HM Treasury recently launched a consultation to seek views on its proposals to reform the business energy efficiency tax landscape, following the announcement by the Chancellor in the Summer Budget that energy policies and regulations would be subject to review.

The government is seeking feedback on what data should be collected and made publicly available, and whether new regimes, rates and incentives should require board level sign-off.

The Proposals – Reporting, Tax and Incentive Reform

  • Single Reporting Scheme: The government is proposing a single reporting scheme to effectively manage business energy use and emissions. Currently there are a number of reporting frameworks in place. For example, the Energy Savings Opportunity Scheme (ESOS) legislates that certain undertakings in the UK are required to calculate their total energy consumption and provide a voluntary framework for the auditing of these calculation results. Many companies subject to ESOS in the UK are also subject to the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), and mandatory greenhouse gas (GHG) reporting was introduced in 2013 requiring all companies publicly-listed in the UK to report on their GHG emissions in annual reports. The proposal is to develop a single reporting framework which incorporates the most effective elements of these various schemes. In order to drive change, the consultation paper demonstrates a preference to adopt a framework in line with ESOS to ensure a significant reduction in the compliance costs associated with such obligations.
  • Single Tax: The government has proposed a single tax in response to the following criticisms the system is currently facing:

(i) tax rates on carbon vary significantly across different business types and fuel types, and

(ii) the current tax system is too complex. The proposal is to abolish the CRC – which requires businesses to monitor and report their energy use and purchase allowances for the carbon they emit – and in its place extend the reach of the current business energy consumption tax, known as the Climate Change Levy (CCL).

  • Incentives: The proposal recognises that long-term cost efficiency savings have not proved to be, in their own right, sufficient to attract investment in new technologies. Consequently, the proposal queries whether additional financial incentives should be introduced, to be funded by additional revenues secured through the new streamlined tax programme. The existing incentive scheme, known as Climate Change Agreements (CCA), has been criticised for not effectively offsetting the competitive disadvantage of the CCL and allowing businesses to secure CCAs by making only marginal energy efficiency improvements. CCAs are voluntary agreements providing eligible sectors with a discount on the rates they must pay under the CCL in exchange for developing and meeting energy efficiency targets.

From Proposal to Publication

The consultation is due to close on 9 November 2015, with the HM Treasury expected to publish its formal response at the 2016 Budget. Considering this timeframe, it is unlikely that any changes will come into force before 2017, and therefore the current ESOS and CRC compliance requirements will continue to apply.

However, business across the UK will welcome reduced complexity in complying with their obligations to increase energy efficiency and meet decarbonisation targets. It remains to be seen how the government will develop the details of its proposed reform.