Abstract

The United Kingdom has long been at the forefront of climate action, setting ambitious decarbonisation targets, including its legally binding commitment to achieving net-zero greenhouse gas emissions by 2050. A cornerstone of the UK’s strategy to fund the extensive infrastructure and technological shifts required for this transition has been the implementation of ‘green levies’ – environmental and social charges primarily imposed on energy bills. While undeniably instrumental in catalysing investment in renewable energy generation and energy efficiency, these levies have concurrently emerged as a contentious factor in the escalating operational costs faced by industrial sectors, particularly energy-intensive industries (EIIs). This detailed research report provides an exhaustive analysis of the array of green levies applied within the UK energy market, tracing their historical genesis and evolutionary trajectory. It meticulously unpacks their specific, often disproportionate, impact across diverse industrial sectors, from large-scale manufacturing to small and medium-sized enterprises (SMEs). Furthermore, the report undertakes a rigorous comparative analysis, examining the divergent approaches adopted by other leading nations and economic blocs in financing their respective renewable energy transitions and climate mitigation efforts. This comparative perspective specifically focuses on how these international counterparts manage to achieve their climate goals without imposing undue or disproportionate burdens on their energy-intensive industries, thereby maintaining global competitiveness. By thoroughly scrutinising the underlying mechanisms, economic implications, and exploring a spectrum of potential alternative funding strategies, this report aims to offer a nuanced and profound understanding of the complex challenges and nascent opportunities inherent in financing the UK’s imperative journey towards a resilient, low-carbon economy. It seeks to inform policy discourse on achieving environmental sustainability without compromising industrial viability and economic prosperity.

1. Introduction

The global imperative to address anthropogenic climate change necessitates a fundamental transformation of energy systems, shifting away from fossil fuel dependence towards sustainable, low-carbon alternatives. The Paris Agreement, a landmark international accord, underscores the collective commitment to limit global warming, with individual nations subsequently establishing ambitious domestic targets. The United Kingdom, a signatory to this agreement, has enshrined into law its target of achieving net-zero greenhouse gas emissions by 2050, a commitment that demands substantial, sustained investment in renewable energy infrastructure, energy efficiency measures, and innovative decarbonisation technologies [1].

In pursuit of these ambitious climate objectives, the UK has predominantly relied on a policy framework that externalises the costs of environmental initiatives onto energy consumers, primarily through ‘green levies’ applied to electricity and, to a lesser extent, gas bills. These charges have been a critical financial instrument, driving the rapid deployment of renewable energy sources such as offshore wind and solar photovoltaic technology, and fostering significant improvements in domestic and industrial energy efficiency [2]. However, the economic architecture of these levies has not been without its critics. A growing body of evidence and industry concern highlights their significant contribution to elevated industrial energy costs, particularly for sectors characterised by high energy intensity, such as steel, chemicals, and glass manufacturing [3].

This predicament creates a delicate balancing act: how to fund the essential transition to a low-carbon economy effectively, transparently, and equitably, without simultaneously undermining the international competitiveness of key industrial sectors. The concern extends beyond direct financial burden; it encompasses the potential for ‘carbon leakage’, where industries relocate to jurisdictions with less stringent environmental regulations, thereby negating domestic emissions reductions and causing economic detriment [4].

This comprehensive report aims to dissect this multifaceted challenge. It begins by meticulously detailing the structure, historical evolution, and specific policy objectives of the various green levies implemented in the UK. It then proceeds to assess their differential impact on various industrial sectors, differentiating between energy-intensive industries and small-to-medium enterprises (SMEs). A critical component of this analysis involves a comparative study of how other major economies – including the European Union, the United States, and Germany – finance their respective clean energy transitions. This international perspective will illuminate alternative policy instruments, funding mechanisms, and best practices designed to achieve climate goals while safeguarding industrial competitiveness. By synthesising these findings, the report seeks to provide robust insights into identifying sustainable and equitable funding models for the UK’s net-zero transition, thereby fostering both environmental stewardship and economic resilience.

2. Green Levies in the UK: Structure and Evolution

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

2.1 Definition and Purpose

Green levies, within the UK energy market lexicon, refer to a collection of statutory charges incorporated into household and non-domestic energy bills. Their fundamental purpose is multifaceted: to internalise the environmental and social costs associated with energy production and consumption, to incentivise a shift towards lower-carbon energy sources, to improve energy efficiency, and to provide support for vulnerable consumers [2]. Conceptually, these levies align with the ‘polluter pays principle’, where the costs of environmental damage or necessary mitigation are borne by those who generate the impact, or, in this case, consume the energy that drives the system. They represent a significant departure from purely market-driven pricing, reflecting policy interventions aimed at achieving specific public goods related to climate change, energy security, and social equity [5].

These charges are typically categorised into three broad types:

• Environmental Costs: Directly funding renewable energy generation or carbon reduction schemes.
• Social Costs: Supporting vulnerable households through energy efficiency upgrades or fuel poverty alleviation programmes.
• Network Costs (partially, as some network charges facilitate renewable integration): Although primarily for grid infrastructure, certain elements are influenced by the changing energy mix and the need to accommodate distributed renewable generation.

