The Climate Change Levy is a carbon tax that is added to the energy bills of business and public sectors organisations. It was introduced on 1 April 2001 and typically adds approximately 15% onto those energy bills.  

There are a number of exemptions from the levy which means that it is not payable when, for example, the energy derives from a particular source. Once such exemption relates to electricity generated from qualifying renewable sources.

In the Chancellor's budget speech on 8 July 2015, George Osborne confirmed that this exemption was to be removed with effect from 1 August 2015 which meant that the levy would for the first time become payable on energy generated from renewable sources.

The Government's rationale for this was that this particular exemption was no longer required because since it has been introduced more effective national policies have been implemented to support renewable energy generation. The Government also took the view that the suggested change would simplify and stabilise the levy.

Removal of the exemption

Legislation was contained in the Summer Finance Bill 2015, which is currently going through the Houses of Parliament and Commons, to amend the Finance Act 2000 to adjust the exemption such that electricity generated from renewable sources on or after 1 August 2015 will not benefit from the exemption.

The legislation allows utility companies to accumulate renewable source electricity and renewable levy exemption certificates. To the extent that these have been generated prior to 31 July 2015 it will still be possible to supply electricity exempt from the levy for a transitional period which is still to be determined.

This apportionment of electricity from renewable energy sources and supplied before and after 1 August 2015 will therefore need to be factored into Climate Change Levy tax returns submitted at the end of the 2015/2016 tax year.

Impact of removing the exemption

Predictably, the Government took the view that this change would not impact on wholesale electricity prices or that it would increase energy bills as the energy market is a competitive market.

However, it is difficult to see how this change will not have a significant impact on some businesses.

For example, we know that clients who generate electricity from renewable sources are almost certainly going to be affected. Up until now, if biomass was used as a fuel source then it would mean that the operator/purchaser of the biomass would not have to pay the climate change levy. As a result of the Chancellor's plans those operators will now have to either pay the levy or, if eligible, enter in to a climate change agreement which requires energy use reductions in return for a subsided levy.

For those operators who pay the levy then their costs will automatically rise because the proportion of their energy supply which comes from renewable sources will now become subject to the levy. This was demonstrated very clearly by the sharp drop in the share price of the Company which operates Drax power station immediately following the Chancellor's speech. This resulted in a £425 million reduction in the company's value which has been attributed directly to the increased costs as a result of the removal of the levy.

Interestingly, Drax announced at the end of September that it would not be renewing funding for an existing carbon capture and storage research project which was looking into the potential to capture up to 90% of carbon emissions from a new coal fired power station and store them beneath the ocean.

We do not know why the Company has withdrawn this funding. However, it does seem to be a coincidence that shortly after the Government decides to remove an exemption from the climate change levy which will increase the Company's operating costs that the Company withdraws funding for a project which sought to identify ways of safely managing emissions from power plants.

This appears to be at least one example of where the Government's change in policy has had a negative impact on other emission reduction measures and we are sure that there will be others.