Climate change levy explained
Climate change levy is a tax on supplies of gas and electricity to business users, and consumption of fossil fuels for electricity generation.
The decarbonisation of the energy sector has given rise to a lot of new scenarios and business models including:
- Combined heat and power plants
- Green gas
- Battery storage and other embedded or local generation
Adapting to these new business models can be a challenge for many companies.
Climate change levy rates
The current main rate of climate change levy is 0.672p per kWh on natural gas and 0.775p per kWh on electricity. On 1 April 2024, the rate for natural gas will increase to 0.775p per kWh but for electricity, it will stay the same.
Climate change levy exemptions and reliefs
Climate change levy exemptions and reliefs are available for:
- Domestic users
- Charities without commercial activities
- Businesses that only consume small amounts of energy (less than 145 kWh of natural gas a day and/or 33 kWh in electricity per day)
- Community heating schemes
- Combined heat and power plants
- Energy intensive businesses which have a climate change agreement
- Businesses with mineralogical and metallurgical processes
- Businesses which use gas, electricity, coke or coal for non-fuel uses in their processes, such as electrolysis, steelmaking and other chemical processes
Some of these reliefs have to be claimed by sending certificates to the energy supplier and HMRC.
How to reduce the rate of climate change levy payable
Businesses who have already entered into a climate change agreement with the Environment Agency are eligible for a discount on the climate change levy charged on their bills. The agreement states that you will aim to reduce the business’s carbon footprint. Businesses would have needed to sign up to the agreement prior to 30 June 2022.
At Spring Budget 2023 the government launched a consultation on extending current climate change agreements to 31 March 2027 and reopening the existing agreements to new entrants. Proposals for a future replacement are also being consulted on.
If you entered into an agreement, the rate of climate change levy will be reduced by up to 88% on natural gas and 92% on electricity. The gas discount increases to 89% from 1 April 2024.
Installation of on-site renewable electricity generation or a combined heat and power plant is also a good way of reducing climate change levy and safeguarding against further energy price rises. The recent increase in energy prices has improved the business case for investment in on-site generation. Use of renewable electricity and ‘good quality’ electricity from a combined heat and power plant, which is generated on-site, is not subject to climate change levy.
Help with climate change levy
We have a specialist team with extensive experience of dealing with climate change levy. Our experts can advise you on any exemptions or reductions you might be eligible for, help you with any associated compliance, answer technical queries, provide an analysis of the impact of new business models and assist with HMRC enquiries and investigations.
Talk to Evelyn Partners
If you have any queries about climate change levy and the implications on your company, call us now.
Frequently asked questions about climate change levy
What is carbon price support?
Carbon price support is a rate of climate change levy that applies to fossil fuels, such as gas and coal, used in the generation of electricity. The electricity generator has to register for climate change levy and account for any tax due.
Does climate change levy apply to electricity exported to grid?
If you are just exporting electricity to grid so that someone else can make an onwards supply of the electricity to the end user, you do not have to charge climate change levy.
If you are supplying the end user of the electricity yourself, then you will need to consider whether climate change levy should be charged. The rules are complicated and need in-depth analysis of the specific facts and circumstances.
Is climate change levy vatable?
Climate change levy is shown as a separate line on invoices for gas and electricity. It forms part of the net price, and is subject to VAT.
If climate change levy is self-accounted by a business with a climate change levy registration, for example an electricity generator self-accounting for carbon price support, then no VAT is due. The climate change levy is declared on the climate change levy return and paid to HMRC.