It will be cheaper to control climate change than not to control it, as the Stern Review memorably said. However, that does not mean that it will be cheap. Ed Miliband, UK Energy Secretary, said recently:
“You can have cheap energy, or you can have clean energy, but you can’t yet have cheap, clean energy.“
By 2040 or 2050, renewable energy from the sun or the wind or the waves or the tides will be less expensive than coal and oil are today, and there will be massive improvements in energy security, which will have financial as well as many other advantages. It will no longer be necessary for the US and UK to invade countries like Iraq to get at the oil. However, the transition from a fossil fuel economy to a renewable one and the use of low-carbon bridge technologies, like nuclear power and carbon capture and storage (CCS), will cost billions.
Should this transitional cost be paid out of taxation receipts or by fuel bills? Higher fuel bills encourage energy efficiency, but have a significant social impact – poor people living in leaky buildings sometimes cannot afford to keep warm and each winter many of them die. This is a greater problem in the UK, given the very poor state of the housing stock, than it is in colder countries such as Scandinavia. This is not surprising, since Scandinavia performs better on most issues than does the UK. More surprising is that winter fuel deaths are proportionately higher in the UK than in Russia.
Therefore, in theory, the cost should be paid out of progressive taxation like income tax. However, in practice, we cannot afford to wait until governments have got their deficits under control before beginning the low-carbon transition. Much of the money will have to be collected through fuel bills. This can be through:
Explicit levies, as the UK government is now proposing to fund CCS.
Cap-and-trade schemes, such as the EU Emissions Trading System.
A feed-in tariff/net metering.
A Renewable Obligation/Renewable Portfolio Standard.
These will all increase fuel prices.
‘Fuel poverty’ – the name given to the situation in which people have to spent more than 10% of their income on fuel – is prevalent in the UK, mainly because of the awful state of the building stock. The government has set targets to reduce this, but the targets will be missed (see Fuel poverty in the UK by Prashant Vaze). Fuel poverty will be a major issue for whichever UK government is elected in 2010 and, if it is the Conservatives, they will be well aware of this. Party leader, David Cameron, was an Adviser to the Treasury when the last Conservative government put Value Added Tax onto domestic fuel, and this caused enormous (and legitimate) opposition.
So what should be done to control fuel poverty during the low-carbon transition? Overall, redistribution of wealth is greatly needed in the UK – fuel poverty is just one form of poverty and levels of inequality have actually increased during 12 years of Labour government. However, there are three specific steps on fuel poverty that any government should take:
Prevent energy companies collecting higher tariffs from poor customers than from rich ones. Those who pay by direct debit have a lower tariff than those who do not – possibly because they do not have a bank account. Those who pay in advance by pre-payment metres, possibly to help control their budget, pay higher tariffs still. This is unacceptable. Energy companies may argue that the costs of operating pre-payment metres are higher and that these costs need to be recovered. However, the costs could and should be recovered from all customers, not just the poor. Cross-subsidy from rich and middle-income customers to poor customers is entirely justifiable.
Require energy companies to offer a lower tariff to those identified as vulnerable to fuel poverty. In the UK, utilities offer Social Tariffs to such people. These are voluntary – though introduced only after extensive ‘negotiation’ with government. The UK government has now said that, in future, these will be mandatory, and an Energy Bill that would make them mandatory is now before the UK parliament. There are other valuable aspects to the Energy Bill, including a levy to fund CCS (which would obviously increase fuel poverty without mandatory social tariffs), so it should be supported. It will definitely pass the House of Commons, where Labour has a majority, but may not pass the unelected House of Lords, where no party has a majority.
Improve the private rented sector. Privately-owned properties that are rented out include the worst examples of heat inefficiency. The ‘tenant-landlord problem’ is much debated – the landlord could improve the state of the building, but the tenant pays the fuel bills. Government has talked about making it compulsory for owners to improve the energy rating of properties before letting them out, but this was met with a threat that many properties would be withdrawn from the market. A better way would be to require landlords to improve the energy rating if a tenant asks for it. Landlords would not be likely to keep properties off the market just because a tenant might ask for improvements. I live in a rented flat, with large single-glazed windows. It gets pretty cold. The cost of double-glazing would only be a couple of weeks rent.
Some fuel-poverty campaigners argue that the tariff should increase as more fuel is used, so that the first 100 units cost x, the second hundred 2x and so on. This is referred to as a rising block tariff. A scheme like this is used in California. However, it would not be appropriate in the UK. Some poor people live in old, very inefficient homes. If they are retired, or unemployed or ill, or have young children, they will need to use a lot of energy.