1.2 The CIOT s Environmental Taxes Working Group has previously commented on the principles of environmental taxes.

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1 Reforming the business energy efficiency tax landscape HM Treasury consultation document September 2015 Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) presents its response to HM Treasury s Consultation Document on reforming the business energy efficiency tax landscape published on 28 September 2015 at The CIOT s Environmental Taxes Working Group has previously commented on the principles of environmental taxes. 2 Executive summary 2.1 We welcome the proposed simplification to reduce the administrative burden on business and to improve streamlining of business energy taxation and we take the view that environmental taxes can play a significant role in a modern tax system and in enabling the Government to meet its statutory obligations under the Climate Change Act However, it is fundamental that they are implemented with close attention to sound principles to ensure they are effective. Taxes which merely shift pollution elsewhere, or which raise revenue without leading to greener behaviour, are failing to do their job. 2.2 Put simply, green taxes should ideally be easy to avoid (by a change in behaviour) but hard to evade. They should aim to be self-consuming as the desired behavioural change is produced, rather than being merely revenue raising. 2.3 We believe it is necessary to have clear objectives of what an environmental tax is intended to do and that environmental tax policy should conform to

2 Adam Smith s four basic principles of taxation: Fairness, Certainty, Convenience and Minimising the Compliance Burden. 2.4 For environmental taxation to be fully effective in changing behaviour, it is important that the Government gives taxpayers confidence that measures will be in place for a long period. In order to make long-term investment commitments, businesses require certainty and stability. This is particularly the case with environmental tax as acting in a greener way often requires substantial up-front investment. 2.5 We are concerned that there is insufficient clarity around the direction of environmental tax policy. For this reason we call on the Government to put in place an Environmental Tax Framework, or road map, for the rest of the Parliament, along the lines of the Tax Framework for Business adopted in the last Parliament. We note that the Summer Budget 2015 did announce plans for a Business Tax Roadmap to be published by April 2016 and look forward to this addressing the long term policy on environmental taxation. Consultation questions 3 Question 1: Do you agree with the principle of moving away from the current system of overlapping policies towards a system where a single business/organisation faces one tax and one reporting scheme? Please provide evidence on level and types of benefits of an approach like this. 3.1 Direction of environmental tax policy The CIOT fully supports a review of the current environmental tax system and would welcome simplification, certainty and stability. However, we strongly believe that policymakers need to consider their objectives very carefully from the outset. Environmental taxes can make a difference, acting potentially as a more cost-efficient driver of behavioural change across all sectors but it is fundamental that they are implemented with close attention to sound principles to ensure they are effective. Taxes which merely shift pollution elsewhere, or which raise revenue without leading to greener behaviour, are failing to do their job. 3.2 The Climate Change Levy was introduced in April 2001 as an environmental tax, intended to change polluting behaviours and to assist in meeting the UK s obligations for reduced carbon emissions. The recent removal of Renewable Source Energy CCL exemption means that the tax is moving away from the environmental principles on which it was founded and becoming a revenue raising tool. Other measures introduced over recent years such as the capping of Carbon Price Support rates of CCL, the removal of CPS exemption for site-located combined heat and power plants, and the introduction of credit mechanisms for certain industry sectors for indirect energy costs arising from CPS and EUETS, all serve to cloud and confuse the issue over the direction and intent of carbon taxation. 3.3 We are concerned that there is insufficient clarity around the direction of environmental tax policy. For this reason we encourage the Government to put in place an Environmental Tax Framework, or road map, for the rest of the Parliament, along the lines of the Corporate Tax Road Map adopted in the last Parliament. 2

3 3.4 Principles of effective environmental taxation This consultation proposes to streamline and simplify the current tax system by replacing the CRC and CCL with a new energy consumption tax based on the CCL. 3.5 Establishing and maintaining an effective environmental tax policy presents challenges. There are some fundamental questions to answer at the outset: what is or should an environmental tax be; how do we monitor its success; and how should we deploy revenues raised from the imposition of the tax? 3.6 Previously, the Government has taken the view that only taxes that meet the following objectives are environmental taxes: 1. The tax must be explicitly linked to the government s environmental objectives. 2. The tax should be one that encourages environmentally positive behavioural change. 3. The tax is structured in relation to environmental outcomes so that the more polluting the behaviour, the greater the tax levied. 3.7 We support the Government s commitment to developing an effective framework that provides businesses with certainty and encourages business investment in energy efficiency and carbon saving. We are concerned about the variety of changes this industry has faced in recent years and the impact this is having on businesses ability to invest and confidence to plan longerterm in alternative energy sources. 4 Reporting 4.1 Question 2. Do you agree that mandatory reporting should remain as an important element of the landscape in driving the uptake of low carbon and energy efficiency measures? If not, why not? Question 3. Should such reports require board level sign-off and should reported data be made publically available? Please give your reasons. Question 4. Do you agree that government should develop a single reporting scheme requiring all ESOS participants (and potentially the public sector (see paragraphs ) to report regularly at board level? If so, what data should be included in such a report? Question 5. The government recognises the importance of ensuring market actors have access to transparent, reliable and comparable information to support financing and investment in energy efficiency and low carbon measures. How best can a streamlined report achieve this? To what extent does your response apply to other large companies (as defined in the Companies Act) that are not listed companies? 3

