Draft Climate Change Levy (Fuel Use and Recycling Processes) (Amendment) Regulations 2026
(1 day, 12 hours ago)
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The Exchequer Secretary to the Treasury (Dan Tomlinson)
I beg to move,
That the Committee has considered the draft Climate Change Levy (Fuel Use and Recycling Processes) (Amendment) Regulations 2026.
It is a pleasure to serve on the Committee with you in the Chair, Ms Vaz. The draft regulations exempt from the climate change levy electricity used in—this is a word I am going to struggle to say repeatedly—electrolysis to produce hydrogen and natural gas used as a source of carbon dioxide to produce sodium bicarbonate from soda ash. They do this by expanding the climate change levy non-fuel use exemption to include the relevant new processes.
The CCL was introduced in 2001 with the purpose of encouraging energy efficiency across our economy by taxing energy supplies such as electricity or gas. From the outset, the tax has included a non-fuel use exemption, the principle behind which is that when fuels that are liable to CCL are not used for energy, they should not be taxed as if they were. Today, that principle needs to be applied to two modern industry realities that are not currently included in the exemption.
First, when produced in a low-carbon way, hydrogen can help to power the UK’s clean energy transition and support our 2050 net zero ambitions. One key method of hydrogen production is electrolysis. In that process, the electricity is not used as a fuel, as it is the feedstock that enables the chemical reaction. Yet without the change in the draft regulations, electricity used in the process would be charged CCL in most cases.
Secondly, the chemical process that converts soda ash into sodium bicarbonate is a new production technology in which natural gas performs two roles: it provides heat and serves as an essential source of the carbon dioxide needed for the production process. Where a taxable commodity is used partly as fuel and partly for a non-fuel purpose, the non-fuel use exemption is intended to accommodate such mixed uses. Yet as things stand, the natural gas used will attract CCL, despite the partial non-fuel use that is fundamental to the chemistry involved.
Similar non-fuel use processes in soda ash production are already exempt from CCL. The Government are satisfied that it is appropriate to add this use of natural gas to the exemption, thereby helping to ensure alignment and consistency across industrial processes, as well as supporting the relevant part of the chemicals sector.
The changes in the draft regulations deliver on the Government’s commitment at the 2025 spring statement to remove CCL costs in respect of electricity used in electrolysis to produce hydrogen. I commend the draft regulations to the Committee.
James Wild (North West Norfolk) (Con)
I am grateful to the Minister for setting out the scope and the impact of the draft regulations. We support the approach to update the legislation to put it beyond doubt that electricity used in electrolysis processes to produce hydrogen will count as a non-fuel use, and therefore benefit from the exemption from the levy.
I also acknowledge that the inclusion of the production of sodium bicarbonate came as a result of the consultation, so there we have it: a Government who listen. Sadly, there are a host of issues on which the Government have not yet listened that I could talk about, were they in scope, from the farm tax to the jobs tax. We live in hope.
I do not propose to detain the Committee unduly, but I would like to raise a couple of points. First, as Members will know, the consultation proposed three options to deal with the issue. The Government justified selecting option A on the basis that it was the quickest to implement. It is a sensible procedure to adopt, but option B included support for a broader category of methods of producing hydrogen. Will the Minister confirm the proposed timetable for the consideration of broader treatment as part of the wider review of the climate change levy to which the Government have committed? I note that the Finance (No. 2) Bill, which the Minister and I discussed in Committee, increases the overall levy, adding £2 billion to the cost on British industry.
My second point concerns the costings in the tax information and impact note and the explanatory notes, which refer to this change as having a negligible impact. Given the ambitions for hydrogen across the economy, and the ramping up of its production, can the Minister share any projections of the potential benefits for the sector?
Dan Tomlinson
I thank the shadow Minister for his questions. I always enjoy listening to him; one day, I am sure I will do so on a bumper car in his constituency. Those Members who did not serve on the Finance (No. 2) Bill Committee will not know that reference; I will have to update them afterwards.
We will conduct the wider review of the CCL as swiftly as possible. It is important that we keep all our taxation policies under review, not least given the changes that are taking place in the economy. It was right that the Government consulted on the changes in the draft regulations earlier in the year, and we will continue to listen to the various industries that are affected by the CCL.
We chose to proceed with the option that the shadow Minister outlined in large part because we wanted to make sure we could bring in the change as quickly as possible. Those in the industry have been asking for the change, which will support them in the move towards using low-carbon technologies and processes, and we wanted to implement it as swiftly as possible. It is my understanding that if the Committee agrees to the changes, they will come into effect immediately—as of tomorrow—which is good. Progress has been very swift now that we have finally got here.
There was one other question on which I will have to respond after the Committee, because it is has fallen out of my head.
Question put and agreed to.