The overall policy objectives underpinning these levies are critical to understanding their design and evolution. They include: driving decarbonisation targets, enhancing the UK’s energy security by diversifying supply, fostering innovation in clean technologies, and addressing fuel poverty by making homes more energy-efficient [6].

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

2.2 Historical Development

The UK’s framework of green levies has undergone considerable evolution, reflecting changing climate ambitions, technological advancements, and economic realities. Key policy mechanisms that have constituted or contributed to these levies include:

2.2.1 Climate Change Levy (CCL)

The CCL, introduced in April 2001 under the then-Labour government, was one of the UK’s earliest and most significant environmental taxes aimed at business and public sector organisations. Its primary objective was to incentivise energy efficiency and reduce greenhouse gas emissions by placing a tax on energy delivered to non-domestic users. The levy applied to electricity, gas, coal, and liquid petroleum gas (LPG) [7].

Initially, electricity generated from ‘good quality’ combined heat and power (CHP) and new renewable energy sources (those accredited after August 2000) was exempt from the CCL. This exemption was designed to provide a competitive advantage to low-carbon generation. However, over time, the scope and exemptions of the CCL shifted. A pivotal change occurred in 2015, when the government announced that all electricity, including that from new renewables, would become subject to the CCL from April 2016. This reform was intended to simplify the tax regime and ensure a consistent approach to energy taxation, although it removed a direct financial incentive for renewable generators [8].

To mitigate the impact on energy-intensive industries, the CCL was coupled with Climate Change Agreements (CCAs). Under these voluntary agreements, energy-intensive businesses could receive a significant discount (initially 80%, later 90%) on the CCL rates if they met specific energy efficiency or carbon reduction targets agreed with the Environment Agency. This mechanism aimed to balance environmental objectives with industrial competitiveness, providing a pathway for industries to reduce their tax burden through proactive emissions management [9].

2.2.2 Renewables Obligation (RO)

Established in 2002, the Renewables Obligation was a seminal policy instrument designed to support large-scale renewable electricity generation in the UK. It operated as a market-based mechanism, placing a legal obligation on licensed electricity suppliers to source a specified, annually increasing proportion of their electricity from accredited renewable sources [10].

Suppliers could meet their obligation in three ways: by purchasing renewable electricity directly, by purchasing ‘Renewables Obligation Certificates’ (ROCs) from accredited renewable generators, or by paying a ‘buy-out’ price into a fund. ROCs were issued to generators for each megawatt-hour (MWh) of eligible renewable electricity produced. The value of ROCs was driven by market forces, providing a financial incentive for renewable energy development. Different renewable technologies were often ‘banded’ (e.g., offshore wind receiving more ROCs per MWh than onshore wind), reflecting their varying development costs and maturity [11].

The RO proved highly successful in stimulating the deployment of renewable energy capacity, particularly onshore and offshore wind farms. However, it also faced criticism for its complexity, administrative burden, and for being a ‘pass-through’ cost directly onto consumer bills, lacking transparency compared to direct government subsidies. The RO was closed to new generating capacity from April 2017, largely superseded by the Contracts for Difference (CfD) mechanism [12].

2.2.3 Feed-in Tariffs (FiT)

Launched in April 2010, Feed-in Tariffs were designed to encourage the uptake of small-scale, decentralised renewable electricity generation, typically by homeowners, small businesses, and communities. The scheme provided guaranteed, index-linked payments to eligible generators for every unit of renewable electricity they generated, regardless of whether it was used on-site or exported to the grid [13].

FiTs comprised two main components:

• Generation Tariff: A fixed payment for every unit (kWh) of electricity generated, paid by an energy supplier.
• Export Tariff: An additional payment for every unit of electricity exported back to the grid, also paid by an energy supplier.

The tariffs varied by technology (e.g., solar PV, wind, hydro, anaerobic digestion), size, and installation date, with higher tariffs for earlier adopters and less mature technologies. The scheme featured a ‘degression’ mechanism, where tariffs for new installations were periodically reduced to reflect falling technology costs. FiTs played a crucial role in accelerating the growth of rooftop solar PV across the UK. Like the RO, the costs of FiTs were ultimately funded by a levy on all electricity suppliers, which was then passed onto consumer bills. The scheme closed to new applicants in March 2019, replaced by the Smart Export Guarantee (SEG) for export-only payments [14].

2.2.4 Energy Company Obligation (ECO)

The Energy Company Obligation (ECO) was introduced in January 2013, succeeding previous energy efficiency schemes like the Carbon Emissions Reduction Target (CERT) and Community Energy Saving Programme (CESP). ECO has a dual objective: to reduce carbon emissions from the UK’s housing stock and to address fuel poverty by requiring energy suppliers to deliver energy efficiency measures to homes, particularly those occupied by low-income and vulnerable households [15].

