, allowing them to increase their carbon emissions.

The report estimates that "between 2011 and 2020, the 90m tonnes of carbon dioxide savings the CRC participants are expected to achieve will be emitted instead by heavy industry".

The problem may be fixed in future as the European scheme is itself reformed, but accountants Ernst and Young suggest it is not the only issue with the new tax.

"The CRC assumes a fixed carbon intensity for electricity and doesn't reward sourcing electricity renewable energy under green tariffs," says Ben Warren, partner at Ernst and Young.

"This is starting to have an impact on green tariffs as companies resent getting no benefit for this under the CRC."

The Department of Energy and Climate Change accepts there is a problem, and told the BBC: "We are looking at a range of measures to try and simplify the scheme and recognising the overlap with some other schemes is one of the areas of complexity for it."

Business critical

But such a consultation is unlikely to assuage business - the CRC scheme itself is not under debate.

The government's Spending Review estimated it would raise £715m in its first year, based on emissions from this April, rising to £1bn in 2014-15.

The new director general of the CBI, John Cridland, wants the government to restore the scheme to its previous structure, which provided incentives for emission reduction rather than a tax.

"The incentive behind the Carbon Reduction Commitment must be restored to help companies go green," says Mr Cridland. "If not, it should be stopped altogether because in its current form it adds yet another cost to doing business."

Ben Wielgus, of KPMG's climate change and sustainability practice, says the tax meant business was effectively paying multiple times for their emissions.

"We find CRC participants in the difficult situation of paying for carbon emissions three times - once through the CRC, once through the climate change levy (CCL) and once through the cost of carbon charged by their electricity companies through energy bills."

Some companies have also complained that the scheme does not actually tax the polluter. Most retail and commercial property covered by it is not actually owned by the companies which occupy them.

"Where else in life would you tax one person to change another's behaviour," says Donal McCabe from Land Securities, one of the largest commercial property owners.

Land Securities, like other companies, would like to see the tax replaced with a series of incentives.

"Our general view is that taxing to change behaviour is not a fantastic track," says Mr McCabe.

Encouraging investment

But investors in green technology disagree.

James Cameron, founder of Climate Change Capital, says this is one of the best ways of reducing emissions in practice.

"What you are trying to do is, over time, take that whole commitment [to reduce carbon emissions]and apply it to individual areas. Lots of things are marginal but dealing with the built environment is not."

Last week, the Carbon Trust announced a new partnership with technology firm Siemens to provide £550m in loans to businesses to improve their energy efficiency.

The scheme will run for three years and opens on 4 April - just as companies start monitoring emissions to be paid for under the new levy.

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