Introduced on April 1, 2001 under the Finance Act 2000 it was forecast to cut annual emissions by 2.5 million tonnes by 2010, and forms part of the UK's Climate Change Programme. The levy applies to most energy users, with the notable exceptions of those in the domestic and transport sectors. Electricity generated from new renewables and approved cogeneration schemes is not taxed. Electricity from nuclear is taxed even though it causes no direct carbon emissions.
From when it was introduced, the levy was frozen at 0.43p/kWh on electricity, 0.15p/kWh on coal and 0.15p/kWh on gas. In the 2006 budget it was announced that the levy would in future rise annually in line with inflation, starting from April 1, 2007 A reduced levy applies to energy-intensive users provided they sign a Climate Change Agreement.
Revenue from the levy was offset by a 0.3% employers' rate reduction in National Insurance. However, the 2002 Finance Act subsequently increased that rate by 1%, reversing the reduction. Part of the revenue is used to fund a number of energy efficiency initiatives, including The Carbon Trust.
The Climate Change Levy effectively replaced the Fossil Fuel Levy.