The GMB responseto the

Climate Change: Draft UK Programme

GMB Research Department

May 2000
Climate Change Draft UK Programme

These comments mainly relate to Delivering Emissions Reductions: Business Climate Change Levy (SectionII, Chapter 4) of the DETR draft programme.

Introduction

In mid-1999, anumber of companies and several trade associations, including the ChemicalIndustries Association and the Engineering Employers Federation, sought GMB support in opposition to theproposed Climate Change Levy. The Chemical Industries Association (CIA) werespecifically seeking GMB support for their campaign which called for the exemption, from the levy, of electricityused in electrolytic processes.

The CIA contendedthat the levy placed the UK chlor-alkali production under threat - an industrywith a combined turnover in the region of 3.75bn. The CIA argued[1]that as electricity is the major feedstock for chlor-alkali and otherelectrolysis processes the levy would severely damage the competitiveness ofthe UK electrolytic processors, their suppliers and customers. They furtherargued that the UK should be consistent with the draft European Directive onEnergy Products, preserve the competitiveness of UK industry and thatelectricity used in the electrolytic processes should therefore be exempt.

The GMB recognisedthat without an exemption 4,000 jobs were directly at risk with a further10,000 downstream jobs threatened, mainly in the regions which were alreadyexperiencing high levels of unemployment. It was also clear that there was nodirect equivalent of the levy within the European Union. In fact, under the1999 German Environmental Tax Reform Law electrolytic processes had beengranted such an exemption. Therefore, the levy would place UK manufacturers ata significant competitive disadvantage.

It was alsogenerally accepted that even if UK jobs were exported the global demand forchlorine would remain constant. Moreover, there was a genuine concern that manyof our global competitors did not share this Governments commitment toenvironmental protection. The GMB concluded that there were sound economic andenvironmental reasons for an exemption.

In July 1999, itwas announced that electrolysis would be exempt from the levy. Following the2000 Budget the key issue, within industry generally and the chemical sector inparticular, remains the use of the European Directive on Integrated PollutionPrevention and Control as the criteriafor eligibility to negotiate energy efficiency agreements and therebyqualify for the rebate.[2]

The GMB alsorecognises that there is an urgent need to reach a satisfactory andcommon-sense solution by providing a clear definition for good qualityCombined Heat & Power (CHP) generation to enable such plants to becomeeligible for the rebate.

Exclusion oftrade unions

Respondents are asked to identifyany gaps in the draft programme. An obvious and glaring omission has been thedeliberate exclusion of the trade unions. As representatives of almost 7 millionBritish workers the trade unions have a legitimate expectation to be included,as equal partners, in the discussionsand subsequent negotiations involving Government and industry arising from theproposed Climate Change Levy.

John Prescott, in the introductionto the draft programme states that Weneed to nurture a fundamental change in attitudes. And we need to develop astrong partnership between public and private sectors so that everyone can dotheir bit to tackle climate change. It is inconceivable that the DeputyPrime Minister believes that this fundamental change of attitude is achievablewithout a formal role for the trade unions. This gap must be plugged.

Climate ChangeLevy

For many years the GMB hasrecognised the seriousness of the threat posed by global warming. As anenvironmentally aware trade union we are in favour of measures which reducegreenhouse gases. The evidence of rapid and serious climate change is welldocumented and the case for urgent action by governments world-wide is beyonddispute.

For a number of years the GMBsenergy policy has been one which is based on a balanced use of all the fuelsindigenous to the UK. As part of that policy we have sought greater levels ofinvestment into renewable energy sources and clean coal technologies.

The GMB shares the view of the Tradeand Industry Select Committee (11^th Special Report) that the question at issue is not whethergreenhouse emissions should be reduced but how to do it. Accordingly, wesupport the Governments commitment to its international environmentalobligations. However, we remain unconvinced that the Climate Change Levy, inits present form, is likely to achieve the Governments environmentalobjectives.

GMB Climate Change Levy policy

The ClimateChange Levy proved to be controversial and the proposals generated widespreadopposition. As a result, the GMBdeveloped its policy based on the following principles:

The proposed levy should be no heavier in the UK thanin the rest of the European Union and no industrial sector should besignificantly disadvantaged;

Companies that have already made significant energysavings should not be penalised as aresult of the levy in comparison with companies that have made little or noreductions in harmful emissions; and

The GMB would campaign with and support companies andindustries with genuine concerns provided we are included as equal partners indiscussions with Government.

Broad criticisms

There are twobroad points which need to be made:

(i) Environmental objectives

It is uncertain whether theClimate Change Levy will achieve theGovernments environmental targets (notwithstanding the crucial issue ofwhether those targets are rigorous enough to counteract the projectedenvironmental damage).

