Why don't we keep the CRC, but scrap the stealth tax element?
A couple of weeks ago I was invited to give evidence to the Energy and Climate Change Committee of MPs as part of its investigation into the government's Carbon Reduction Commitment (CRC). The invite was the result of a survey BusinessGreen undertook in partnership with Global Action Plan and CloudApps into what our readers thought of the CRC and its effectiveness. The survey had thrown up some interesting results, confirming anecdotal evidence that lots of people think the CRC is an onerous distraction, while also revealing most organisations had complied with the legislation and many had seen awareness of environmental and energy issues rise as a result.
It was this contradiction that meant I was left stumped by the first question from the Committee's chair, Tim Yeo, MP: "Are you broadly a supporter of the CRC, or a critic of it?"
My rather rambling answer boiled down to a fudged compromise between both positions (I would later manage to pour most of a jug of water over my notes, so this less than perfect opening was still in many ways my most eloquent contribution to proceedings). I argued that there was plenty to admire in the over-arching principles governing the CRC – the desire to force companies to track their emissions, the need for a financial incentive to drive investment in energy efficiency – just as there was plenty to criticise in its significant administrative burden and the lack of planning that saw the scheme turned into a tax at short notice.
This dichotomy remains firmly in place and as the government continues its review into whether to simplify or scrap the scheme even those who are more supportive or dismissive of the scheme than I accept it will be challenging to reform or replace the scheme in a way that retains its benefits while removing its weaknesses.
The most vocal voice in this debate currently is the CBI, which has been campaigning against the CRC since the Chancellor moved to turn it into an effective carbon tax by scrapping the revenue recycling element of the original scheme and is now calling for it to be scrapped altogether.
With the government finally approving plans for mandatory carbon reporting for listed firms, the CBI's claims that the CRC is over-complex and overlaps with too many other carbon policies are gaining traction and chime with the government's anti-red tape agenda. However, DECC is thought to be keen to retain a policy that has secured high levels of compliance, has established standards for carbon reporting that thousands of organisations are now following, and has undoubtedly forced more organisations to pay attention to energy efficiency while driving a clear additional price signal into the market that should encourage investment in energy saving measures.
But could there be a compromise available between these two positions? Is there a way to throw out the bathwater of excessive financial and regulatory burdens while keeping the baby of improved energy savings and carbon reporting safe and sound?
There might just be and it centres on the question of whether businesses are opposed to the CRC because of the scrapping of the revenue recycling element and the conversion of the scheme into a £1bn a year stealth tax, or whether they are also opposed to it in its original form?
If the answer is the latter, then there is not much that can be done. The row over whether to scrap or reform the scheme will continue.
But if the main objection is the taxation element, then perhaps the answer is to simply go back to what was originally planned.
Reinstate the revenue recycling element and in one swoop you defuse much of the criticism of the scheme, provide a much clearer financial incentive for investment in energy efficiency measures by distributing penalties and bonuses based on organisation's performance, return relevance to the much-criticised CRC league table, and retain the benefits associated with the establishment of the CRC's reporting requirements. Some businesses would continue to complain about the complexity of the scheme and the administrative burden, but this would be reduced over time as people became more used to the CRC's requirements.
A return to the CRC's revenue-neutral roots would solve a lot of problems and deliver a significant boost to energy efficiency initiatives across the UK.
The problem is that it would leave a £1bn hole in the Treasury's finances and ensure the Chancellor once again has to face charges of a U-turn. All of which means this particular U-turn will not happen.
But if Osborne can put aside his political pride there is a strong case for restoring the CRC to its original form – a form that only two years ago most businesses were prepared for, if not necessarily happy with. He could then claw back the lost revenue, either through the departmental savings that enabled the delay in the fuel duty increase, or a more appropriate environmental levy. The fact is that once Obsorne decided he wanted to increase carbon taxes on businesses as part of his deficit reduction plan the easiest avenue for achieving this was through an increase in the existing Climate Change Levy. But because he thought he would face opposition from businesses and some of his own MPs if he made such a visible tax raid he instead went for a classic stealth tax in the form of changes to the CRC. Why not just impose the carbon tax increase where it should have been levelled in the first place?
As mentioned this U-turn is never going to happen, but it really is worthy of consideration on the simple grounds that the alternatives currently available are far from perfect.
We are either going to see modest reforms to the CRC and the continuation of a scheme that overlaps with numerous other carbon taxes and is widely reviled by the CBI and many businesses, or a period of yet more policy uncertainty while ministers scrap a scheme that has achieved many of its goals in order to replace it with we know not what. Perhaps it is time to look for the third way.
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