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Session 2000-01
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Delegated Legislation Committee Debates

Draft Climate Change Levy (Use as Fuel) Regulations 2001

Fourth Standing Committee on Delegated Legislation

Thursday 15 March 2001

[Mr. Bill O'Brien in the Chair]

Draft Climate Change Levy (Use as Fuel) Regulations 2001

9.55 am

The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move

    That the Committee has considered the draft Climate Change Levy (Use as Fuel) Regulations 2001.

The Chairman: With this we may consider the draft Climate Change Levy (Combined Heat and Power Stations) Prescribed Conditions and Efficiency Percentages Regulations 2001, the draft Climate Change Agreements (Energy-intensive Installations) Regulations 2001, the draft Climate Change Levy (Electricity and Gas) Regulations 2001 and the draft Climate Change Levy (Solid Fuel) Regulations 2001.

Mr. Timms: I am delighted that you are overseeing our deliberations this morning, Mr. O'Brien. I hope that all members of the Committee will find it an enjoyable and stimulating session.

Climate change is probably the greatest environmental threat facing the world. Scientists estimate that the world's climate could warm by about 30 deg C over the next 100 years. That is a rate of warming greater than any since the last ice age, 10,000 years ago. Climate change is likely to affect all aspects of the world's environment, economy, society and health. Apart from the increase in temperature, it is estimated that rainfall could increase by as much as 10 per cent over England and Wales and 20 per cent over Scotland by the 2080s. Higher temperatures in the United Kingdom might also exacerbate the effects of air pollutants, particularly in the summer months. This is a serious problem that we have taken determined action to tackle, responding in particular to the agreement reached by the developed countries at Kyoto in December 1997.

The climate change levy, alongside other initiatives, will make an important contribution towards meeting our objectives. The levy package as a whole, including the negotiated agreements with the energy-intensive sectors, is expected to save at least 5 million tonnes of carbon a year by 2010. As well as those environmental benefits, the complementary cut in employer national insurance contributions will generate additional employment opportunities. The schemes to promote energy efficiency and renewable energy directly will stimulate investment in new environmental low-carbon technologies. There has been much debate about the climate change levy but these regulations will be widely welcomed and will not present the Committee with any great difficulty.

The first set of regulations relates to use of fuel. Liability to climate change levy is dependent on a taxable commodity being used as a fuel. Non-fuel uses are exempt from the levy and a draft list of such uses was published in November 1999. The schedule covers a variety of non-fuel uses such as electrolysis, steam reformation and dual-use functions, such as use as both a fuel and a reductant in blast furnaces. In those cases, it has been decided to offer a full exemption provided that the non-fuel element of the use is more than incidental. Provision will be made to incorporate additional items in the schedule when taxable commodities are identified and accepted as being used for non-fuel purposes.

Combined heat and power stations enjoy certain exemptions from climate change levy because of their environmental benefits. The CHP regulations specify the conditions and limits for those reliefs, and make various provisions for the calculation of the efficiency ratings of combined heat and power stations. The standard has been widely circulated and is familiar to industry and to representative bodies.

The third regulations deal with energy-intensive installations. The list of energy-intensive installations in paragraph 51 of schedule 6 is derived from the list of activities in annexe 1 to the integrated pollution prevention and control directive, which covers the main energy-intensive sectors of industry that are subject to international competition. Installations that are covered by the directive will be required to use energy efficiently.

The directive is being implemented through the Pollution Prevention and Control (England and Wales) Regulations 2000. Part A installations, as set out in part 3 of schedule 1 to those regulations, include all the installations listed in annexe 1 to the IPPC directive and several others. The effect will be to allow any part A installation to be covered by a climate change agreement and thus benefit from the 80 per cent. discount in the rate of climate change levy. Members of the Committee will be familiar with that.

Other than those for combustion plants, thresholds in the list of part A installations will not apply for the purposes of determining whether an installation is eligible to be covered by an agreement. That will prevent discrimination against small sites, which I know will be welcome. However, the combustion thresholds need to be retained in order to prevent any combustion plant being eligible. Installations in Scotland and Northern Ireland will be eligible in the same way as installations in England and Wales.

The fourth regulations deal with electricity and gas. The chargeable event for climate change levy purposes is the supply to the final consumer. In most cases, the supplier is a gas or electricity utility. Those are defined in legislation as entities requiring supply licences under the Gas Act 1986 or the Electricity Act 1989. Some supplies of gas and electricity, however, are not required to be made under supply licences. The regulations deal with those cases.

Finally, under the solid fuel regulations, coal and other solid fuels are taxable commodities for climate change levy purposes. Their use is chargeable with the levy unless the supply is otherwise excluded or exempted. In some cases, waste products such as yard sweepings are sold cheaply for low-grade heating purposes. Although unsuitable for normal use, these products still have some energy value and are sold at low prices—typically between £5 and £20 per tonne. The imposition of the levy at a rate of more than £11 per tonne could result in such products becoming uneconomic, with resultant undesirable effects. To prevent that from happening, the regulations provide that solid fuel with an open market value not exceeding £15 per tonne at the time of supply is not a taxable commodity for the purposes of the climate change levy.

