The UK Tax Implications of High Energy Usage in Data Centres

A data centre with 1000 servers running at 13% utilization with a Power Usage Effectiveness (PUE) of 2 and an energy rate of 0.12p per kWh will pay £18k in CCL taxes per annum.

The following is a summary of UK Government legislation for energy and climate change.

Climate Change Levy (CCL)

Introduced on 1st April 2001 the CCL is a tax on the use of energy in industry, commerce and the public sector. The levy applies to industrial and commercial energy supplies in the following sectors: industry, commerce, agriculture; and public and service sectors.

Taxable commodities and rates:

Taxable commodity	Rate
Electricity	£0.00456 per kWh
Gas supplied by a gas utility	£0.00159 per kWh
Any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state	£0.01018 per kilogram
Any other taxable commodity	£0.01242 per kilogram

Source: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_InfoGuides&propertyType=document&id=HMCE_PROD1_027235

Department of Energy & Climate Change (DECC)

The DECC was created to bring together energy policy with climate change mitigation policy. Climate change and energy policies are inextricably linked – two thirds of our emissions come from the energy we use. Decisions in one field cannot be made without considering the impacts in the other.

Carbon Reduction Commitment (CRC)

Starting in 2010 CRC is for all businesses not covered by a climate change agreement (see below) and the EU Emissions Trading System (See below). The policy has been developed with DECC, Energy Act 2008 and the Climate Change Act 2008. An estimated 20,000 organizations will be affected by the scheme and failure to comply will result in penalties.

How does it work? (Proposed)

• CRC will cover organizations with an annual energy bill of > £500k
• All energy other than transport fuels is included in the figure
• Carbon allowances will be allocated by auction
• Annual allowances will reduce over time
• Participants may be able to buy EU ETS credits to comply with emissions cap (see below)
• League tables published outlining best and worst performers in terms of carbon emission and reductions
• Self certification of monitoring, reporting and verification of emission
• Backed by independent risk based audit regime

European Union Emissions Trading System (EU ETS)

The rationale behind emission trading is to ensure that the emission reductions take place where the cost of the reduction is lowest thus lowering the overall costs of combating climate change.

How does it work?

• Government allocates (free) emissions allowances to participating companies·
• If the company goes over their allowance they can purchase additional allowances from the market·
• The additional allowances are sold by companies who have emitted less than their original allocation of allowances

Emissions trading gives companies the flexibility to meet emission reduction targets according to their own strategy; for example by reducing emissions on site or by buying allowances from other companies who have excess allowances. The environmental outcome is not affected because the total amount of allowances allocated is fixed.

Energy intensive sectors

Energy intensive sectors are a wide range of industrial sectors, from major energy intensive processes such as steel, chemicals and cement, to agricultural sectors, such as intensive pig and poultry rearing.

Climate Change Agreements (CCA)

Climate Change Agreements (CCAs) allow eligible energy intensive business users to receive up to an 80% discount from the CCL in return for meeting energy efficiency or carbon saving targets set by the Government.

CCAs have a two-tier structure:

• A sector-level agreement between Defra and the sector or trade association (known as an umbrella agreement)
• Individual agreements between Defra and the operator of the facility (known as underlying agreements).

Targets are set on a company by company basis and must be met in order to receive the discount.

Recommendations for Reducing Energy and Taxes:

Employ the use of a reporting tool for measuring and monitoring energy use and sever efficiency. This will aid decisions such as decommissioning underutilized servers and the reallocation of workloads to use servers more efficiently, all of which will reduce overall energy consumption including cooling costs.

Lower overall energy consumption = Lower taxes

Understanding US Government Carbon Tax: Cap-and-Trade

A data center with 1000 servers running at 13% utilization with a Power Usage Effectiveness (PUE) of 2 will be producing approximately 2000 metric tons of CO_{2 per year. If we estimate that each Cap-and-Trade permit (per metric ton) will cost $15, a 1000 server data center will pay $30k in Cap-and-Trade taxes per annum.}

The goal of Cap and Trade is to reduce greenhouse gas emissions including carbon dioxide throughout the economy using cost effective methods. The program is yet to be finalized.

What is The Cap?

Large emitting companies will have a limit on the amount greenhouse gases they can emit. Each ton of GHG emitted by the company must be covered by a permit. The number of permits will be reduced over time allowing less pollution until the crucial reduction goal is met.

What is The Trade?

A set number of permits are issued per year ensuring that the overall reduction of greenhouse gases is achieved. Efficient companies who successfully emit less than their target can then trade their remaining permits to companies who are not able to reduce their emissions, acting as a reward for the efficient companies.

What is a successful program?

A successful Cap-and-Trade program would limit the rise in global temperature to approximately 2.0 degrees Celsius / 3.6 degrees Fahrenheit above pre-industrial levels by 2050 as part of a larger plan to abate global warming. In order to achieve this, US Government will have to lower the cap until emissions are reduced to 80 percent below 1990 levels by 2050. Initially the government would auction off the permits for around $10 to $15 per metric ton of CO₂ or its equivalent[1].

The program is initially estimated to generate in the region of $50 billion rising to $300 billion. Revenues are expected to be used to help offset costs to businesses and shareholders of affected industries and to help low to middle income Americans cover the cost of energy price increases which may occur as a result of the switch to renewable energy sources. It will also be used in the development of green technologies and trading.

Recommendations for Reducing Carbon and Taxes:

Employ the use of a reporting tool for measuring and monitoring energy use and sever efficiency. This will aid decisions such as decommissioning underutilized servers and the reallocation of workloads to use servers more efficiently, all of which will decrease energy consumption including cooling costs, reducing your overall carbon emissions.

Lower carbon emissions = Lower taxes

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[1] Center for American Progress: Cap and Trade 101 (2008)