The Trade and Industry SelectCommittee was not persuaded that the Government could set emissions reductionstargets or, establish effective monitoring and compliance procedures for thegreat majority of small and medium sized enterprises. Moreover, the GMB notes withconcern the considered opinion of the Environmental Audit Select Committee whenit concluded that it was difficult toassess what it (the levy) plays in the overall savings which will be requiredto meet the Kyoto commitment and the Governments targets.

The environmental efficacy of thedecision to recycle the levy via a 0.3% reduction in employers NationalInsurance Contributions (NIC) is unclear. A more logical approach would havebeen to recycle the levy in such a way that encouraged increased take-up ofenergy efficient technologies and renewable energy sources.

The Government takes the viewthat the NIC reduction will promote employment opportunities. No doubt it will.Yet the measure is a Climate Change Levy and, as such, its success can only bejudged against energy efficiency gains and / or environmental improvements. Thequestion remains whether an employment subsidy is an effective method ofachieving such objectives. The linkage is highly dubious. Accordingly, the GMBcontinues to have serious doubts with this aspect of the policy.

(ii) General tests ofgood taxation

In 1997 the Government in itsStatement of Intent on Environmental Taxation stated that Environmental taxation must meet thegeneral tests of good taxation. It mustbe well designed, to meet objectives without undesirable side-effects; it mustkeep dead-weight compliance costs to a minimum; distributional impact must beacceptable; and care must be had to implications for internationalcompetitiveness.

The Environment, Transport andRegional Affairs Select Committee (5^th Report) concluded that thesystem of exemptions, negotiated agreements and reduced rates has produced anextremely complex and cumbersome market instrument which will result in arelatively modest emissions reduction.

The GMB agrees with that conclusion.By the Governments own standards the Climate Change Levy does not meet the test of good taxation.

Specificcriticisms

(i) An inequitable levy

The Climate ChangeLevy and the associated 0.3% reduction in employers National InsuranceContributions (NICs) represents a shift in the burden of taxation from goodssuch as employment to bads such as environmental pollution. The reduction inemployers NICs will reduce labour costs and is likely to act as a spur togenerate employment opportunities in labour intensive sectors.

From the outset, thelevy has been consistently promoted as a fiscally neutral instrument. It tooksome time before the implications of this phrase became clear and it did notmean that no firm or sector would lose out as a result. A reduction in NICswill have a disproportional benefit for the service sector at the expense ofmanufacturing as most energy intensive sectors are capital rather than labourintensive. For example, under currentproposals BOC, the industrial gases group, will pay out 8.5m yet only 500,000will be offset by the NICs reduction.[3]One effect of this is that the manufacturing sector will cross-subsidise thealready booming service industries with transfers from the declining industrialnorth and Scotland to the affluent south.

(ii) A threat to UKmanufacturing

Previously, there wassome evidence to support the argument that certain energy intensive sectorswere over-egging their tax liabilities in an attempt to scupper the tax andto get something much less demanding in its place.

Yet even successfulindustrial sectors are concerned about the levys potential impact. The UKchemical industry employs around 250,000 and accounts for 2.5% of GDP and 11.5%of manufacturing industrys gross added value. It is the countrys topexporter, exporting 71% of production and contributes around 4bn annually tothe UK balance of payments. The Chemical Industries Association has warned theGovernment that its members operate in a global economy. The levy, asconstructed, ignores the impact of international competition. This is a majorflaw and one which this Government continues to disregard.

It is estimated thattwo-thirds of UK manufacturing companies covering plastics, metals, water, foodand packaging industries remain outside the rebate regime.[4]The Engineering Employers Federation claims that, in the face of internationalcompetition, the levy continues to threaten UK manufacturing and jeopardise100,000 jobs.[5] At a timewhen UK manufacturing has lost 210,000 jobs in the past year alone the EEFsclaim cannot be dismissed lightly.[6]The inequity of the levy, as the BOC case demonstrates, will undoubtedly be afactor which will influence investment decisions. At a time when Britishindustry is being hammered by the twin evils of an over-valued currency andhigh domestic interest rates the Climate Change Levy could turn out to be thestraw that breaks the camels back. It could very well make the differencebetween survival or bankruptcy for many hundreds of small and medium sizedcompanies that are unable to enter into negotiated agreements and will notreceive rebates. In such circumstances, companies will face numerousinsurmountable barriers to increasing their energy efficiency.