4 4.2 We support the Government s aim to reduce compliance time and costs where possible and to work with existing (and statutory) reporting requirements to ensure minimising duplication. 4.3 The UK already has a complex tax system and lengthy tax code which constitute a substantial bureaucratic burden for taxpayers, particularly small businesses. It is important that environmental tax measures do not unduly add to that burden. 5 Question 6. Do you agree that moving to a single tax would simplify the tax system for business? Should we abolish the CRC and move towards a new tax based on the CCL? Please give reasons. 5.1 We support the Government s intention to deliver a stable policy environment that is more effective in encouraging long term investment in energy efficiency and carbon saving. We believe it is essential to overcome the recent pattern of piecemeal changes that have led to uncertainty and a breakdown of confidence in long-term investment. 5.2 The proposal is to abolish the CRC and move the revenue raising element into a single business energy consumption tax based on the CCL. We pose the question: will the new single tax be an environmental tax? 5.3 If CCL is to be used as a template, it is worth exploring its flaws. Since its introduction CCL has been criticised because the rates are too low, and there are too many reliefs, to achieve its intended environmental goals. It appears to have been influenced by a range of political, social and practical concerns rather than just environmental objectives. For example, the exclusion of domestic consumption is seen as irrational from an environmental perspective. This arguably makes CCL more difficult to understand and administer. 5.4 It would be more logical from an environmental point of view if CCL focused purely on carbon emitting activities and relieved clean activities. 6 Question 7. How should a single tax be designed to improve its effectiveness in incentivising energy efficiency and carbon reduction? 6.1 We believe that accepted principles of good taxation should be applied to all new environmental tax measures. If adopted, we suggest any new consolidated tax and reporting scheme should conform to the four basic principles of taxation from Adam Smith s The Wealth of Nations : 1. Fairness - The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities. 2. Certainty - The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. 4

5 3. Convenience - Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributors to pay it. 4. Minimising the Compliance Burden - Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. 6.2 The CIOT s Environmental Taxes Working Group has previously made more detailed comments on the principles of environmental taxation. 7 Question 8. Should all participants pay the same rates (before any incentives/reliefs are applied) or should the rates vary across different businesses? For example, do you think that smaller consumers and at risk Energy Intensive Industries (EIIs) should pay lower rates? 7.1 The Institute for Fiscal Studies has previously reported that the rate of CCL has not kept pace with inflation. Whilst CCL rate increases are now in line with this measure there is a question as to whether a higher rate of CCL would be more effective at combating climate change. 7.2 The current CCL is a tax on fuel consumption rather than emissions. There are some areas where the CCL treatment of fuel is inconsistent with the level of emissions associated with that fuel. This is worth raising to ensure any new tax deals attempts to remove such anomalies. For example: As domestic/charitable consumption is excluded from CCL there is no CCL incentive for these users to become more energy efficient or to switch to cleaner sources of fuel. According to the Central Office of National Statistics, domestic users contributed 14%of greenhouse gas emissions in There is a CCL exemption for gas burned in Northern Ireland but gas burned elsewhere in the UK is liable to CCL. As burning gas in Northern Ireland has the same environmental impact as burning gas in Great Britain there is no environmental reason for the difference in treatment. 7.3 The design of the current CCL regime appears to have been influenced by a range of political, social and practical concerns rather than just environmental objectives. This has led to tax outcomes that appear irrational from an environmental perspective, and arguably make CCL more difficult to understand and administer. CCL would be more logical from an environmental point of view if its pure focus was to tax emitting activities whilst relieving clean activities. This may mean that other measures (eg fuel allowances, planning regulations) would be required to tackle social/political concerns such as fuel poverty etc. 5

6 8 Question 9. Do we currently have the right balance between gas and electricity tax rates? What are the implications of rebalancing the tax rate ratio between electricity and gas? What is the right ratio between gas and electricity rates? 8.1 Carbon price support (CPS) is not mentioned in the consultation, albeit a specific CCL charge on fossil-fuelled electricity generation. Its carbon price impact would need to be taken into account when considering the appropriate relationship of taxation rates between gas and electricity. 9 Question 10. Do you believe that the CCA scheme (or any new scheme giving a discount on the CCL or on any new tax based on the model of the CCL) eligibility should only focus on industries needing protection from competitive disadvantage? If so, how should government determine which sectors are in need of protection? 9.1 We consider that the application of the CCA scheme, and indeed other reliefs built into carbon taxation, should follow the principles of environmental taxation set out above. It is recognised however that Government has to balance competing needs between such matters as decarbonisation and carbon leakage, energy affordability, energy security, tax revenue etc. 9.2 Bearing in mind the above we do consider that it may be appropriate to conduct a critical review of the CCA schemes in place, or similar replacements built into any new tax, regarding scope, numbers, and effectiveness. This may particularly address the need for greater simplicity in operation and eligibility. 9.3 The Energy Tax Directive already defines energy intensive businesses and its use could lead to additional sectors being able to benefit from a CCA relief. We do still consider that the overall environmental taxation principles should need to be carefully considered before concluding on any expansion. 10 Question 11. Do you believe that the CCA scheme (or new scheme) eligibility should focus only on providing protection to those EIIs exposed to international competition and at risk of carbon leakage? If so, how should the government assess which CCA sectors are at risk of carbon leakage? 10.1 In a global economy international competition cannot be ignored, and any taxation measures introduced that lead to a net overall global increase in emissions, through issues such as carbon leakage, should be avoided It is to be hoped that greater global recognition of the risks posed by climate change will lead to reduced risks of carbon leakage. The results of the forthcoming 2015 UN Climate Change Conference, which has the aim of creating a universal and binding agreement on carbon, may influence this and may need to be factored into the final recommendations of this consultation. 6

