The government may adopt an alternative environmental tax to replace its scheme to cut corporate energy use if it cannot reduce the scheme's administrative costs, Chancellor George Osborne said in his budget statement on Wednesday.
The so-called Carbon Reduction Commitment (CRC) was devised under the previous Labour government.
The mandatory energy efficiency scheme forces businesses including banks, hotels, hospitals and schools to help cut Britain's greenhouse gas emissions by 4 million tonnes and corporate energy bills by 1 billion pounds ($1.6 billion) a year by 2020.
The CRC has been widely criticised for being costly, confusing and unfair.
The Carbon Reduction Commitment is cumbersome, bureaucratic and imposes unnecessary costs on business, Osborne said.
We will seek major savings on the administrative costs, and if that cannot be done, we will replace the revenues with an alternative environment tax.
If savings cannot be delivered, the government will make proposals in autumn this year for an alternative tax.
The government will bring forward proposals in autumn 2012 to replace CRC revenues with an alternative environmental tax and will engage with business before then to identify potential options, the budget document said.
The government will also raise a carbon price support rate for 2014-2015 by over 30 percent to 9.55 pounds per tonne of carbon dioxide from 7.28 pounds, the budget document showed.
Last year, the government announced plans to set a price floor for European Union emissions permits in the UK at 16 pounds per tonne from April 1, 2013, rising to 30 pounds per tonne by 2020.
The government hopes the floor will underpin the price of EU emissions permits, which have lost over half their value in the past year, and incentivise investment in low-carbon technology.
To ensure the price floor targets are reached, the government proposed the introduction of a top-up tax from April 2013. The last budget said the top-up component for 2013-14 would be set at 4.94 pounds per tonne and could rise to 7.28 pounds/tonne in 2014-15.
Setting the tax rate two years in advance relative to a volatile commodity is fraught with challenges. There is also the risk that the support rate will be punitive should carbon credit prices return to historical averages, said Jonathan Grant, director of sustainability and climate change at PriceWaterhouseCoopers.
UK manufacturers' organisation EEF said the support rate rise would push industrial electricity prices up another 6 to 7 percent on top of existing policies.
(Reporting by Nina Chestney and Karolin Schaps; Editing by Mark Potter and Jane Baird)