Who are the real losers from green taxation?

20th November, 2013

It all got started at a rowdy session of Prime Minister’s Questions late last month in the House of Commons. Large price rises had just been announced by many of the energy suppliers. So David Cameron promised to instigate a hard look at the impact green taxes might be having upon fuel bills, with a view to announcing changes in the Chancellor’s Autumn Statement.

This perfectly reasonable announcement instantly prompted a quite unseemly hubbub of misinformation and special pleading. Initially, all the focus was placed upon the specific requirements placed by government upon the large electricity and gas retailers, which the Department of Energy & Climate Change said, categorically, was adding just 7 per cent at most to an average household bill.

DECC continuously examine these figures. These reviews consistently show that these particular “green taxes” ultimately ensure our bills are on average lower in the years to come than they would be without them, thanks to energy efficiency and reduced reliance on imported gas.

They are also a source of revenue for the Treasury, because unreclaimable VAT, charged on such obligations (even at the lowest permissible rate of 5 per cent) still netted income of around £230m a year.

Of these, the renewable obligation, funding larger scale generation like onshore and offshore wind, added around 2 per cent (£30 for the average home), plus some 0.6 per cent (£7) to cover feed in tariffs for small-scale renewables. It was agreed that these were not under review.

Social welfare measures

Slightly larger amounts were available to cover energy efficiency measures (around 4 per cent, or £47 per home.)

But these programmes are rather less ecologically oriented and rather more to do with social welfare. Certainly approaching half the £1.3bn a year of investment under the Energy Company Obligation is aimed squarely at helping low-income households. Also charged to fuel bills are warm home discounts (1 per cent) which provides £135 subsidies for the fuel bills of around 2m households – sadly, less than half the households in fuel poverty.

And, even though its start has been delayed again, now until 2015, there is still around £3 being added to the average bill to pay for the roll-out of smart meters. This is a programme of considerable benefit to each energy company, obviating the need for legions of meter readers.

Given that the entire debate was prompted by the large rises in kilowatthour charges, it was inevitable that initially the concentration would be upon these overt extra charges. But of course there are several other Government policies that increase the cost of units of fuel much more.

All of these may be carefully hidden from consumer view, by applying only to non-residential users, whether in business, the public or the third sector. But the costs inevitably add to the eventual prices for goods and services offered to households.

According to the Office of Budget Responsibility, during 2013/14 the Climate Change Levy (CCL) and the new Carbon Floor Price together will raise £1.5bn for the Treasury. The Carbon Reduction Commitment – originally an imaginative trading scheme, now just a revenue raiser – levies some £0.74m. And receipts from the EU emissions trading scheme (EU:ETS) add a further £0.7bn. These green taxes will net the Treasury £3bn this year.

Additionally, total VAT tax take from residential sector fuel is now up at £2bn a year, compared with just £1bn ten years ago. Even the latest announced price hike nets the Treasury an extra £180m from VAT.

All this completely dwarfs the amounts which the Big Six energy companies are told to raise, amounts that – with the exception of the smart meter programme – were around at similar rates last year too.

In contrast, it is the green taxes on the productive part of the economy that are soaring. To quote the latest figures from HM Revenue and Customs, the introduction of the carbon floor price in April is pushing up the combined tax receipts from it and the CCL by a whopping 93.6 per cent since last year. And the carbon floor price is set to rise astronomically. By 2015/16 it is set to be up around £2bn a year.

Which, to cite its bitter opponents, the Engineering Employers Federation, means that at the current EU:ETS price trajectory, this UK policy intervention will ensure that UK electricity consumers will be paying more than six times as much per tonne of CO2 as our European competitors.

Treasury compensation

Even so, a wide range of energy intensive companies are being compensated by the Treasury: there are separate compensation schemes for EU ETS and the CCL discount (the only compensation linked to efficiency out of these three), running into hundreds of millions of pounds. What do households get in compensation for these taxes that increase the costs of the goods they buy? Nothing.

The Prime Minister is seeking to alter policies that cause problems for householders. The answer is staring him in the face. Don’t mess around with the Energy Company Obligation. Instead recycle much of these energy tax revenues into household energy efficiency, starting with the worst off, to reduce people’s bills sustainably and permanently.

Written by Andrew Warren, Managing Director of Association for the Conservation of Energy.

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