7 11 Question 12. Do you believe that the targets set by the current CCA scheme are effective at incentivising energy efficiency? Do you believe that the current CCA scheme is at least as effective, or more effective, at incentivising energy efficiency than if participants paid the full current rates of CCL? How could CCAs be improved? Are there alternative mechanisms that may be more effective? 11.1 Currently, energy intensive businesses that sign up to CCAs receive a reduction in their CCL bills, (90% electricity; 65% gas etc), provided they meet certain emissions reductions and/or energy efficiency targets The CCL reduction provides an incentive to businesses to make energy efficiency improvements which they might not otherwise make, however we wonder whether this intervention is required given the relatively low rates of CCL being already potentially ineffective at driving the desired changes in energy efficiency There are other problems associated with CCAs: for example, not every industry that uses high quantities of power benefits from a CCA. If the rate of CCL was higher than this in itself may encourage any type of business to make energy savings without the need for a complex system of agreements and certificates. Alternatively a CCA system could be maintained but with more stringent emissions targets and robust penalties for failure to help drive behavioural change. Of course, merely imposing a higher rate of CCL would be an extra cost to business and may have other political implications, and enhanced risks of carbon leakage, (see q10),so the Government may need to provide additional support to businesses in some other way. 12 Question 13. Do you agree that incentives could help drive additional investment in energy efficiency and carbon reduction? Please explain why you agree or disagree This response focusses on environmental tax issues and so no comment is made. 13 Question 14. What is the best mechanism to deliver incentives for investment in energy efficiency and carbon reduction (eg tax reliefs, supplier obligations, grants, funding based on competitive bidding)? Are different approaches needed for different types of business? If so, which approaches work for which business types? What approaches should be avoided? 13.1 In order to make long-term investment commitments, businesses require certainty and stability. This is particularly the case with environmental tax as acting in a greener way often requires substantial up-front investment The current picture is confused. Recent announcements do appear to have shifted the focus away from decarbonisation and towards revenue raising. Areas contributing to this view include not only the sudden and unexpected removal of CCL exemption for renewable source power but also the various measures, and potential actions, announced earlier in 2015 concerning restricting the Levy Control Framework cap and the desire to restrict the impact of regulatory measures on power costs. 7

8 13.3 It is interesting to note that in June 2015 the Committee on Climate Change published its 2015 progress report on reducing emissions and preparing for climate change. This acknowledged that initial targets for emissions reduction set under the Climate Change Act had been met and even exceeded but still forecast a shortfall in reaching emissions targets for the fourth carbon budget ( ). Accordingly it recommended action be taken to ensure that the pace of emissions reductions accelerates The Government response advised that in this Parliament the Government will come forward with options to address the shortfall in relation to the post framework, and that our new emissions reduction plan will be published towards the end of Any new business energy tax will impact on this plan and also ideally in an Environmental Tax Framework as previously called for by the CIOT. 14 Question 15. What impact would moving to a single tax have on the public sector and charities? 14.1 In principle all taxpayers would benefit from a single coherent climate tax providing it would be simpler to administer, understand and pay than the present range of disconnected taxes and financial obligations. The public sector and charities would not seem to differ from this The proposal that the new CCL model would exclude certain activities of a number of organisations from a price signal that drives energy and emissions savings because of the fact that charities are currently excluded from paying the existing CCL on 'non business use' of energy does have some merit. Continuing to exempt third sector providers of public interest services from climate taxes might be seen as morally good but this does raise questions of equity with public sector providers of similar services who are likely to be required to pay such taxes in full. 15 Question16. How should the merged tax be designed to improve its effectiveness in driving energy and carbon savings from the public sector and charities? 15.1 We do not see the answer to this question being materially different to that of the private/commercial sector. A single coherent climate tax based on the polluter pays principle would seem preferable to the current regime. 16 Question 17. Should a new reporting framework also require reporting by the public sector? 16.1 As with question 16, we believe the same principles apply to all taxpayers. Any reporting obligation is burdensome, therefore its impact should be kept to the absolute minimum required to ensure the objectives of the tax are met. 8

9 17 The Chartered Institute of Taxation The Chartered a. Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,500 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 6 November