CO2 emissions-trading scheme – an environmental stealth tax?

by Business Case Studies on Wednesday 16th January, 2008

CO2 emissions-trading scheme – an environmental stealth tax?

In mid-November, the government published the Climate Change Bill. The bill's overall objective is to reduce CO2 emissions by at least 26%-32% by 2020, compared with 1990 levels. The impact of the bill on big organisations comes in the form of the Carbon Reduction Commitment. This will be a mandatory, auction-based emissions-trading scheme (which will come into force in 2009). The benefits gained from introducing more energy-efficient ways of operating should outweigh the costs of participating in the scheme. Many companies have pre-empted the government's scheme and introduced their own green policies and targets for CO2 reduction (The Sunday Times Online, 2 December 2007).

Martin Waller, writing in The Times, suggests the emissions-trading scheme could be an environmental stealth tax on business. This could raise hundreds of million of pounds for the taxman over the next five years through the auction of a large chunk of the next round of carbon emission permits. Under the EU rules that set up the scheme, national governments can retain a maximum of 10% of emission permits. Business organisations have complained that the British government's decision to auction 7% of the permits is the highest proportion retained by any EU country. (The Times Online, 17 December 2007)

A document seen by The Times suggests there is a degree of sensitivity in government over whether the proceeds of the auction should be regarded as a tax. The government department, Defra, said: 'Greenhouse gas emissions cause damage to the environment that, without policy action, no one has to pay for. Business requires a price signal for carbon in order to take full account of the cost of their emissions and to drive reductions'.(The Times Online, 17 December 2007)

Employer organisations are concerned about the added financial burden placed on them by the need to bid for permits. In some sectors, such as power generation, this could rise to 50%. If the consequent price rises are passed straight on to the consumer, these could make industries such as steel less able to compete with other parts of the world. It has been suggested that the money raised could be spent on low carbon technology within the UK. (The Times Online, 17 December 2007)

The Times 100 case study for McCain Foods highlights how use of a SLEPT analysis helps a company analyse changes in today's fast-moving external environment. The external environment consists of everything outside the business. The case study shows how McCain Foods identifies changes in the external environment and then rise to the challenges posed by change.

Sources:

The Times Online – Concern over Government's sale of CO2 emission permits, 17 December 2007

The Sunday Times Online – Keeping ahead of climate change, 2 December 2007

The Times 100 Edition 12 Case Study – McCain, How McCain responds to changes in the external environment

Potential Study Questions:

  • Apart from the introduction of new schemes by government, what other external factors are outside the control of businesses?
  • Read the full article (The Times Online, 17 December) and the summary of how the emissions-trading scheme works. Look at the industries covered by the scheme and assess the effect on the economy of them passing on the increased costs to the consumer.

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