ECO places an obligation on the largest energy suppliers to achieve specific carbon and home heating cost reduction targets. These targets are met by funding the installation of various energy efficiency measures, such as loft insulation, cavity wall insulation, external solid wall insulation, and boiler upgrades, for eligible households. The scheme has evolved through several phases (ECO1, ECO2, ECO3, ECO4), with each iteration refining the eligibility criteria and the types of measures supported to maximise impact on fuel poverty and carbon reduction [16]. The costs incurred by energy suppliers in meeting their ECO obligations are recovered through a levy on all domestic energy bills, making it a social policy cost passed on to consumers.

2.2.5 Contracts for Difference (CfD)

Although not directly termed a ‘green levy’ in the same way as the RO or FiT, the Contracts for Difference (CfD) scheme, introduced in 2014, is a central mechanism for funding large-scale renewable electricity generation and its costs are recovered via a levy on electricity suppliers. The CfD mechanism aims to provide long-term revenue stability to renewable energy investors, thereby reducing financing costs and encouraging investment [17].

Under a CfD, a renewable generator agrees a ‘strike price’ for its electricity output. If the market reference price for electricity is below the strike price, the generator receives a top-up payment from the ‘CfD counterparty’ (a government-owned company, the Low Carbon Contracts Company, LCCC). Conversely, if the market price is above the strike price, the generator pays back the difference to the LCCC. This provides a stable, predictable income for generators, de-risking investment in capital-intensive projects, particularly offshore wind [18]. The costs of these top-up payments (or revenues from clawbacks) are ultimately passed onto electricity suppliers through a ‘Supplier Obligation’, which is then reflected in consumer bills. The CfD scheme has been highly successful in driving down the cost of offshore wind power in the UK, often delivering prices below wholesale electricity prices in recent auction rounds.

2.2.6 Capacity Market (CM)

The Capacity Market, also established in 2014, is designed to ensure electricity supply security by providing payments to reliable sources of electricity capacity (e.g., power plants, demand-side response, interconnectors) in return for their commitment to be available when needed [19]. This mechanism was introduced in response to concerns about the ‘missing money problem’ in electricity markets, where declining revenues for conventional generation, due to increasing renewables and falling demand, threatened long-term investment in reliable capacity.

Generators and other capacity providers bid into annual auctions for future delivery years, securing a payment for each unit of capacity they commit to make available. These payments are funded through a levy on electricity suppliers, which is then passed through to consumer bills. While not strictly a ‘green’ levy, the CM plays a crucial role in managing the intermittency of renewable generation and ensuring system stability during the transition to a low-carbon grid. Its costs are an integral part of the overall charges on energy bills [20].

2.2.7 UK Emissions Trading Scheme (UK ETS)

Following its departure from the European Union, the UK established its own Emissions Trading Scheme (UK ETS) in January 2021, replacing its participation in the EU ETS. The UK ETS is a cap-and-trade system that sets a limit on the total amount of greenhouse gases that can be emitted by participating sectors, including power generation, energy-intensive industries, and aviation [21].

Under the UK ETS, covered installations must hold allowances for each tonne of emissions they produce. These allowances can be purchased through auctions or traded in a secondary market. While the UK ETS is primarily a direct cost for emitters and influences wholesale electricity prices, it is not a direct ‘levy’ on energy bills in the same way as the RO or ECO. However, the cost of carbon allowances is a significant operating cost for affected industries and power generators, which can be passed through to consumers in the form of higher energy prices or product costs [22]. Revenues generated from the auctioning of UK ETS allowances accrue to the Treasury, offering a potential source of funding for future green initiatives.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

2.3 Recent Reforms and Policy Adjustments

Recognising the cumulative impact of these various policy costs on industrial competitiveness, particularly in the wake of volatile global energy markets and the cost of living crisis, the UK government has introduced several targeted reforms. These reforms aim to alleviate the burden on businesses while maintaining momentum towards net-zero [3].

2.3.1 British Industrial Competitiveness Scheme (EII Exemption Scheme)

In a significant move to support energy-intensive industries, the UK government has expanded and enhanced the existing Energy Intensive Industries (EII) Exemption Scheme, often referred to as the ‘British Industrial Competitiveness Scheme’. This scheme aims to reduce electricity costs for thousands of energy-intensive businesses by up to 25% by 2027. The core mechanism involves providing exemptions from specific policy costs embedded within electricity bills [3].

Key levies targeted for exemption under this scheme include:

• Renewables Obligation (RO): Exemptions from the costs associated with the RO supplier obligation.
• Feed-in Tariffs (FiT): Exemptions from the costs associated with the FiT supplier obligation.
• Contracts for Difference (CfD): Exemptions from the costs passed through via the CfD supplier obligation.
• Capacity Market (CM): Exemptions from the costs associated with the CM supplier obligation.

This measure directly addresses the policy costs that have historically contributed to the disparity between UK industrial electricity prices and those in competitor nations. The objective is to provide crucial financial relief, helping these industries to remain competitive internationally and safeguarding jobs within vital manufacturing sectors such as steel, chemicals, ceramics, and glass [3, 23].

2.3.2 British Industry Supercharger Program (Network Charge Reductions)

Complementing the levy exemptions, the government also introduced the ‘British Industry Supercharger’ program. This initiative specifically targets reductions in electricity network charges for eligible energy-intensive sectors. Network charges, which cover the costs of transmitting and distributing electricity, constitute another substantial component of industrial electricity bills. The program initially offered a 60% discount on these charges for energy-intensive sectors, with plans announced to increase this to a substantial 90% from April 2026 [24].

