UK: the first low-carbon economy - does the 2009 Budget deliver?

01 April 2009

Background

The Government has made it clear it wishes to be the leader in tackling climate change.  This is demonstrated by the Climate Change Act 2008 which sets out an ambitious target of reducing the UK's greenhouse gas emissions by 80% by 2050 by reference to a 1990 baseline.  In addition the Act includes the introduction of a mandatory cap and trade scheme (the Carbon Reduction Commitment) for all organisations with facilities in the UK where their electricity bill for 2008 exceeds 6,000 MWh. 

At the EU level there is a commitment of 20% of the EU's energy to come from renewable sources by 2020, with the UK's target being 15%.  At the recent London Summit the G20 confirmed their commitment to reach a global agreement on climate change in Copenhagen in December this year as a successor to the Kyoto Protocol. 

The Government has acknowledged the need for investment in low-carbon development and to encourage the provision of finance for this sector.  Globally the low-carbon and environmental sector is estimated to be worth £3 trillion.  By 2015 it is estimated that this sector in the UK alone will be worth £150 billion. 

Energy security is also a concern for the UK.  Investment in new generation capacity of up to 35 GW is required, almost half of current capacity, over the next 2 decades to replace ageing power stations and to meet growing energy demand. 

The Government's 2009 Budget, as a result, includes a number of 'green' elements to assist it in achieving its ambitious emissions reduction targets, to encourage investment in the low-carbon sector and to address concerns as to security of energy supply and we have summarised the main changes below.  The proposals build on a number of existing policies and funding projects but whether this will be sufficient to create the new jobs and businesses in this sector that the Government desires is debatable and how it proposes to raise the funding for the projects it has announced is a very large question. 

Raising money through taxes 

Landfill Tax (“LFT”) 

  • The standard rate of LFT will increase by £8 per tonne on 1 April each year from 2011 to 2013. The rate will therefore be £48 per tonne from 1 April 2010. The lower rate, for inert waste, will be frozen at £2.50 per tonne for 2010-2011. 

  • The Government has also published a consultation on how to modernise the existing LFT regime. The consultation closes on 24 July 2009.  This includes a proposal to change the definition of taxable disposal and certain wastes are to be brought back within the scope of LFT. 

  • The Government also intends to tighten the legislation enforcing landfill tax following an adverse court judgment last summer and to ensure that certain specified uses of material on a landfill site will be subject to this tax. 

Climate Change Levy (“CCL”) 

  • The Government will extend the CCL exemption for indirect sales of electricity generated using combined heat and power (“CHP”) beyond 2013 to 2023, subject to obtaining State aid approval. It is hoped this will bring forward £2.5 billion of investment. 

  • Facilities that manufacture certain plastic products will be entitled to claim a restricted entitlement to relief from the CCL by entering into Climate Change Agreements (“CCA”). This will apply to supplies of electricity and liquefied petroleum gas only. 

Low-carbon transport 

  • Electric vehicles will pay no fuel duty or Vehicle Excise Duty (“VED”). 

  • Special discounts previously available to certain early technology low-carbon cars will be abolished. 

  • Main fuel duty will increase by 2p per litre on 1 September 2009 and by 1p per litre in real terms on 1 April each year from 2010 to 2013. 

  • Confirmation of 2008 pre-budget reforms to VED for cars registered from 1 March 2001 onwards to incentivise the purchase and manufacture of lower-carbon cars. 

“Expensive” cars 

  • New special capital allowances rules for cars costing more than £12,000. Expenditure on cars with CO2 emissions exceeding 160g/km will attract a writing down allowance of 10% per annum. Expenditure on cars with CO2 emissions of 160g/km or less will attract a writing down allowance of 20 per cent per annum. 

Energy Saving and Water Efficient Enhanced Capital Allowance Schemes (“ECA”) 

  • The list of technologies qualifying for the ECA schemes allow businesses investing in certain technologies (designed to reduce energy consumption or to save water or improve water quality) to obtain a 100% tax deduction for the cost of investment in relevant technologies has been expanded to include uninterruptible power supplies, air to water heat pumps and close control air-conditioning systems. 

