Tax breaks to address climate change need urgent reform

01 December 2015

Rebecca Reading

Amber Rudd, the energy secretary, has made it clear that the market, not the generosity of the public purse, should be the main driver to address climate change. Indeed, recent cuts to government subsidies for renewable projects have been severe and surprised many in the sector with the speed of their introduction.

If private businesses are really expected to step in then the Enhanced Capital Allowances (ECA) scheme needs an urgent review. A tax break introduced to push buying decisions towards capital expenditure with green credentials, the regime gives a 100 per cent tax deduction, as opposed to 18 per cent under normal rules, with the possibility of 19 per cent cash back if tax losses arise. Sounds promising?

ECAs have been around for over a decade, but our observation is that they are not widely accessed.

One problem is that ECAs are available for expenditure on items on the Energy Technology List. This sounds simple, but the List is constantly updated and items move on and off, making decision-making difficult. There are also plenty of products that have environmental benefits, but will never appear on the List because the strict criteria are not met.

Another situation where opportunities are missed is on new buildings. The built environment must be critical in terms of reducing energy consumption and in the light of the Chancellor’s commitment to building in last week’s Autumn Statement, it must be worth looking at ways to make new property as energy efficient as possible.

Property developers, however, can be disinterested in a building’s green credentials because they cannot benefit from the ECAs. Suppliers of green building products are keen to make the end user aware of energy saving features, and the end users themselves would want to take advantage of the ECA tax breaks, but with the developer in between it becomes difficult to make this work.

It is questionable whether ECAs make a meaningful contribution to addressing climate change, but as a business-centred measure, we hope they are reformed rather than scrapped. 

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