In the United Kingdom, the Conservative-Liberal Democrat coalition, which has been in power since May 2010, has set itself the target of being “the greenest ever” UK government.

This article looks at how the government intends to make good on what could prove to be an expensive promise while maintaining the support of the public and business leaders and keeping the UK’s nascent economic recovery on track.

The government launched an ambitious “Plan for Growth” in March 2011 as an “an urgent call for action” to put the UK on a path for sustainable, long term economic growth. It is a 126-page policy document jointly authored by the Treasury and the Department for Business Innovation & Skills that, at a high level, covers everything from tax policy to the scheduling of public holidays.

The Plan for Growth identifies four main policy targets. The first two, which have been considered in previous editions of Project Finance NewsWire, effectively restate the chancellor’s mantra that “Britain is open for business” and are the commitments that the UK will establish the most competitive tax system in the G20 and become one of the best places in Europe to start, finance and grow a business. The other two targets are to encourage investment and exports as a route to a more balanced economy and to create a more educated work force that is the most flexible in Europe.

One of the measurable bench marks identified by the government on the route to a more balanced economy is increased investment in low-carbon technologies. The Plan for Growth argues that taking action now to put the whole economy on a low-carbon, resource efficient path which maintains UK competitiveness will lay the foundations for strong and sustainable growth in the future.

The government acknowledges that there will be significant transitional costs but, equally, UK businesses have already shown a willingness to pursue environmentally-friendly initiatives. In 2008-09, the UK low carbon and environmental goods and services sector was worth £112 billion, an increase of 4.3% on the previous year, and it employed 910,000 people.

A recent report by one of the large accountancy firms notes that in 2010 the UK, together with Germany, replaced the Iberian peninsula as the focus for renewable deal making in Europe. The United Kingdom’s share of total deals in 2010 put it in second place in the European league table but, at 11%, that was still some considerable way behind Germany in first place with a 27% share. The report also revealed a downward trend in deal sizes from previous years. Although this may be viewed positively in that an increasing number of small- and medium-sized businesses are already turning to green technologies, larger-scale projects are likely to be more attractive to the debt markets.

It is clear that the coalition government has an ideological commitment to green technologies but, while the economic recovery remains relatively weak and many of the previously announced public spending cuts are only now beginning to bite, it cannot afford to be seen to add to the financial burden of industry and consumers purely for ideological reasons. This has clearly been recognized within government so there has been an emphasis on the long-term nature of the policies, with many of the changes stretching out more than 20 years. Also, as with its approach to general tax reform, the government has actively engaged with the most affected groups before announcing specific policy initiatives.

So, for example, February 2011 saw the first meeting of the “Green Economy Council,” which brings together a cross-departmental group of government representatives and more than 20 business leaders and trades union representatives from a range of industries and sectors.

As chairperson of the first meeting, the government’s business secretary, Vince Cable, recognised that while the government is committed to the transition to a green economy, there is also a “need to minimize the burdens on business and industry during this transition, while [the government] create[s] the necessary conditions for green growth and investment in the green economy.” The Green Economy Council is a forum for representatives from the Department for Business, Innovation & Skills, the Department of Energy and Climate Change and the Department for Environment, Food and Rural Affairs to liaise with the business community on the investment and business environment needed for a transition to a growing green economy. Many green policies add to the costs of business, at least in the short term, but the government clearly expects the process of change to be eased if business leaders are actively engaged in development of green policies.

The three government departments represented on the Green Economy Council are also charged with developing a “Road Map to a Green Economy” that is expected to be published before the summer and is intended to “articulate the business and investment environment the government will provide to make possible the shift to a growing green economy.” Until then, the Plan for Growth identifies a series of action points on the road to achieving the “greenest ever” UK government objective, some of which have already resulted in specific policy announcements.

There is inevitably considerable overlap between green initiatives and tax reform, and the “new approach” to tax policymaking recently instigated by the government includes a commitment to consultation that effectively mirrors the methods already being used in the development of green policies.

Carbon Price Levy

In his March 2011 budget, the chancellor, George Osborne, announced the introduction of “a carbon price floor” the main tenets of which were suggested in a December 2010 consultation document that elicited 155 detailed responses. The new policy, which will take effect from April 1, 2013, is not, despite its name, a government-guaranteed minimum price for carbon but an extension of the “climate change levy” or “CCL.”

CCL was introduced in 2001 as a per-unit charge on “taxable supplies” of “taxable commodities” to encourage the use of renewable energy by taxing the business use of most traditional sources of energy.

Currently, CCL is levied on most supplies of electricity, gas, solid fuel and liquefied gas for non-domestic use. The obligation to account for CCL falls on the supplier, but the economic cost is invariably passed on to the business consumer. Accordingly, CCL acts to encourage businesses to reduce their energy usage or turn to renewable sources of energy.