  • Three existing sub-technologies (single duct and packaged double duct heat pumps, prime to air heat pumps and package heat pumps) will be removed from the list. 

Cushion gas  

  • Cushion gas (put simply that is the gas injected into an underground storage facility to bring it up to operating pressure) is eligible for plant and machinery capital allowances. 

North Sea oil and gas production 

These changes are being made to remove fiscal barriers to the reuse of this infrastructure for other activities but the concessions are large in comparison to other “greener” measures. 

  • A new 'field allowance' (£75m for smaller fields and £800m allowance for fields with heavy oil) which can, over time, be offset against the supplementary charge and so reduce the rate of tax paid by developers of particular types of projects. 

  • Relieved CGT on sales of North Sea stakes, so long as the cash is reinvested elsewhere in the North Sea. 

  • Companies are to be stopped from claiming tax relief for the costs of scrapping oil rigs until they actually do the work. 

  • Restrictions were announced on tax relief of the decommission costs claimed too far in advance of the actual decommissioning. 

Encouraging investment by increased funding 

Carbon budgets 

The Government proposes to set the first three carbon budgets at levels leading to a 34% reduction in greenhouse gas emissions, as against 1990 levels, by 2020 and the Government laid the necessary order, on the budget day itself, before Parliament for approval as is required by the Act, with the expectation that this will come into force on 31 May 2009.  Without specifying the details, the Government has stated that its "level of ambition" of carbon budgets will be reviewed once a "satisfactory" global deal on climate change is reached.  Obviously, no-one can be sure of the details of the final deal at Copenhagen, so it is understandable that the Government wishes to reserve its position, but the Budget report does not define what type of deal would be satisfactory, or, even if it cannot define what is "satisfactory", how precisely its ambitions would change if such a "satisfactory" deal were reached.  Even though the budget levels are intended to be legally-binding, there remains a major degree of uncertainty. 

The background to carbon budgeting is the obligation in section 4 of the Climate Change Act 2008 for the Secretary of State to set for each succeeding period of five years, beginning with the period 2008-2012, an amount for the net UK carbon account, and to ensure that the net UK carbon account for a budgetary period does not exceed the carbon budget. 

What is notable is that the target level of reduction of 34% against 1990 levels by 2020 is an increase compared to the legally-defined reduction specified in the Climate Change Act 2008 of 26% lower than the 1990 baseline. 

Clearly there are many policy details to be completed as to how this target is to be achieved, and this summer, again as required by the Act, the Government will publish an energy and climate change strategy setting out these details. 

Carbon Capture and Storage ("CCS") 

The Government proposes to allocate £60 million to fund engineering and design studies for carbon capture and storage.  The Treasury states that a further £30 million is being found within existing environmental budgets.  This is part of a proposed £1.4 billion support programme for the low-carbon sector.  The purpose is to reduce "technological risk" for CCS projects and give greater clarity on costs.  Information from the studies must, in return for the funding, be made available to promote global understanding of CCS. 

The European Commission has recently approved the UK's application for granting State aid for two front end engineering and feasibility studies (FEED-studies) on two industrial-scale CCS demonstration projects.  As Competition Commissioner Neelie Kroes stated: "Carbon Capture and Storage is an important element in the EU's climate change policy and needs to be demonstrated at industrial scale."  The European Commission found that aid for such projects was an appropriate and proportionate step towards promoting an objective of common interest, without distorting competition. 

Energy efficient buildings 

Tackling emissions from buildings is one of the big concerns for the Government for reaching its emissions reduction target and it has therefore introduced additional measures building on a number of initiatives already in place. Over the next 2 years the following additional funding is to be made available: 

  • £100 million extra to improve the insulation of 150,000 homes in the social sector via the Decent Homes programme – this is in addition to the one million homes that were insulated in 2008. 