The GMB takes the viewthat all sectors of the economy must play an active role in reducing harmfulemissions. Moreover, we share the impression that the Government is happy toallow industry to bear the brunt of the emissions reductions because it is theeasiest and most politically expedient course to take. As currently designed,the levy places UK industry at a significant competitive disadvantage as wellas effectively penalising companies that have previously made environmentalefficiency improvements.

The GMB urges theGovernment to make further adjustments to the levy in order to take accountof the needs of British manufacturing and the threat of global competition.Crucially, the Government must be more consistent and even-handed in itsapproach to different industrial sectors. The GMB takes the view that if it isacceptable to take into account the threat of international competition in thecase of the horticultural industry, and subsequently allow that sector a fiftypercent rebate[7], then itmust also be right to consider the plight of UK manufacturing and re-configurethe levy accordingly.

(iii) NegotiatedAgreements

Companies that are ineligible toenter into negotiated agreements will also be debarred from qualifying for the80% rebate. To date, only Memoranda of Understanding (MoU) have been agreed.These MoUs contain little in detail apart from indicative targets andprogress on reaching full agreements has been slow. Eligibility to enter intoan agreement depends upon whether a site is covered by the European Directiveon Integrated Pollution Prevention and Control (IPPC). IPPC covers thoseindustries with the greatest potential to pollute and tends to focus on largersites.

The decision to use the IPPCcriteria has been widely criticised. The Environmental Audit Select Committeerightly condemned the lack ofconsultation prior to making the IPPC criteria the gateway to negotiatedagreements. The Trade and Industry Select Committee report concluded that theIPPC choice was made on administrative convenience grounds as the easiest way of identifying energy intensiveindustries.

The Chemical Industries Association[8]and others have pointed out, that IPPC was designed for a different reason thandetermining eligibility for energy efficiency agreements. Furthermore, theEnvironmental Audit Select Committee doubted the feasibility of the government negotiating and managing agreementswith up to 60 industrial sectors, sub-sectors and trade associations in thetime available, especially when reliable data may not be available for many ofthese.

The choice of the IPPC criteria hasbeen described as illogical. According to the Confederation of BritishMetalforming some companies will be in the absurd position of benefiting fromthe rebate in some of their activities but not in others.[9] IPPC favours big polluters at the expense ofenergy intensive users, many of whom have in recent years made significantenergy efficiency gains. Under IPPC criteria some of the most energy intensivechemical sites in the UK will be excluded from the rebate regime. Such sites,including those that have made significant energy efficiency improvements inthe past, will find it increasingly difficult to make any further significantefficiency gains.

Lord Marshall had previouslyrejected the use of IPPC criteria as a failure to meet these requirements wouldbe a criminal offence and, as a consequence, such energy efficiencyimprovements would tend to be set at conservative levels. Marshall took theview that such a measure would be unlikely to act as a spur to innovation oraccelerate the required changes in manufacturing processes. He concluded thatthere should be a standard energy tax up to a certain threshold, perhapsdefined as a percentage of total energy costs. This suggestion was rejectedwithout any explanation.

The Environment, Transport andRegional Affairs Select Committee concluded that the use of IPPC criteria as acondition to enter into negotiated agreements is likely to create anomalies and inequalities which will only serve todiscredit the levy. The Packaging and Industrial Film Association (PIFA)argues that IPPC will lead to market distortions between the paper and plasticindustries, within the UK and Europe and will result in further UK marketpenetration by our global competitors. The GMB agrees with the Environment,Transport and Regional Affairs Select Committee in their suggestion that asimple, rigorous and equitable approach to define energy-intensive industrieseligible for agreements and rebates is adopted to replace IPPC.

In recent months, several tradeassociations have raised doubts over the legality of the proposed negotiatedagreements. Such agreements, it is argued, breach existing EC State Aid rules.The DETR appears confident that the new State Aid guidelines, which will takeeffect from July 2000, will permit negotiated agreements. What is less clear iswhether the use of the IPPC criteria and the subsequent equity of the levydiscounts is permissible under European law.

Conclusion

The GMB remains opposed to theClimate Change Levy for the following reasons: Those companies which havepreviously made significant energy efficiency improvements will, in practice,be effectively penalised as they will be treated the same as companies whichhave made little or no energy gains nor reductions in harmful emissions.Service industries will benefit at the expense of an already weak manufacturingsector. Finally, the levy places the UK at a competitive disadvantage to ourEuropean Union neighbours and no account seems to have been taken of the threatposed by global competition.

GMB Research Department

[1]CIA: The case for exempting electrolysisfrom the proposed climate change levy May 1999.

[8] ChemicalIndustries Association, press release, 23/03/00.