The UK’s Climate Change Levy: Is It Working?

The centrepiece of the UK Government's greenhouse gas emission abatement programme is the Climate Change Levy. Introduced in April 2001, the Levy is an industrial energy tax, with major concessions offered to minimise adverse effects on British businesses. The Government's choice of a taxation mechanism was shaped by the perceived efficiency advantages economic instruments have over command and control regulations. Existing research, however, stresses that environmental taxes are complex instruments, which may not be effective in addressing certain pollution situations, and depend on careful design and implementation for their success. An empirical investigation of the effect of the Levy on businesses in the Northwest of England has revealed that, contrary to some theoretical postulates, the Levy has had a rather muted, haphazard effect, and there has been no substantial new investment in energy efficiency technologies or extensive switch to renewable fuels. Other studies have highlighted some problematic economic effects of the Levy. If the Climate Change Levy is to be environmentally effective, a variety of changes will be necessary. These include widening the price differential between green and brown fuels, extending the Levy to the household and transport sectors, and enhancing the offsetting deductions to employers' national insurance contribution. Also, the relationship between the Levy and the new tradeable emission allowances scheme must be reviewed.