Chancellor Philip Hammond delivered the government’s Budget on Monday 29 October.
The principal changes are:
- Clarity on carbon pricing, with the CPS rate frozen and a no deal Brexit carbon price confirmed
- Confirmation of a rebalancing of Climate Change Levy rates
- Reform of Enhanced Capital Allowances to boost electric vehicle infrastructure
Budget announcement details
Total Carbon Price
Reflecting that the price of EU Emissions Trading System (ETS) allowances has risen significantly over recent months, the government will freeze the Carbon Price Support (CPS) rate at £18/tCO2 for 2020-21. From 2021-22, the government will seek to reduce the CPS rate if the Total Carbon Price (EU Emissions Trading System + Carbon Price Support) remains high.
In the event of a “No Deal” Brexit and the UK departing from the EU ETS in 2019, the government would introduce a Carbon Emissions Tax to help meet the UK’s legally binding carbon reduction commitments under the Climate Change Act 2008. The tax would apply to all stationary installations currently participating in the EU ETS from 1 April 2019. A rate of £16/tCO2 would apply to each tonne of carbon dioxide emitted over and above an installation’s emissions allowance, which would be based on the installation’s free allowances under the EU ETS. The government also committed to bring forward new legislation so it can prepare for a “range of long-term carbon pricing options”.
The Office for Budget Responsibility notes receipts from the carbon price floor (CPF) are little changed, with the rise in electricity generation from renewables and natural gas at the expense of coal continuing to reduce the tax base.
The Autumn Budget 2017 previously stated that the government is “confident” that the Total Carbon Price is currently set at the right level, and that the government would continue to target a “similar” carbon price until “unabated coal is no longer used”.
Climate Change Levy (CCL)
The CCL is a tax on energy delivered to non-domestic users in the United Kingdom. Its aim is to provide an incentive to increase energy efficiency and to reduce carbon emission. Some sectors are exempted through Climate Change Agreements (CCAs), charities, and the non-domestic users consuming no more than 4.4MWh of gas per month, or 1MWh of electricity per month.
The Budget sets the CCL main rates for 2020-21 and 2021-22 and continues with the government’s commitment to rebalance the main rates paid for gas and electricity. The electricity rate will be lowered in 2020-21 and 2021-22. The gas rate will increase in 2020-21 and 2021-22 so it reaches 60% of the electricity main rate by 2021-22.
The measure was first sign-posted in the government’s 2016 Budget which outlined plans to rebalance CCL rates for different fuel types to reflect recent data on the fuel mix used in generation rebalancing the rates to reach a ratio of 1:1 (electricity:gas) rates by 2025. The ratio for the current year (2018-19) is 2.8:1 and for next year (2019-20) is 2.5:1.
The Office for Budget Responsibility notes “receipts in the near term are little changed since March, but they are boosted in 2023-24 when the current CCA scheme comes to an end.“
Enhanced Capital Allowances (ECAs)
The government will end ECAs and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List from April 2020. The savings will be reinvested in an Industrial Energy Transformation Fund, to “support significant energy users to cut their energy bills and transition UK industry to a low carbon future.”
The government will extend Enhanced Capital Allowances for companies investing in electric vehicle charge points to 31 March 2023.
Business low-carbon funding
As part of the Industrial Strategy, the government will establish an Industrial Energy Transformation Fund, backed by up to £315mn of investment, to support businesses with high energy use to transition to a low-carbon future and to cut their bills through increased energy efficiency. The government will also issue a call for evidence on introducing a new Business Energy Efficiency Scheme, focused on smaller businesses.
North Sea fiscal regime
As announced at Autumn Budget 2017, the government will introduce a transferable tax history mechanism in Finance Bill 2018-19 for oil and gas companies that will remove tax barriers to new investment in the North Sea. Headline tax rates for oil and gas will be held at their previous level.
£20mn is allocated in 2019-20 to support UK research into nuclear fusion.
Cornwall Insight view
Rarely has a Budget speech had so little on energy in the main speech, however important detail lurked in the accompanying documents.
Industry will welcome more clarity on carbon pricing, whatever scenario occurs in the next few months. CCL rates rebalancing represent an action that has little impact in the short term on total tax take.
This entire Budget also comes with the proviso that much of this is conditional on the outcome of Brexit negotiations. On 28 October, Hammond confirmed that in the event of a no-deal Brexit, the government would need to come forward with a new Budget. This would involve a “different response”, with “fiscal buffers” being maintained to provide support for the economy. At the Budget, Hammond said this could take the form of the Spring Statement becoming a “full fiscal event”.