I. Title of the Best Practice

II. Overview of the Best Practice

A.Description of the Climate Change Levy
The climate change levy is intended as a levy on the use of energy in industry, commerce and the public sector. It follows closely the recommendations made in a 1998 report by the UK industrialist, Lord Marshall, in his report Economic instruments and the business use of energy.

The levy will play a major role in helping the UK to meet its targets for reducing greenhouse gas emissions. However, it has been designed so that it will entail no increase in the tax burden on the non-domestic sector as a whole as the revenue from the levy will be returned to companies and organisations in that sector. The mechanism for this financial recycling will be through a reduction in an employment tax and the provision of £50 million to schemes to promote energy efficiency and to stimulate the take-up of renewable sources of energy, eg solar and wind power. This allocation represents a major increase from current UK levels of funding.

As well as promoting energy efficiency, the levy will encourage employment opportunities and stimulate investment in new environmental technologies. In designing the levy, the UK Government has also taken into account Lord Marshall's recommendation that it should protect the competitiveness of UK firms. The Government has also recognised the need for special consideration to be given to energy intensive industries, for example, cement manufacture, the steel industry, and glass making. For this reason the government intends to set significantly lower rates of levy for those energy intensive industry sectors that can agree rigorous targets for improving their energy efficiency, in accordance with UK government criteria. These energy efficiency agreements are being negotiated with relevant industry bodies on behalf of the companies within the sectors concerned. Heads of Agreement with the first batch of industry sectors are expected by the end of 1999.

The climate change levy will be introduced in April 2001. It was announced in March 1999 to provide two full years for industry to adjust to the new system. The levy is expected to save around 1.5 million tonnes of carbon per year by 2010. It will apply to gas (natural gas and liquefied petroleum gas), coal, and electricity, where these sources are used by business, agriculture and the public sector for energy uses. It will not apply to fuels used by the domestic or transport sectors, or those used for the production of other forms of energy (eg electricity generation), or for non-energy purposes (eg coke used as a reducing agent in steel manufacture). The levy will not apply to fuel oils; these are already subject to UK mineral oils duty. Energy used in private homes (the domestic sector) will not be subject to the levy. This is for reasons of social policy, to ensure that the poorest members of society are not obliged to pay more for the energy which they consume.

The development of the levy arises from a collaboration between a number of UK government departments:

• HM Treasury (the UK finance department - overall responsibility for the levy);
• HM Customs & Excise (UK revenue collectors - responsible for designing the levy);
• the Department of the Environment, Transport & the Regions (the UK's environment department - responsible for negotiating energy efficiency agreements with the energy intensive industrial sectors);
• the Department of Trade and Industry (overall responsibility for relations with industry and for the energy supply industry); and
• the Ministry of Agriculture, Fisheries & Food (for agricultural sectors).
• There are also links with the Scottish Executive, the National Assembly for Wales, and the Northern Ireland Office, to ensure that the whole of the UK is involved and has an input to the process.

B. Reasons for Inclusion as a Best Practice
1. The climate change levy is an example of a carefully designed economic instrument, intended to achieve a number of desirable objectives, namely, a reduction in energy use (and hence carbon dioxide emissions), to encourage employment opportunities and to stimulate investment in new technologies.

2. As well as helping the UK to meet its Kyoto target of a 12.5% reduction in greenhouse gas emissions, the climate change levy will also help the UK to move towards the Government's domestic goal of a 20% reduction in carbon dioxide emissions.

3. Industry and other key sectors have been consulted in the design process and care has been taken to ensure that, while stimulating business to use energy more efficiently, the levy minimises the compliance costs of businesses and protects the competitive position of UK industry.

4. The levy is part of a package of measures which, taken as a whole, will ensure that all parts of the UK economy, including transport and the domestic sector play their part in tackling the problem of climate change. Other measures are in place, or will be developed, to encourage energy efficiency in households, transport, agriculture, and the energy supply industry.

