Lex House, 17 Connaught Place, London, W2 2ES, United Kingdom.
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Martin Shaw
Environmental Taxes Team
HM Revenue and Customs
By e-mail to: Environmentaltaxes.consultation@hmrc.gsi.gov.uk 11 February 2011
Dear Mr. Shaw
Carbon price floor: support and certainty for low-carbon investment
Thank you for the opportunity to provide comments on the above consultation paper.
Responses to the consultation questions on which we are able to comment are set out below. By
way of background, it is London School of Business and Finance‟s mission to become the first
choice for business education in Europe. Through educating the world‟s most creative, talented
and ambitious students, London School of Business and Finance aims to bridge international
boundaries and provide individuals around the globe with an opportunity to achieve academic,
personal and professional success. LSBF attract over 15 000 quality candidates from over 140
countries worldwide, and continues to experience exponential growth, both on-campus and
online, all around the world, while continuing to develop corporate training, partnerships and
associations with best-practice organisations globally.
In partnership with established and globally renowned academic partners, LSBF deliver two
accredited MBA programmes and a suite of postgraduate and undergraduate business degrees (in
partnership with University of Wales and Grenoble Graduate School of Business, triple
accredited by AMBA, EQUIS and AACSB). LSBF is also a well established provider of
professional programmes such as the ACCA, CIMA, CFA® and CIM, and operate best practices
school-wide.
The school continues to expand rapidly in response to demand from UK domestic and
international students for globally accredited business qualifications and currently operates four
campuses across the UK; London (Holborn and Marble Arch), Birmingham and Manchester as
well as international offices in Prague (Czech Republic), Toronto (Canada), Moscow (Russia),
Hong Kong (China), Johannesburg (South Africa), Port Luis (Mauritius), Bogota (Colombia) and
Almaty (Kazakhstan).
The school recognises its responsibility to the next generation of business and finance leaders in
terms of equipping that generation with the knowledge, skills and experience to manage the
necessary transition to a low carbon economy and society. As part of this effort we are in the
process of designing and validating an MBA programme in Carbon Entrepreneurship. We are
pleased to know that we are not alone in this endeavour and that other business schools are
already delivering similar programmes, or are working towards them. What has become very
clear over the last three years is that business as usual is no longer an option. A banking crisis
that nearly destroyed the heart of capitalism, an economic recession, and continued rebalancing
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London School of Business & Finance. Registered in England. Reg. 04977611
Lex House, 17 Connaught Place, London, W2 2ES, United Kingdom.
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of the global economy have convinced us that carbon is no longer a luxury about which it is
fashionable to be sceptical. The placing of carbon at the centre of economy and society is a
wake-up call to a world of significant population growth, ensuing resource scarcity, chronic fossil
fuel dependency, fishery depletion, and for the UK, as with many other jurisdictions, short term
energy dependency.
We therefore welcome the proposals set down in this consultation and would urge speed and
decisiveness in their implementation.
A small but perhaps important definitional point is the need to clarify whether the consultation is
referring to Carbon Dioxide or Carbon Dioxide Equivalent throughout. There is a significant
difference and much confusion of the two terms throughout the technical and academic literature.
3.A1: What are your expectations about the carbon price in 2020 and 2030? And how
important a factor will it be when considering investment in low-carbon generation?
Classical economic theory would predict a steadily increasing carbon price between now and
2030. However the “learning-by-doing” nature of the regulatory framework associated with the
EU ETS has pinpointed significant flaws in the legislation and its implementation. The most
recent hacking into and stealing carbon credits from the Czechoslovak registry is one in a series
of scandals and miscalculations that have led to a poorly regulated market and therefore a
subdued and volatile carbon price. Addressing and correcting these flaws should be an urgent
political priority at both EU and member-state level.
Carbon price expectation for the medium to long-term is absolutely fundamental for the potential
investor in low-carbon infrastructure. As the consultation notes the capital expenditure
investment is considerable with very long payback periods. Therefore any factor which can be
given greater certainty in the investment appraisal decision is critical to a successful behavioural
shift.
3.A3: How much certainty would investors attribute to a carbon price support mechanism
if it were delivered through the tax system?
Despite frequent criticism, we agree with Sir James Mirrlees (“Reforming the tax system for the
21st century” – Institute for Fiscal Studies, 2010) that the UK tax system is “not, on the whole, a
dreadfully bad one”. For example, the taxation of savings is much improved. The taxation of
owner-occupied housing has been rationalised. And the UK system has fewer loopholes and
opportunities than some others. However, the authors‟ balanced assessment is tested to the limit
in Chapter 11 of that publication on „Tax and Climate Change‟. Here the authors conclude that
we are a long way from having anything like a coherent approach to the pricing of greenhouse
gases, as in most countries. And this is a result of overlapping policies, poorly designed, and on
the basis of, apparently, the flimsiest of evidence. The Climate Change Levy (CCL), for
Royal Patron: HRH Prince Michael of Kent, GCVO
London School of Business & Finance. Registered in England. Reg. 04977611
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example, introduced in April 2001teaches us several lessons about the design and implementation
of an environmental tax or fiscal incentive:-
It is closer to a tax on energy consumption rather than a tax on greenhouse gas emissions.
