Under the Climate Change Levy package described in the Finance Bill, a sum of £150 million has been set aside for use in fiscal year 2001/2002 to support projects that will help reduce greenhouse gas emissions. The fund for 2001/2 includes an estimated £100 million of tax relief that will be used for enhanced capital allowances (ECAs).
The other £50 million will be part of public spending supporting greenhouse gas emission reduction initiatives by companies affected by the Climate Change Levy. The use of this fund has not been agreed yet, but is likely to include extra funding for site level energy surveys and some financial support for Trade Association initiatives.
Impact of ECAs
An Enhanced Capital Allowance (ECA) is a financial mechanism that is intended to increase the level of energy efficiency investment in industry.
The ECA scheme will provide for 100% write down for tax calculations of investments in qualifying energy efficient equipment. This has the effect of bringing forward the tax benefits of the depreciation on capital equipment. The ECA provides a benefit by allowing purchasers of equipment to pay less tax in early years. This benefit is simply one of timing of tax payments and does not affect a company’s total tax payments over its life.
The size of the benefit for a particular investment depends on the company’s cost of capital. For a cost of capital of 15% the benefit is of the order 10% of the original investment cost . So, if a company is considering a £100k investment for a project that save energy worth £30k per year, the ECA will improve the payback period from 3.3 years to 3.0.
The incentives to invest created by the tax benefit could extend beyond the immediate financial considerations. Assuming that the ECA scheme is well publicised it is likely to increase awareness in these technologies per se.
ECAs will only be available for a list of specified technologies. The initial list of technologies includes:
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It is expected this list will be reviewed and updated. In particular the list could be expanded to low carbon technologies such as renewables, especially wind and solar.
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Further information on ECAs may be obtained from www.eca.gov.uk |