  • A new housing package whereby local authorities will receive £100 million for the construction of new social housing with higher energy efficiency standards. 

  • £400 million of funding is to be provided to stimulate housing development in the short term and boost capacity in the house building industry by unlocking currently stalled housing developments by leveraging in private development finance through a combination of reducing up front costs with equity, gap and infrastructure funding, and increased funding for affordable housing. 

The Government is consulting (Heat and Energy Saving Strategy Consultation February 2009) on how to further increase energy efficiency with the aim of retrofitting the entire housing stock by 2030. The strategy is expected to be published later this year. 

  • £65 million is provided for funding of loans to install energy efficiency measures in public buildings, via the Carbon Trust Salix Scheme in England, which will support approximately 3000 projects in schools, hospitals and other public sector institutions. 

The Government continues to support small scale and local low-carbon energy generation projects so as to assist in reaching the renewable sources target for the UK of 15% by 2020.  As a result, a further £45 million will be available for small scale renewable electricity and heat technologies, primarily though the Low Carbon Buildings Programme, and £25 million is to be provided in funding low-carbon community heating schemes.

These measures are expected to lead to savings of 380,000 tonnes of carbon dioxide per year. 

Renewable energy 

Investment in the low-carbon sector and energy and renewables projects has been hit by the falls in carbon and energy prices, the credit problems and exchange rate fluctuations (it is interesting to note however that in 2007 only 4% of the UK’s electricity was generated from renewable sources), and so the Budget included a number of items to support this sector and help attract investment as follows: 

  • £405 million to support the development of low-carbon industries and "advanced green manufacturing" so as to make the UK a world leader in this sector - £250 million through BERR and £155 million through DECC. This funding will be delivered through existing programmes such as the Environmental Transformation Fund and as part of the Strategic Investment Fund.  The hope is that this will allow the UK to develop expertise in particular low-carbon sectors, such as offshore wind and marine energy. 

  • To support offshore wind projects £525 million will be provided to allow a revision of the banding of Renewables Obligations Certificates ( "ROCS") so that offshore wind will receive 2 ROCs (as compared to the current 1.5), for each megawatt of electricity produced, subject to the offshore wind project meeting specified completion criteria and achieving financial close 2009-2010.  For 2010 - 2011 the figure will be reduced to 1.75 ROCs per megawatt of electricity.  This assistance therefore is only for a limited period and is likely to be an issue for developers who need to commit to projects now for delivery from 2012 onwards. 

  • To help tackle the issue of raising the necessary finance the European Investment Bank will make funds available of up to £4 billion for renewable energy projects in the UK, through direct lending to energy projects and intermediated lending to banks.  The hope is that this will allow £1 billion of consented small and medium sized UK renewables projects to move from the design to deployment stage.  

The Government will also publish shortly its Renewable Energy Strategy having already published a Low Carbon Industrial Strategy in March 2009. 

Waste infrastructure 

The 2009 Budget aims to promote alternatives to landfill for biodegradable waste – each year businesses and households generate around 100 million tonnes of waste and two-thirds of this currently ends up in landfill. 

In order to combat the decrease in credit available to those investing in waste infrastructure, the Government already announced in March 2009  that  more than £2 billion of PFI credits would be available for waste projects. The Treasury Infrastructure Finance Unit (TIFU), which was launched as part of this, will support projects that are struggling to raise debt finance, thereby filling the gap left by the contraction of available private finance. 

£10 million of new grants have in addition been announced in the Budget for the financial year 2009 -2010 to deliver anaerobic digestion and in-vessel composting infrastructure so as to encourage development of this technology and reduce recyclable waste being sent to landfill.  The inclusion of in-vessel composting is disappointing as this does not harness the methane emissions produced for energy generation.  Anaerobic digestion breaks down biodegradable waste through microorganisms producing a renewable biogas in the process, whilst in-vessel composting reduces biodegradable waste in a closed system.