Headline issue

The UK has a complex system of energy taxes which affect the business sector. Overlaps between taxes mean that carbon prices are uneven across sectors and fuels, and result in some businesses paying for their carbon dioxide emissions several times over.

This paper provides an overview of such policies, investigates how they impact UK businesses and their competitiveness, and proposes a simplified and more effective policy framework.

Key points

  • As a result of the UKs complex system of energy taxes, carbon prices vary significantly across fuels and sectors and, in several cases, overlap. This means carbon prices currently range widely, from £1.40/tCO2 for LPG for some firms to £65.70/tCO2 for electricity for others.
  • Green levies on electricity mean that the carbon content of electricity is more heavily taxed than it is for other energy sources, like gas and coal. This is inconsistent with the goal of promoting further electrification of the economy.
  • The impact of climate change policies on business competitiveness  is often used as a justification for tax exemptions and discounts (such as through the Climate Change Agreements (CCAs)). However, there is no evidence that policies, such as the Climate Change Levy (CCL) and the European Union Emission Trading System (EU ETS), have had any impact on business competitiveness to date.
  • The layering of different policies has created institutional complexity, adding to the administrative burden for businesses. This is the case, for instance, with the CRC Energy Efficiency Scheme, whose administrative complications and costs, together with a history of frequent revisions, have made it an unpopular measure.
  • In order to reduce administrative burdens and overlaps, as well as make carbon prices more uniform across the economy, the paper proposes a simplification of the three key downstream policies –the CRC, the CCAs and CCL – by merging them into a single tax instrument that retains the design of the CCL: a ‘CCL+’.
  • Electricity should be subject to a reduced rate of CCL+ to account for the fact that electricity already bears the cost of the EU ETS, the carbon price floor and market support for renewables.
  • Determining the appropriate carbon price for such an instrument is a sensitive issue and, ultimately, a political choice. In principle, there is an argument for aligning the carbon price for businesses along a single value for both the EU ETS and non-EU ETS sectors, and consistent with the overall UK carbon budget.
  • A reform along these lines could result in higher tax rates for several businesses, and increase fiscal revenues for the Government. There is a case for recycling these additional revenues back to businesses whose international competitiveness would be impacted, provided these can be accurately identified. Compensation options could include lump-sum payments or reductions in business taxes. Revenues could also be used to cover the expenditures associated with other climate-related policies, for instance by reducing the burden of the RO or FITs on energy bills.
Keep in touch with the Grantham Research Institute at LSE
Sign up to our newsletters and get the latest analysis, research, commentary and details of upcoming events.