Distributional impacts of UK climate change policies

Fuel bills vs income-tax bills: who pays for our low-carbon future?

Project duration: January 2010 to June 2010

The UK government isn’t short of policies for attempting to mitigate the impact of climate change. The last administration’s proposals were outlined in its Low Carbon Transition Plan and most, if not all, of these are likely to be maintained or adopted by the current one: feed-in tariffs, the Carbon Emissions Reduction Target (or successor scheme), smart meters et al.

All these policies will deliver some benefits to the UK housing stock in the form of insulation and renewable energy measures: but someone will have to pay for them. The question is who?

A study [Distributional Impacts of UK Climate Change Policies] by CSE and the Association for the Conservation of Energy (ACE) aimed to find out by establishing:

  • What needs to be done to UK housing, in terms of sustainable energy deployment, in order to meet our renewables target of 15% by 2020
  • The proportion of this target to be met through renewable heat, renewable power and energy conservation;
  • The range and size of technologies required;
  • The cost of meeting these targets, and how these costs are recovered, through people's energy bills, through income tax, or even through a financial transaction tax

In addition, the report’s authors, CSE’s Ian Preston and Vicki White and ACE’s Pedro Guertler, explored the wider implications for social justice in the context of climate change mitigation policies.

The costs and (where applicable) benefits (in the form of insulation and renewable energy measures) of nine government policies were modelled:
1) EU Emissions Trading Scheme
2) Carbon Emissions Reduction Target (CERT)
3) Proposed Supplier Obligation after CERT
4) Community Energy Saving Programme (CESP)
5) Renewables Obligation
6) Feed-in tariffs (FIT)
7) Renewable Heat Incentive (RHI)
8) Smart meters
9) Product policies

The impact on consumer energy bills resulting from the modelling are presented in terms of the 'counterfactual bill'. This is the assumed average energy bill in 2020 which doesn't include 'uplift' arising from LCTP policies, but does take into account fuel price rises.

These were set against different models of cost recovery: firstly through consumer bills where the cost is spread evenly across all customers; then through consumer bills but distributed according to the commercial imperatives of the supplier (could be loaded onto ‘undesirable’ customers for example); and finally through income tax.

Energy bills vs taxation

Analysis shows that, if the costs of all the policies described above are recovered through consumer energy bills, the average annual household energy expenditure in 2020 (assumed to be £1,154) will increase by £103 (a rise of 8.5%). Like all ‘spread-even’ bill increases, this scenario takes more from higher-income households in absolute terms, but hits the poor, who spend a higher proportion of household income on energy, significantly harder.

This could be addressed through a ‘protected-block tariff’ by which energy suppliers are allowed to recover the additional costs of climate change policies only on consumption in excess of, say, the first 2,000kWhs. Consumption in excess of this (e.g. for the heating and lighting of large homes, swimming pools etc) would bear the brunt of the cost-recovery. This would protect the poor but would require regulatory backing.

Recovering policy costs through income tax on the other hand sees it decrease by £193 (16%), as households reap the benefit of insulation and micro-renewables, but aren’t paying for these through their bills.

However, under this cost recovery scenario, annual household income falls by an average of £309 (as the measures are paid for by income tax). Therefore, under the income taxation scenario the average household is £116 ‘net’ worse off, compared to £103. The impact, of course, changes according to the household’s tax bill. The lowest-income households who pay least income tax will actually see a net surplus of £96 (i.e. what they save in energy costs more than compensates for the slight decrease in household income. By contrast the richest households paying the most tax would be £1,378 worse off - though at around 0.7% of their income this is probably affordable.

“In brief” said Ian Preston “our research appears to show that the use of energy bills to recover the cost of climate change policies is more regressive - hits the poor harder than the rich - than the taxation route.”

Both approaches require the population to pay for measures from which they may or may not benefit. The ‘winners’ see an overall reduction in their energy bills under either scenario, with the income taxation route benefiting those on lower incomes.

“It’s unlikely in the current economic climate that any government would be willing to use income tax to fund these measures - which could run to billions of pounds” added Ian. “So if energy bills are the way that the climate-change policies of the Low Carbon Transition Plan – or whatever succeeds it – are recovered, then it must be done as fairly as possible.

This means firstly that no one fuel is unduly burdened by climate change policy costs. So you can’t pile all the costs on, say, electricity which would hit the poor harder. Secondly, you must ensure that expenditure on measures is linked to the householder - not the house. And thirdly, energy companies should design tariffs that penalise high consumers and protect the vulnerable.”

Click here to download The Distributional Impacts of UK Climate Change Policies

Findings from CSE's study form the basis of a report from the Department of Energy and Climate Change (DECC) entitled Estimated impacts of energy and climate change policies on energy prices and bills.

Click here to download DECC's 2010 report

Click here to download DECC's 2011 report

Click here to download the UK Low Carbon Transition Plan (5mb)

Read more about CSE's work on energy justice here.

For further information contact:

Ian Preston | 0117 934 1422

Relevant downloads and links:

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