Who benefits, who pays?

Assessing the distributional impacts of different policy cost recovery assumptions

Project duration: January 2011 to June 2011

There are a number of policies already in place and many ideas that are being discussed, which consider how to deal with the issue of climate change. A big uncertainty about these policies surrounds how they are paid for and, perhaps more importantly, who pays for them.

CSE has already done much work in this area – our report, the Distributional impacts of UK climate change policies examined the issues surrounding policy costs and potential methods for recovering them.

Following this, CSE produced a study called 'Who benefits, who pays?', which looked at different approaches to recovering the costs of climate change policies in the UK. The aim was to explore how different cost recovery mechanisms might impact on domestic energy consumers.

The study was led by Vicki White. “There are a lot of uncertainties about how policy costs are passed on to energy consumers, and there is little information available about how energy suppliers actually treat these costs across their tariff structures and customers," she explained.

"This scenario modelling is therefore important in developing understanding of the implications and potential impacts on domestic consumers of different mechanisms of policy cost pass-through.”

The study was commissioned by Ofgem, and CSE analysed and explored three different scenarios for passing on the costs of climate change policies to domestic customers, which were:

  1. All policy costs to be charged through energy bills on a ‘per unit consumed’ basis (£/kWh)
  2. Only those policies which impact ‘up-stream’ in the wholesale markets to be charged through ‘per unit consumed’ with other policies charged on a ‘per customer’ basis (£/customer)
  3. Policy costs to be recovered on an income taxation-related basis rather than through energy bills

Vicki explained: "Whilst these are of course just hypothetical situations, they help to inform further consideration of policy cost recovery options."

The study uses the Distributional Impacts Model for Policy Scenario Analysis (or DIMPSA as it's commonly and more simply called), which is an analytical tool developed by CSE to model the distributional impacts of current and proposed policy on household energy bills.

The model results show that on average in 2020, domestic energy bills will be lower compared to the baseline of 2010, and the 2020 “counterfactual” bill under all scenarios. This decrease relates particularly to policy assumption about improvements in product efficiency over time.

Overall scenario 1 and 2 result in an average decrease of nearly £100 compared to the 2020 counterfactual bill – i.e. savings through policy measures outweigh the additional levy on bills of policy cost recovery. Scenario 1 appears slightly more favourable with a greater average decrease in bill across the dataset as a whole compared to scenario 2.

The income taxation model results in the greatest decrease in bills of all scenarios (as no costs are levied on bills in this scenario), but the net impact, when allowing for the decrease in household income is less favourable – all households are still better off on average, but by half the amount of scenarios 1 and 2.

Further analysis of the model results shows that passing on policy costs on a per unit basis (£/kWh) is a more progressive structure, meaning that vulnerable, low income households are on the whole better off relative to higher income households. There are, however, some low-income households that are worse off under this approach, primarily those who have electric or no central heating.


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