5. The proposals for negotiated agreements will ensure that the heaviest industrial users of energy will have an incentive to accelerate investment in energy saving technologies or adoption of other energy efficiency measures.

6. Revenue will be recycled back to business, principally through a reduction in an employment tax ("National Insurance Contributions"), so reducing the cost of jobs and stimulating employment.

7. The negotiated agreements associated with the levy have been designed to allow companies to participate in the system of international greenhouse gas trading provided for in the Kyoto Protocol.

8. The negotiated agreements provide for effective procedures for monitoring, reporting and verification of progress in reaching energy efficiency targets.

C. Problems and their Solutions
It was important to ensure that all the principal parties were able to contribute to the design of the levy. A consultation paper was therefore issued at the time of the announcement of the levy seeking views on practical issues which would affect the way in which the levy would be designed and administered.

In order to ensure that the levy did not apply to domestic consumption of energy, and to minimise compliance costs, the government decided to apply the levy to energy supplied to industrial and commercial users. Suppliers of energy products are therefore required to register and pay the levy, not consumers.

In considering discounts from the levy for energy intensive industrial sectors some way had to be found to define the industries concerned. This was achieved by making use of the European Union's Integrated Pollution Prevention and Control Directive, which lists the processes which it covers. The Directive covers the main energy intensive sectors. Use of the Directive to define an `energy intensive industry' avoids subjective decisions on inclusivity, for example, those based on energy consumption cut-off points.

In order to ensure that energy efficiency agreements were achievable and workable it was important that relevant industry sectors were involved in the development of the broad outline of agreements to form the basis of detailed negotiations. However, it was impossible, administratively, to negotiate with all the owners or manager of affected sites (many thousands, in all). Consequently, negotiations with the energy intensive sectors have been working towards the development of Heads of Agreement documents. Meanwhile, bilateral negotiations have taken place between the Department of the Environment, Transport and the Regions and individual industry sectors on specific energy efficiency targets. These are based on the "All Cost Effective" potential for energy efficiency measures for each sector, in other words, the assumption of a rapid uptake by companies in the sector concerned of all suitable technologies when they become cost effective to install (taking into account the age of existing plant). Negotiations are undertaken at sector level (through trade associations) rather than with owners or managers of individual sites in order to make the process manageable.

III. Categorizing the Best Practice

1. Classification(s) (Indicate main classification(s) only)
( X ) Regulatory Approach (Policy approaches - regulations, incentives, etc)
( ) Practical Action (Action undertaken independently by a social actor)
( ) Social Network Mechanism (Co-operative structure)

2. Social Actor(s) Involved (Indicate main social actor(s) only)
( ) Citizens
( X ) Central government
( X ) Local government
( X ) Business

3. Sector(s) (Indicate main sector(s) only)
( X ) Energy
( ) Household
( ) Transportation
( X ) Industrial Enterprises
( X ) Other (Non-Industrial) Business
( X ) Agriculture/Land Use/Forestry
( X*) Other (please specify)

*: The climate change levy will apply to industry (including fuel industries), commerce, agriculture, public administration and other services (including educational establishments and hospitals). The levy will NOT apply to energy used in private dwellings.

4. Target Greenhouse Gas(es)
( X ) CO2
( ) CH4
( ) N2O
( ) HFC
( ) PFC
( ) SF6
( ) Other

IV. List of Attachments

1. Report by Lord Marshall - Economic Instruments and the Business Use of Energy

2. A Press Notice (news release) from HM Treasury Climate Change Levy to Encourage Energy Efficiency, available on the Internet web site:
http://www.hm-treasury.gov.uk

V. Contact

Contact Person:	Duncan Egerton
Title:	Climate Change Levy Secretariat
Organization:	Dept of the Environment, Transport, & the Regions
Email:	Duncan_Egerton@detr.gsi.gov.uk
Tel:	+44 171 890 4822
Fax:	+44 171 890 6559
Address:	DETR - EEBP3, Zone 6/F5, Ashdown House, 123 Victoria Street, London SW1E 6DE, UK
Note:	-