These combined measures – exemptions from policy levies and significant reductions in network charges – represent a concerted effort by the UK government to mitigate the impact of historically high energy costs on its industrial base. The intent is to create a more level playing field for UK manufacturers compared to their international peers, thereby reducing the risk of carbon leakage and encouraging investment in domestic production and decarbonisation technologies [23].

3. Impact of Green Levies on Industrial Sectors

The cumulative effect of green levies and other associated charges has undeniably facilitated the UK’s renewable energy transition. However, this progress has come with significant financial implications for various industrial sectors, challenging their operational viability and international competitiveness.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

3.1 Energy-Intensive Industries (EIIs)

Energy-intensive industries (EIIs) are defined by their substantial consumption of energy as a primary input, with energy costs often representing a significant proportion (typically over 10-20%) of their total operating expenditures [25]. In the UK, this category encompasses vital sectors such as steel, chemicals, cement, paper, glass, ceramics, and aluminium production. These industries operate under intense global competition, where even marginal differences in input costs can have profound impacts on profitability and market share.

The historical imposition of green levies has placed a disproportionate burden on EIIs. Studies and industry reports consistently highlight that electricity prices in the UK have been significantly higher than the median of International Energy Agency (IEA) member countries. For instance, before recent reforms, UK industrial electricity prices were reported to be as much as 46% above the IEA median, with green levies and network charges accounting for a substantial portion of this differential [26].

3.1.1 Competitive Disadvantages and Carbon Leakage

The elevated energy costs stemming from green levies directly translate into a competitive disadvantage for UK-based EIIs. This disadvantage manifests in several ways:

• Reduced Profit Margins: Higher operational costs squeeze profit margins, making it challenging for businesses to invest in necessary capital upgrades, research and development, or process improvements that could enhance efficiency or decarbonisation efforts.
• Investment Deterrence: Companies are less likely to invest in expanding or establishing new production facilities in the UK if energy costs are significantly higher than in rival nations. This can lead to a stagnation or decline in domestic manufacturing capacity [27].
• Carbon Leakage: This is a critical concern. Carbon leakage occurs when, due to stringent climate policies (like high carbon costs or levies) in one country, energy-intensive production shifts to countries with looser environmental regulations. While emissions might decrease domestically, they effectively increase globally, undermining the purpose of the original policy and leading to a net loss of economic activity and jobs in the stricter jurisdiction [4]. For example, a steel producer facing high electricity costs from UK levies might consider relocating production to a country where energy is cheaper and environmental regulations are less stringent, exporting carbon emissions rather than eliminating them.
• Impact on Global Supply Chains: EIIs often form the foundational elements of wider manufacturing supply chains. If these foundational industries become uncompetitive, it can have cascading negative effects on downstream sectors and overall economic resilience.

While the EII Exemption Scheme and the British Industry Supercharger program aim to mitigate these impacts, their long-term effectiveness hinges on sustained political will, the scale of the relief, and the ability to adapt to evolving global energy markets and climate policies. The ongoing debate highlights the tension between the ‘polluter pays’ principle and the realities of global industrial competition.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

3.2 Small and Medium Enterprises (SMEs)

While the absolute energy consumption of Small and Medium Enterprises (SMEs) is generally lower than that of EIIs, the cumulative effect of green levies can still present significant challenges. SMEs often operate with tighter margins, fewer dedicated resources for energy management, and less bargaining power with energy suppliers compared to larger corporations. Consequently, they are less able to absorb or strategically mitigate the impact of rising energy costs [28].

3.2.1 Disproportionate Burden and Operational Constraints

• Limited Capacity for Energy Management: Many SMEs lack the internal expertise or capital to invest in sophisticated energy efficiency technologies or to actively manage their energy procurement through hedging strategies. They are often subject to standard commercial energy tariffs that fully pass through levy costs [29].
• Impact on Profitability and Growth: For SMEs, especially those in manufacturing, hospitality, or retail, energy bills represent a substantial fixed cost. Increases due to levies can directly erode profitability, hindering their ability to reinvest, innovate, or expand. This can constrain growth, limit job creation, and potentially lead to business closures in highly competitive sectors.
• Consumer Pass-Through: In many cases, SMEs may attempt to pass on increased energy costs to consumers through higher prices for goods and services. This contributes to broader inflationary pressures and can reduce consumer purchasing power, impacting overall economic activity [30].
• Reduced Investment in Energy Efficiency: Ironically, while green levies aim to fund efficiency, the increased cost burden on SMEs can reduce their disposable capital to invest in the very energy-saving measures that would alleviate their bills in the long run. Schemes like ECO, while beneficial for some, primarily target residential properties, leaving a gap for commercial SMEs.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

3.3 Broader Economic and Societal Impacts

The ramifications of green levies extend beyond specific industrial sectors to influence the broader UK economy and society:

