Reforms to Climate Change Levy to force up corporate energy bills

The case for businesses to invest in energy-efficiency measures is set to increase, with the Treasury announcing this week that tax relief on the Climate Change Levy available to some firms will be reduced from April 2011.

Under the terms of the Climate Change Levy, businesses that make binding commitments to improve their energy efficiency can sign up to Climate Change Agreements that qualify them for tax relief.

But presenting his Pre-Budget Report (PBR) to the House of Commons this week, chancellor Alistair Darling said he would make changes to the Climate Change Levy to provide incentives for deeper cuts in carbon emissions.

The PBR document confirmed that the government would reduce the rate of relief on offer from 80 per cent to 65 per cent, and also extend the Climate Change Levy to cover the plastics and industrial laundries sector. The Department of Energy and Climate Change said the changes would serve to cut carbon emissions by an extra 250,000 tonnes a year.

Barbara Bell, senior manager of environmental taxation at KPMG, told BusinessGreen.com's sister title Accountancy Age that the changes could cost some firms hundreds of thousands of pounds. She added that the reduction in tax relief could be followed by further cut.

"Are we working towards abolition of the reduced rate?" she asked. "This is the first time in 10 years there has been a change in the reduced rate. This could be a small part of much bigger changes."

The Treasury said that the resulting increase in energy bills for firms that have signed Climate Change Agreements will give them further incentives to curb energy use, but some business groups were more sceptical about the effectiveness of the changes.

The Dairy UK trade group said that the changes would cost dairy companies £1m a year and would effectively reduce the incentive for firms to invest in energy-efficiency measures.

Gerry Sweeney, chairman of the trade group's Energy Savings division, accused the government of delivering mixed messages and watering down a fiscal incentive for those dairy firms that have already made binding commitments to improve their energy efficiency.

"The dairy industry has worked hard over the past 10 years to save more than 130,000 tonnes of carbon from entering the atmosphere," he said. "As the Copenhagen summit puts the spotlight firmly on climate change, it is extraordinary that the UK government is mixing its messages and reducing fiscal incentives for action."

However, Antony Blakey, chairman of clean tech company Ultra Green said that the changes were unlikely to have a significant impact either way. "For most businesses, the Climate Change Levy is a matter of pennies and pence in terms of their overall profits," he said. "What is really sad is that industry must be coerced and incentivised simply to do the right thing and cut their carbon emissions."

The Treasury was unavailable to comment at the time of going to press.