Of the Comprehensive Spending Review’s many casualties, Edward Machin finds manufacturers’ discontent being made increasingly wintery by a governmental about turn in carbon reduction policy.
Your business has signed up for the mandatory Carbon Reduction Commitment (CRC), renamed the CRC Energy Efficiency Scheme in April 2010. Its benefits, both reputational and otherwise, promise a keener, greener future for a battered, but recovering, industry. Things are looking up. That is until you are informed that revenues from the sale of CRC allowances, totalling £1 billion a year by 2014/15, will be used to support the country’s public finances rather than be recycled to participants — your company included. And that rebate you were due for CRC participation thus far? Swallowed by the public purse, alas.
“We’re seeing a lot of anger concerning the CRC,” says Michael Hutchinson, an environmental partner at law firm Mayer Brown LLP. “It’s both extremely complicated and bureaucratic; what’s left is essentially a tax with red tape all over it.” And the driver for such opprobrium? Last October’s Comprehensive Spending Review. Under the CRC’s original framework, organisations using more than 6,000 megawatts of electricity per year would buy £12 allowances for every tonne of CO2 emitted.
Where that money was due to be recycled for participants in the revenue-neutral scheme, new rules outlined by George Osborne mean the cash — a green tax, effectively — will go straight to the Treasury’s pot. Unsurprisingly, “The decision to move away from a payment recycling scheme to a mandatory flat rate tax will have a huge impact on around 5,000 UK companies,” says Kevin Houston, director of Carbon Masters, a spin-out company from the University of Edinburgh.
Based on publicly available carbon emissions data, Houston’s organisation calculates that the likely minimum tax charge for qualifying businesses will be £42,000 annually. He says these companies could further see their total bill for electricity, gas and carbon tax double over the next five years if consumption increases by a relatively modest five per cent per annum. Similarly, research undertaken by Energy Team, an environmental consultancy, finds that businesses with an average £1 million gas and electricity bill will pay £750,000 without a chance of a rebate. Prices will increase year on year, too, with organisations spending up to £110,000 by 2015 for a £1 million energy bill.
“For a scheme initially brought about to change behaviour and encourage businesses to become more environmentally friendly, these changes mean it will simply operate as a tax for companies taking part,” says Harry Manisty, an environmental tax specialist at PriceWaterhouseCoopers.
Catch me if you can
The kicker, should one be needed, is this: while enforcement proceedings for non-compliance haven’t been undertaken yet, your company may be towing the line while others continue to flout the regulatory requirements without penalty. Indeed, says Michael Hutchinson of law firm Mayer Brown, “some organisations have taken a strategic decision to do just that. ‘Why bother as they’ll never come after me’ — that sort of thing. It’s a pointless law.” For those manufacturers actively evading CRC, though, 2011 might just be the year that such cloak and dagger operations prove costly. “We expect to see new powers given to the Environment Agency, known as civil sanctions, being tested ever more forcefully,” says Helen Loose of Keystone Law.
Such authority will also be given to the National Measurement Office, enabling it to issue compliance notices and stop notices and impose variable monetary penalties on manufacturers and importers of products breaching EU energy efficiency rules.
“It’s going to be increasingly difficult to float under the radar,” agrees Steven McNab, a partner in Simmons & Simmons’ environment and climate change team. “If the CRC does become a ‘straight’ tax as expected, the authorities’ leniency seen during the scheme’s early days will likely come to an end.
There is significantly lower tolerance for tax evasion than environmental misdemeanours, after all.” There are, though, “some very rational steps to take for getting ahead of the energy reduction piece,” McNab explains. “Manufacturers can usually find 20 to 30% reductions in consumption for little, or no, cost.” Lancashire-based Camfil Farr is one such company. In August 2010, this producer of sustainable filtration solutions became the first UK manufacturing company to be awarded the energy management standard BS EN 16001. Experiencing rising and unstable energy costs, the business has since seen a big reduction in energy consumption, including: gas by 35%; electricity by 22%; water by 12%; diesel fuel by 19%; and waste by 17%.
“Everyone is starting to wake up to the obscene waste of energy in this country,” says Bill Wilkinson, Camfil Farr’s managing director. “Legislation has crept up on everyone, but there are nonetheless huge savings to be made.” Mayer Brown’s Hutchinson agrees. “Despite its many flaws, this movement is presenting significant commercial opportunities for those in the manufacturing sector.
Given the EU’s policy focus on eco-design and building recyclability into the integrated lifetime of a product, the supply chain for clean tech and renewables, to name two, is awash with potential.”
Public relations puff ‘n stuff
While we have barely scratched the surface of where environmental change and economic change meet, John Cridland, the CBI’s newly-appointed deputy general, says the time is right to really get into this puzzle. “It is realistic to start joining the pieces of the jigsaw puzzle for a mature and sophisticated manufacturing sector concentrating on the value added [by sustainable production],” he says.
Many in the sector believe that the jigsaw is anything but box-fresh. Manufacturing organisation EEF’s head of climate and environment policy, Gareth Stace, is one. “Manufacturers have already made substantial reductions in emissions,” he says.
“However, there is increasing evidence that they are struggling under the weight of legislation at European and national level which has produced a chaotic, over-crowded and complex landscape.” He says that manufacturers now need a fresh approach. “This will help a vibrant manufacturing sector to make a sustainable contribution to reducing global emissions of greenhouse gases and continue investing and creating jobs in the UK.” At a CBI climate change summit in November, the great and good of British industry echoed such sentiments. “The cost of inaction will rise exponentially if we continue on a course of business as usual,” said Cridland’s predecessor, Richard Lambert. “The risk to our future energy supplies, unless properly addressed, will seriously undermine the attractions of the UK as a place to invest… With enormous sums of private capital which could re-energise our manufacturing sector shifting to other, more welcoming, parts of the world [as a result].” And while the Chancellor’s announcement that the Government will provide £1bn in funding for a ‘green investment bank’ designed to kick-start the UK’s low carbon economy must be welcomed, it isn’t placating many businessmen at the coalface. “To be perfectly honest the [CRC] scheme is a PR puff,” says Phil Worms, director of Scottish technology firm Iomart. “It doesn’t look at the different types of users; it’s bizarre to compare us to a local authority.” The European Union, too, is preparing to classify heavy clay industries — including manufacturers of brick, roof tile and clay drainage pipe — under ‘carbon leakage risk’ legislation, meaning any emissions over the EU’s stipulated allowance will now be subject to an increasing charge from 2013.
Brick-makers, for example, will be liable to pay for 90% of their emissions by the decade’s end.