• Inflationary Pressures: As businesses (both EIIs and SMEs) pass on increased energy costs, this contributes to higher prices for goods and services across the economy, impacting household budgets and potentially leading to inflationary spirals [30].
• Innovation Paradox: While levies fund renewable energy innovation, the associated higher energy costs can stifle innovation within existing industrial processes. Businesses facing higher operational expenditures may have less capacity to invest in R&D for more sustainable production methods or to adopt cutting-edge low-carbon technologies.
• Regional Disparities: Industries are often concentrated in specific regions. If high energy costs lead to industrial decline, this can exacerbate regional economic disparities, leading to job losses and reduced local prosperity in areas heavily reliant on manufacturing [27].
• Energy Security vs. Affordability: The pursuit of energy security through diversified, renewable generation is a key driver for many levies. However, if the funding mechanism itself leads to significant affordability challenges for industries, it creates a tension between these two crucial policy objectives.

In essence, while green levies have been a powerful engine for decarbonisation, their structure and cumulative impact have created significant economic headwinds for UK industries, necessitating a re-evaluation of how the costs of the energy transition are distributed to ensure both environmental sustainability and industrial resilience.

4. Comparative Analysis: Funding Renewable Energy Transitions Globally

Understanding how other leading nations finance their renewable energy transitions without disproportionately burdening industries offers valuable insights for the UK. Different countries employ a mix of carbon pricing, tax incentives, direct public investment, and targeted subsidies, reflecting their unique economic, political, and energy landscapes.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

4.1 European Union (EU)

The European Union’s approach to funding its renewable energy transition and broader climate goals is characterised by a comprehensive framework built upon supranational policy directives, carbon pricing, and substantial financial mechanisms. The overarching ‘European Green Deal’ sets the ambition to make Europe climate neutral by 2050 [31].

4.1.1 EU Emissions Trading System (EU ETS)

The EU ETS, launched in 2005, is the world’s largest carbon market and a cornerstone of the EU’s climate policy. It operates as a cap-and-trade system for over 10,000 power stations and industrial plants, as well as airlines. It places a cap on the total amount of greenhouse gases that can be emitted by participating installations, with the cap declining over time. Companies must acquire and surrender allowances (European Emission Allowances – EUAs) for each tonne of CO2 equivalent they emit [32].

The EU ETS serves as a primary revenue generator for climate action. A significant proportion of allowances are auctioned, and the revenues accrue to member states, which are legally obliged to spend at least 50% of these revenues on climate and energy-related projects. These funds are used to support renewable energy projects, energy efficiency programmes, and industrial decarbonisation. To prevent carbon leakage, especially for EIIs, the EU ETS initially provided free allocation of allowances to certain sectors. More recently, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM), which places a carbon price on imports of certain carbon-intensive goods (e.g., cement, iron, steel, aluminium, fertilisers, electricity, hydrogen) from outside the EU, mirroring the carbon cost borne by EU producers. This is designed to level the playing field and discourage production from shifting to countries with lower carbon prices [33].

4.1.2 Clean Industrial Deal (CID) / Green Deal Industrial Plan

Published in February 2023, the European Commission’s Green Deal Industrial Plan (sometimes colloquially referred to as a ‘Clean Industrial Deal’) aims to bolster the competitiveness of Europe’s net-zero industry and accelerate the transition to climate neutrality. It outlines a strategy to simplify the regulatory environment, speed up access to finance, enhance skills, and open up trade for resilient supply chains [34].

Key funding mechanisms within this plan include:

• EU Innovation Fund: This fund is financed by revenues from the auctioning of EU ETS allowances and provides financial support for innovative low-carbon technologies and processes, including large-scale industrial decarbonisation projects.
• State Aid Frameworks: The Commission has temporarily relaxed state aid rules, allowing member states greater flexibility to provide direct support, grants, and tax breaks for investments in renewable energy, energy storage, and industrial decarbonisation projects that are strategic for the net-zero transition.
• European Investment Bank (EIB): The EIB, the EU’s climate bank, significantly increases its lending and guarantees for green projects, including those related to renewable energy, energy efficiency, and clean manufacturing. It leverages public funds to attract private investment.
• National Recovery and Resilience Plans: A portion of the post-pandemic recovery funds (NextGenerationEU) is earmarked for green investments at the national level, allowing member states to tailor support to their specific industrial and energy needs.

The EU’s strategy prioritises both climate action and the strategic autonomy of its industries, aiming to build a robust domestic clean technology manufacturing base. This integrated approach combines carbon pricing with targeted investment and regulatory support, shifting some of the financial burden from direct energy bill levies to broader carbon revenue utilisation and public finance [34].

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

4.2 United States

The United States’ approach to funding its clean energy transition has historically been fragmented, relying on a mix of federal and state-level incentives. However, the passage of the Inflation Reduction Act (IRA) in 2022 marked a monumental shift, introducing a comprehensive federal strategy centered on tax credits and direct investments [35].

4.2.1 Inflation Reduction Act (IRA) 2022

The IRA is the largest climate investment in US history, projected to allocate approximately $369 billion over 10 years to climate and clean energy programmes. It fundamentally reshapes the landscape for renewable energy and industrial decarbonisation by primarily utilising long-term tax credits, rather than direct levies on energy bills [36].