The regulations are helpful and will be widely welcomed. I commend them to the Committee.

10.3 am

Mr. Oliver Letwin (West Dorset): I apologise for being late. I was stuck in a traffic jam on the other side of Westminster bridge. If the House still had power over the Greater London area, we might have been able to do something about it. The circumstances on that side of the bridge are appalling, as hon. Members would agree.

If you had been unlucky enough, Mr. O'Brien, to have chaired the proceedings on the Finance Bill, you would have become aware—through many painful hours of debate—that Conservative Members had severe reservations about the climate change levy. The Financial Secretary is certainly aware of that fact.

I initially approached the regulations with scepticism and suspicion, but having heard the Financial Secretary expounding in his usual lucid and fluent way, I have concluded that nothing in them is more objectionable than the underlying text. If I launched into a long diatribe against the climate change levy, which my party is committed to abolish, I know that you would immediately rule me out of order, Mr. O'Brien, so I will refrain from doing so and make no substantive comment on the regulations.

I want to make two brief points, both relating to wider issues that have emerged from the regulations. The first is about the constitutional procedure involved in the draft Climate Change Agreements (Energy-intensive Installations) Regulations 2001. I made a personal commitment at the beginning of the Parliament always to object to Henry VIII proceedings, which these essentially are, both in relation to permission for such clauses in Bills and implementation in particular regulations. I still think it wrong to use secondary legislation to amend primary legislation—even though the amendment in this instance is substantively unobjectionable. Having said that, I accept the Financial Secretary's point that numeric thresholds will be welcome.

Secondly, I have a doubt about the draft Climate Change Levy (Use as Fuel) Regulations 2001. I raise it somewhat tentatively, as the Financial Secretary's legal advisers may have considered the points that I am about to make and genuinely satisfied themselves that there will not be a problem. However, as there are precedents of similar problems, I feel I must alert the Government to the issue.

The governing clause for the regulations is in paragraph 18 of schedule 6 to the Finance Act 2000. In Committee, we discussed paragraph 18(1), which states:

    ``A supply of a taxable commodity is exempt from the levy if the person to whom the supply is made intends to cause the commodity to be used otherwise than as fuel.''

Substantively, that might be unimportant. However, procedurally and interpretatively, as a matter of statutory construction, there might be a difficulty, arising from the fact that, while the intention is to make certain exemptions from the climate change levy—very welcome from our point of view—the fulfilment of that intention requires the abuse of the language.

It is clear that the processes that are listed in part A of the schedule to the regulations involve the use of commodities that would otherwise be taxed as—in ordinary language—fuels. I do not think that anyone in the United Kingdom who grew up speaking English would know of any other way to describe such use than as fuel. However, the regulation intends to implement paragraph 18(1) of schedule 6 to the Finance Act 2000 in a way that would define those uses as non-fuel uses. We all understand that the substantive effect would be to release certain substances from the levy. As I said, we have no objection to that. However, it seems perfectly clear that someone using electricity for electrolysis or the production of aluminium or copper pipe is using it as fuel.

The Financial Secretary is aware that one of our general concerns about the climate change levy, apart from our objection to the whole idea, is that it is extraordinarily complicated and difficult to apply. In practice, the measure could lead to legal challenges. There are issues of competition and relative advantage. It is likely that someone will mount a challenge to the provision on the grounds that it is manifestly doing something that, in ordinary language, it would not be able to do under the relevant provision of schedule 6. His legal advisers may have thought through that issue in greater depth than they normally would and considered how, under the various laws that might apply, we can be sure that no one will mount a successful challenge. If so, it would be helpful to hear that and to have on the record comments that might be of use in future court cases.

I am sure that other problems will emerge as we reach further bouts of implementation of the climate change tax. There is clearly a potential difficulty and it would be helpful to hear how the Financial Secretary and his legal advisers have wrestled with and resolved it, and whether that resolution is firm.

The best thing about the otherwise lamentable proceedings that led to the creation of the climate change levy in schedule 6 of the Finance Act 2000 was that the Financial Secretary took careful steps to consult a wide range of relevant parts of British industry, and energy-intensive industries in particular. Some anomalies and discrepancies have arisen from that consultation, but it is none the less to his credit that he and his colleagues took the time—which was not taken with other measures in the Finance Bill—to find out where the biggest problems would occur.

I assume that, in introducing today's regulations, a parallel process of consultation has taken place, to ensure that the exemptions are the right ones to fulfil the original undertakings. I apologise if the Financial Secretary told the Committee about that before I arrived, although I do not think that there can have been time. I look forward to his response.

10.12 am


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