In addition to the relief for domestic use, CCL includes a number of other key exemptions that will be removed or limited under the government’s new policies. Currently, energy used in the production of other forms of energy is exempted from CCL. This avoids a double charge to the tax for business users and prevents the CCL directly affecting domestic energy prices.

In broad terms, the proposed carbon price floor will tax the use of fossil fuels used in most forms of electricity generation under the auspices of the CCL while oil that is used in electricity generation will become liable to fuel duty so that domestic users will effectively suffer the direct cost of CCL for the first time. Clearly mindful of the political consequences of spiralling domestic energy prices, the government has also already announced its intention to develop a framework to cap the impact of energy and climate change policies on energy bills.

The “carbon price support rate” at which suppliers will be charged will be calculated by reference to the average carbon content of the fuel and the price of carbon. The calculation for arriving at the “carbon price support rate” is the carbon price floor for each year minus the market carbon price.

It is currently expected that the carbon price floor will start at around £16 per ton of carbon dioxide and move on a “linear path” to a target price of £30 per ton in 2020 and eventually to £70 per ton by 2030. So, applying this methodology, the carbon price support rates for 2013-14 will be £16, being the carbon price floor, less the futures market price for carbon that is around £11, which results in a rate equivalent to £4.94 per ton of carbon dioxide.

Once the carbon price support rate has been calculated for any year, it is multiplied by the standard carbon emission factor of the relevant fossil fuel to arrive at the tax rate of CCL and fuel duty.

The extension of CCL to include a carbon price floor is not the only change to CCL already announced.

Presently, combined heat and power (CHP) qualifies for beneficial CCL treatment in that energy provided for use in good quality CHP is excluded from the charge as is electricity generated from CHP sources. The December 2010 consultation document envisaged that the carbon price floor might apply CCL to fossil fuel supplied to CHP facilities. Although the original proposals have been modified in light of representations from the CHP industry, CCL, at a reduced rate, will apply to CHPs, and the current exemption for electricity generated from CHP is to be removed from April 2013. Acknowledging industry concerns, the government has announced its commitment to working with the CHP industry to explore how to keep incentives for CHP.

Certain “energy intensive” industries that might otherwise have suffered most from CCL have been able to benefit from discounted CCL rates by signing up to “climate change agreements” through 2013. Typically, representative associations have entered into umbrella agreements with the government under which particular industries have committed to improve their energy efficiencies and reduce carbon dioxide emissions. The government announced in March that the scheme, to which 54 industry sectors have committed, would be extended for a further 10 years to March 2023. As the result of changes announced in the 2010 budget, the discount rate was reduced from 80% to 65% with effect from April 2011. However, the 80% discount rate is to be reinstated for supplies of electricity from April 2013. In addition, the government will shortly begin consulting with industry on ways to simplify the operation of the scheme.

The encouragement of commercially-operated carbon capture and storage or “CCS” facilities is a key element in the government’s green policies, and it has confirmed its commitment to building a £1 billion demonstration CCS facility. A further three facilities that were to be funded by a newly-introduced CCS levy will now be funded from general taxation and the levy announced by the previous government will not now be introduced. Both demonstration plants and commercial CCS plants will be entitled to relief from carbon price support rates in proportion to the amount of carbon captured and stored.

The government is also committed to promoting the development of new markets in green goods and services. The so-called “green deal” is intended to enable households and businesses to invest in energy efficient measures at no upfront cost. For example, benefits of more than £7 billion over the next 20 years are expected from the introduction of smart meters.

In March the government also announced a £860 million “renewable heat incentive” to create a new market in renewable heat. The incentives will be available to encourage the industrial, commercial and public sector installation of green equipment such as renewable heat pumps, biomass boilers and solar panels. Announcing the initiative, Chris Huhne, the energy secretary, said, “Renewable heat is a largely untapped resource and an important new green industry of the future . . . . This incentive is the first of its kind in the world.” Further details of the renewable heat incentive are expected to be published in May.

Green Investment Bank

The government remains committed to the establishment of the Green Investment Bank and in the March budget, its initial capitalization was set at £3 billion and its start date accelerated by one year to 2012-13. The government’s October 2010 “spending review” had already allocated £1 billion to the bank, and the government is aiming for the remaining £2 billion to be funded from the sale of assets including the £775 million net proceeds from the sale of High Speed 1, the Channel Tunnel rail link. A further £15 billion of private sector investment is expected enabling the bank to bring about an additional £18 billion of investment in green infrastructure by 2014-15. While the government’s announcements in relation to the bank were generally welcomed, there was some disappointment that it will not have borrowing powers until 2015-16.

There can be no doubting the government’s commitment to green initiatives. Also, its eagerness to consult with interested parties both on green policies and general tax reforms has been broadly applauded. But, what currently seems to be missing is a single vision for the UK’s green future that may, in part, be due to the involvement of several government departments in policy development. As mentioned earlier, the government is expected soon to publish its “Road Map to a Green Economy,” and it is to be hoped that it will bring the currently disparate strands of green policy together as a unified vision.