Key mechanisms of the IRA include:

• Expanded Investment Tax Credit (ITC) and Production Tax Credit (PTC): These provide generous tax credits for a wide array of clean energy technologies, including solar, wind, geothermal, clean hydrogen, carbon capture, and energy storage. The credits are technology-neutral, long-term (extending for a decade), and offer bonus credits for meeting domestic content requirements, locating in energy communities, or serving low-income communities. This aims to stimulate domestic clean energy manufacturing and supply chains [37].
• Advanced Manufacturing Production Credits: Specific tax credits are provided for the domestic production of components for clean energy technologies (e.g., solar panels, wind turbine components, EV batteries) and for critical minerals processing. This is a direct industrial policy intervention to foster domestic clean technology ecosystems.
• Clean Commercial Vehicle Credits and EV Credits: Incentives for purchasing electric vehicles and clean commercial vehicles.
• Grants and Loan Programs: The IRA also includes direct grants and loan programs for projects that reduce emissions from industrial facilities, improve energy efficiency, and deploy clean technologies [35].

Crucially, the IRA’s approach relies on tax expenditures, which are essentially government spending through the tax code. This means the costs are absorbed by the federal budget rather than directly passed through as levies on energy consumers. It incentivises private capital investment by making clean energy projects more profitable and reducing their upfront costs, thus fostering significant private sector participation without increasing direct energy bills for consumers or industries [37].

4.2.2 State-Level Policies

Prior to and alongside the IRA, US states have played a significant role:

• Renewable Portfolio Standards (RPS): Many states mandate that a certain percentage of electricity sales come from renewable sources by a specific date, often supported by tradable renewable energy certificates (RECs). This creates a market for renewable energy and drives deployment [38].
• Green Banks: Institutions like the Connecticut Green Bank leverage public funds to attract private investment in clean energy projects. They use various financial tools (e.g., loans, credit enhancements, project aggregation) to de-risk projects and mobilise capital that traditional lenders might avoid. This helps to overcome market failures and scale up clean energy deployment [39].
• State Tax Incentives and Grants: Numerous states offer their own tax credits, grants, and property tax exemptions for renewable energy installations and energy efficiency improvements.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

4.3 Germany (Energiewende Case Study)

Germany’s ‘Energiewende’ (energy transition) is one of the most ambitious national climate and energy policies globally, aiming for a rapid phase-out of nuclear and coal power while significantly expanding renewables. Its funding mechanisms have evolved considerably over time [40].

4.3.1 Renewable Energy Sources Act (EEG)

The Renewable Energy Sources Act (EEG), introduced in 2000, was the primary mechanism driving Germany’s renewable energy expansion. It initially provided guaranteed Feed-in Tariffs (FiTs) to renewable energy producers for 20 years, ensuring them a fixed, above-market price for their electricity. This stability catalysed massive investment in solar PV and onshore wind [41].

The costs of these FiTs were funded by the ‘EEG surcharge’ (EEG-Umlage), a levy added to all electricity bills (domestic and industrial). The EEG surcharge grew significantly as renewable capacity expanded, peaking at over 6.7 cents per kWh in 2021. This substantial levy became a significant burden on electricity consumers and industries, leading to widespread debate about its fairness and impact on competitiveness. To mitigate the impact on EIIs, Germany introduced generous exemptions from the EEG surcharge for eligible energy-intensive companies, similar to the UK’s EII exemptions [42].

In July 2022, Germany abolished the EEG surcharge, shifting its funding from electricity bills to the general federal budget. This reform was a direct response to soaring energy prices and the desire to alleviate the burden on consumers and businesses, making electricity cheaper and more competitive. The shift aimed to make the costs of the energy transition more visible and subject to parliamentary debate rather than being an automatic pass-through charge [43].

4.3.2 Carbon Pricing and Direct Investments

Germany participates in the EU ETS and, in 2021, introduced a national carbon price for heating and transport fuels not covered by the EU ETS. Revenues from both mechanisms are used to support climate-friendly investments. Additionally, institutions like the KfW (Kreditanstalt für Wiederaufbau) development bank provide low-interest loans and grants for energy efficiency and renewable energy projects [40].

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

4.4 Comparative Insights and Key Learning Points

The international comparison reveals several distinct approaches to financing the energy transition, each with its own advantages and disadvantages:

• Levy-Based Funding (UK historical, Germany historical): Direct and clear link between energy consumption and funding for green initiatives. However, can be regressive, lack transparency (as an add-on to bills), and disproportionately impact EIIs, risking competitiveness and carbon leakage. Political vulnerability due to direct impact on bills.
• Carbon Pricing (EU ETS, UK ETS, national carbon taxes): Creates an economic signal to incentivise emissions reductions across the economy. Generates substantial revenue that can be hypothecated for climate investments. Can be volatile, and requires careful design (e.g., free allowances, CBAM) to mitigate carbon leakage risks for EIIs.
• Tax Incentives (US IRA): Stimulates private investment by improving project economics. Less visible as a direct charge on bills/consumers. Can be very effective in mobilising capital and fostering domestic manufacturing. However, represents a significant cost to the general government budget and may be subject to political shifts in tax policy.
• Direct Public Investment (EU Innovation Fund, Green Banks): Addresses market failures, supports strategic industries, and de-risks private capital. Provides stable funding for R&D and large-scale deployment. Requires significant government funding and political will, but allows for targeted support and strategic direction [39].