It is in fact a tax on the supply of energy to business, applied at the same rate whether
generated by gas, coal or nuclear power, despite their very different emission profiles
It was a tax that was intended to be revenue neutral. The neutrality was intended to be
achieved by a 0.3% reduction in Employers National Insurance Contributions (NIC). In
fact, the employer has benefited significantly from this measure, since the saving in NIC
quickly outstripped the revenue raised by CCL
It was applied only to businesses, exempting households all together. Households in the
UK are reckoned to be responsible for approximately 40% of the UK‟s GHG emissions
Alongside CCL was granted the ability to form Climate Change Agreements (CCA) for
those organisations in the energy intensive industrial sectors whereby they would receive
80% exemption from CCL in exchange for agreeing to meet energy efficiency targets
Given that CCL was forecast to raise only £0.7bn of revenue in 2010/11 out of a total tax take of
£540.8bn for that year, one queries its rationale and its effectiveness.
We believe that the CCL is but one example which has dented confidence in the transparency,
certainty, stability and longevity that should be at the heart of the UK‟s tax system and thereby
ease investor anxiety. This is a broader issue than simply allaying uncertainty about the future
price of carbon but is nonetheless vital to engendering longer term thinking in public policy and
regulation.
Box 4.B: Questions on administration
We would make the plea that the provision of carbon price floor support does not become an
issue that is restricted to registered suppliers of energy which HMRC calculate as 255
organisations in the consultation document. This initiative is intended to support the long term
transition from fossil fuel dependency to a plurality of renewable technologies and energy
security. The transition requires widespread acceptance and awareness of consumers of energy –
both corporations, but also, importantly, individual households. One essential factor by which an
80% reduction in GHG emissions can be achieved across the EU by 2050 is by energy efficiency
improvements of 2% per annum year on year. To achieve this requires a public service
consciousness raising campaign on a par with the great improvements in public health in
Victorian Britain or the significant reduction in the smoking population following definitive
epidemiological studies linking cancer to smoking in the 1960‟s.
Royal Patron: HRH Prince Michael of Kent, GCVO
London School of Business & Finance. Registered in England. Reg. 04977611
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Specifically there is much more that could be done by registered suppliers of energy products to
label utility bills for corporations and individual households in terms of directly linking GHG
emissions to units of electricity to the cost of energy.
4.C3: Do you agree that tax relief should be considered for power stations with CCS? If so,
what are the practical issues in designing a relief; what operational standards should a CCS
plant meet in order to be eligible; and how might these issues differ for demonstration
projects?
While we are certainly not qualified to remark on operational standards at a CCS plant we do feel
that the existing Research and Development tax credit regime should be wholly appropriate to
CCS development. Self- evidently the design and construction of CCS capability is about the
„resolution of technological uncertainty‟ and should therefore sit comfortably within this regime.
The weaknesses of the current R&D tax regime are well known and need to be addressed but we
see little value in adding in a new relief.
We note that the use of the R&D Tax Credit has additional economic benefit for the investor,
whereas the Enhanced Capital Allowance scheme promises only improvement in cash flow and
the paying of tax. Anecdotal evidence is that the ECA regime suffers from uncertainty in terms
of assets which may or may not come within the scope of the scheme.
4.E1: How should the carbon price support rates be set in order to increase certainty for
investors, in particular over the medium and long term?
We agree with the Government‟s proposal as set out at 4.40. This would include a rate escalator.
The UK‟s experience of such an escalator in the case of the Landfill Tax is instructive. There,
despite cross Party support, the original price per tonne was set at such a low level that it is only
in recent years that there is evidence of significant behaviour change in the supply chain. By
comparison the Danish experience was to set the price per tonne at an initial swingeing level,
together with the necessary investment in recycling facilities. The result was a significant
reduction in construction and demolition waste to landfill in a very short time.
It is vital, therefore, that the Government set the initial rate for carbon price floor support at an
appropriate and challenging level. One of the lessons that should have been learned from our
experience of the UK ETS, the EU ETS and the Carbon Reduction Commitment is that the price
of carbon, and therefore the level of support required from the government must be set at a level
which will lead to behaviour change. In the past too much store has been placed with economic
analysis which, while relevant and valuable, has tended towards a wide range of values from zero
to several hundred pounds per tonne of emission. We would encourage the government to
engage directly with the business sector, and particularly with those individuals in the CFO role,
when setting the price level. Such engagement should be robust and critical to draw out that
which is material from the CFO‟s perspective in the individual business. Materiality and
Royal Patron: HRH Prince Michael of Kent, GCVO
London School of Business & Finance. Registered in England. Reg. 04977611
Lex House, 17 Connaught Place, London, W2 2ES, United Kingdom.
Tel: +44 207 100 1808 Fax: +44 207 823 2302
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attention to revenue maximisation and cost reduction is after all what drives financial
performance over the long term. In short there needs to be a shift of regulatory focus from the
macro- economic to the practice of accounting.
We hope you find these brief observations of value. We reiterate that this measure is potentially
of great value in setting the UK on the path to a low carbon economy and society and that the
benefits which will be realised go far beyond the technicalities of carbon pricing.
If you would like further clarification to the points raised here, or if we can help further in
progressing this important cross-disciplinary initiative, please do not hesitate to contact the
signatory below.
Best regards,
Dr. Steve Priddy
Royal Patron: HRH Prince Michael of Kent, GCVO
London School of Business & Finance. Registered in England. Reg. 04977611