Crucially, many nations are moving away from solely levy-based approaches towards more diversified funding mechanisms that leverage carbon revenues, general taxation, and strategic public investment. There is a strong emphasis on industrial policy, aiming to build domestic clean technology supply chains and ensure competitive sustainability. The German experience of abolishing the EEG surcharge and shifting costs to the federal budget is a particularly relevant lesson for the UK, demonstrating a policy pivot driven by affordability concerns.

5. Potential Alternatives and Recommendations for the UK

The UK’s experience with green levies highlights a persistent tension between the imperative to fund a rapid energy transition and the need to maintain industrial competitiveness. Drawing lessons from international comparisons and domestic experience, several alternatives and recommendations emerge to foster a more balanced and sustainable funding framework.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

5.1 Reforming the Levy System and Funding Mechanisms

5.1.1 Shifting Costs from Electricity to Gas Bills or General Taxation

Currently, a significant portion of green levies are applied to electricity bills. This creates a disincentive for electrification, which is a key decarbonisation pathway for many sectors (e.g., heat pumps, electric vehicles, industrial processes). Shifting some of these legacy policy costs from electricity to gas bills, or funding them directly from general taxation, could have multiple benefits [44].

• Incentivising Electrification: Making electricity cheaper relative to gas would accelerate the adoption of electric technologies, aligning energy prices with decarbonisation goals.
• Fairness and Progressivity: Funding public goods (like renewable energy deployment or energy efficiency for vulnerable households) from general taxation can be more progressive, as taxes are often income-dependent, unlike flat levies on energy bills. It also increases transparency, as these costs would be debated as part of the annual budget [45].
• Industrial Competitiveness: Removing or significantly reducing policy costs from industrial electricity bills would immediately reduce operating costs for EIIs and SMEs, enhancing their competitiveness without requiring complex exemption schemes.

Challenges include the political difficulty of shifting costs to gas (which would impact gas users, especially during a transition period) and the need for fiscal headroom within the national budget to absorb previously bill-funded costs.

5.1.2 Creating a Dedicated Green Funding Mechanism/Bank

Re-establishing or expanding a dedicated national green investment bank (similar to the original UK Green Investment Bank before its privatisation, or models like the Connecticut Green Bank) could leverage public capital to attract significantly larger private investment into green projects [39].

• Catalytic Capital: A green bank can provide loans, guarantees, and equity investments to de-risk innovative clean technologies and infrastructure projects that traditional financial institutions might be hesitant to fund.
• Strategic Direction: It can target investment towards key areas for the UK’s net-zero transition, such as industrial decarbonisation, grid modernisation, and novel energy storage solutions.
• Reduced Bill Burden: By mobilising private finance, the reliance on direct levies on consumer bills for new deployments could be reduced, spreading the financial responsibility more broadly.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

5.2 Strengthening Carbon Pricing Mechanisms and Revenue Utilisation

5.2.1 Expanding Scope and Stringency of UK ETS

The UK ETS is a powerful tool for carbon pricing. Increasing its stringency (e.g., accelerating the decline of the cap) and potentially expanding its scope to cover more sectors (such as buildings and transport, potentially through a distinct, linked scheme) could deepen its impact [22].

• Stronger Price Signal: A more robust and comprehensive carbon price incentivises emissions reductions across a wider array of economic activities.
• Increased Revenue Generation: A broader and more stringent ETS would generate significantly more revenue. This revenue could then be hypothecated and explicitly directed towards industrial decarbonisation funds, renewable energy infrastructure, or energy efficiency programmes, thereby reducing the need for other levies.

5.2.2 Implementing a Carbon Border Adjustment Mechanism (CBAM)

Following the EU’s lead, the UK could consider implementing its own CBAM. This would place a carbon price on imports of certain carbon-intensive goods from countries without equivalent carbon pricing [33].

• Prevent Carbon Leakage: A CBAM would protect UK industries (especially EIIs) that bear domestic carbon costs from being undercut by cheaper, higher-carbon imports, creating a more level playing field.
• Incentivise Global Decarbonisation: It would encourage other countries to adopt their own carbon pricing mechanisms to avoid the import tariff, fostering global climate action.
• Generate Revenue: A CBAM would also generate revenue that could be reinvested in UK decarbonisation efforts.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

5.3 Enhancing Public and Private Investment Incentives

5.3.1 Investment Tax Credits (ITCs) and Production Tax Credits (PTCs)

Emulating the successful model of the US Inflation Reduction Act, the UK could introduce long-term, predictable investment and production tax credits for clean energy technologies, industrial decarbonisation, and green manufacturing [37].

• Mobilising Private Capital: These credits directly reduce the cost of capital for clean energy projects and manufacturing, making them more attractive to private investors and accelerating deployment.
• Building Domestic Capacity: Tax credits with domestic content requirements could incentivise the establishment and growth of UK clean technology supply chains, fostering economic growth and job creation.
• Long-Term Predictability: Stable, long-duration tax credits provide the certainty investors need for large-scale, long-term projects.

5.3.2 Direct Government Grants and R&D Funding

Increased direct government funding for strategic R&D, demonstration projects, and first-of-a-kind deployments of critical clean technologies (e.g., hydrogen, carbon capture, advanced nuclear, sustainable aviation fuels) is essential [46].

• De-risking Innovation: Government grants can bridge the ‘valley of death’ for nascent technologies, helping them scale from research to commercial viability.
• Targeted Industrial Decarbonisation: Specific grant programmes could support EIIs in developing and adopting breakthrough technologies to decarbonise their processes, moving beyond mere exemptions.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

5.4 Strategic Industrial Policy and Energy Efficiency

5.4.1 Comprehensive Energy Efficiency Programmes

While ECO addresses residential properties, there is a need for robust, accessible energy efficiency programmes for commercial and industrial sectors, including SMEs [29].

• Reducing Demand: Energy efficiency is often the cheapest form of ‘new energy’. Reducing overall demand lessens the total burden of levies and network charges, regardless of their funding source.
• Targeted Support: Programmes offering grants, low-interest loans, and expert advice for energy audits and efficiency upgrades can empower businesses to reduce their own energy costs.

5.4.2 Grid Modernisation and Flexibility Incentives

Investing in grid modernisation, smart technologies, and flexibility markets (e.g., demand-side response, energy storage) can reduce overall system costs, which are ultimately passed onto consumers [47].

• Lower System Costs: A more flexible and efficient grid can better integrate intermittent renewables, reduce congestion, and minimise the need for expensive peaking power plants, leading to lower network charges.
• Optimised Energy Use: Incentives for industrial demand-side response can allow businesses to shift energy consumption to off-peak periods, reducing their bills and supporting grid stability.

Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.

5.5 Policy Coherence and Long-Term Strategy

Ultimately, a successful transition requires a stable, predictable, and coherent policy framework. Frequent changes to levy structures or support mechanisms create uncertainty, deter investment, and increase the cost of capital [12]. A cross-departmental strategy, involving Treasury, DESNZ (Department for Energy Security and Net Zero), and BEIS (Department for Business and Trade), is essential to align climate goals with industrial and economic policy.

6. Conclusion

Green levies have been an indispensable, albeit complex, instrument in propelling the UK’s transition towards a low-carbon economy. Their historical evolution, from the Climate Change Levy and Renewables Obligation to the Feed-in Tariffs and Energy Company Obligation, demonstrates a sustained commitment to decarbonisation and energy security. These mechanisms have undeniably catalysed significant investment in renewable energy capacity and fostered energy efficiency improvements, positioning the UK as a leader in certain green technologies, particularly offshore wind.

However, the analysis unequivocally demonstrates that the predominant reliance on these levies, particularly those applied to electricity bills, has placed a substantial and often disproportionate financial burden on industrial sectors. Energy-intensive industries, operating within fiercely competitive global markets, have faced significantly higher electricity costs compared to international peers, leading to concerns about competitiveness, investment deterrence, and the perilous risk of carbon leakage. Small and medium-sized enterprises have also experienced adverse impacts, albeit differently, affecting their profitability and capacity for growth.

The comparative international review illuminates a divergence in funding strategies. Nations and blocs like the European Union, with its sophisticated carbon pricing mechanisms and targeted industrial policy under the Green Deal Industrial Plan, and the United States, with its transformative, tax credit-based Inflation Reduction Act, offer compelling alternatives. Germany’s ‘Energiewende’ provides a direct lesson in the political and economic pressures that can lead to a shift from bill-based levies to broader budgetary funding. These examples highlight that while the costs of climate action are unavoidable, the manner of their allocation is a critical policy choice.

For the UK to sustain its leadership in climate action without compromising its industrial base, a strategic evolution of its funding approach is imperative. This report advocates for a multi-pronged strategy that encompasses:

• Fundamental reform of the levy system, potentially shifting certain legacy costs from electricity bills to gas bills or, ideally, into general taxation to enhance equity and incentivise electrification.
• Strengthening and broadening carbon pricing mechanisms, particularly the UK Emissions Trading Scheme, and strategically utilising its revenues to fund industrial decarbonisation and green innovation, potentially complemented by a UK Carbon Border Adjustment Mechanism.
• Enhancing targeted public and private investment, exploring the implementation of tax credits akin to the US IRA, and expanding direct government grants and a catalytic green investment institution.
• Prioritising comprehensive energy efficiency programmes across all sectors and investing in grid modernisation to reduce overall system costs.

In essence, the UK stands at a critical juncture. The next phase of its net-zero journey requires an evolved, balanced, and sustainable funding strategy that embraces greater transparency, equity, and strategic foresight. By learning from its own experience and the diverse approaches of other leading economies, the UK can forge a path that not only meets its ambitious climate goals but also ensures the enduring competitiveness and prosperity of its industrial sectors, securing a truly resilient and green future.

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