31 May 2016: The EU and domestic energy bills
Posted in Comment, Policy on 05/31/2016 08:45 am by Stephen TindaleVote Leave is today claiming that, if the UK leaves the EU, domestic energy bills would be lower. They are wrong.
- Domestic energy bills could and should be reduced by changing taxes and tariffs. It is possible to do this without leaving the EU.
- Quitting the European Internal Energy Market – the single market for energy – would substantially increase the cost of energy in the UK.
- We could remain in the single energy market outside the EU, like Norway. That would mean having to follow rules set in Brussels having given up our vote in setting them: democracy by email.
Tories Michael Gove and Boris Johnson and Labour’s Gisela Stuart have today published a piece in Rupert Murdoch’s Sun. They write:
“In 1993, VAT on household energy bills was imposed. This makes gas and electricity much more expensive. EU rules mean we cannot take VAT off those bills.”
Yes, VAT on domestic energy was introduced in the UK in 1993. It was in a finance bill proposed by the then Conservative government and passed by the House of Commons. So it was ‘imposed’ by an elected British government, not Brussels bureaucrats.
I was at the time working for the Labour party. We did all we could to block VAT on fuel, but failed. The Tories had won the 1992 general election, so had more MPs than we did. That’s democracy. And, as Murdoch’s paper had gloated the day after the ’92 election, “It’s the Sun wot won it”, with relentless attacks on Labour leader Neil Kinnock.
Labour did manage to prevent an increase in VAT on domestic fuel to 15% the following year. Gordon Brown promised to reduce it as much as possible, and after 1997 cut it to 5%. He was unable to remove it completely due to EU rules. So the ‘three Brexiteers’ are correct about that. Current EU rules are that once VAT is made payable on something it can be reduced to 5% but not to zero.
They are also right that VAT on domestic energy is not a good tax.
“The least wealthy are hit particularly hard. The poorest households spend three times more of their income on household energy bills than the richest households spend.”
I have never been in favour of domestic energy taxes. As I wrote on Climate Answers in 2009:
“The most serious problem with energy taxes is that they can be regressive, placing a heavier burden on the poor than on the rich.” http://climateanswers.info/2009/10/editorial-26-october-green-tax-shift-could-reduce-emissions-and-create-jobs/
In 1994-6 I worked at think tank IPPR on green taxes, and proposed a tax on commercial and industrial energy use but not domestic energy use. (see http://www.ippr.org/publications/green-tax-reformpollution-payments-and-labour-tax-cuts.)
How to reduce energy bills while staying In
So what should be done to combat fuel poverty in the UK? If we leave the EU, prime minister Boris could indeed remove VAT from fuel, though there is no guarantee that he would – Boris has been known to break promises.
Even if he did, domestic energy bills would nevertheless increase, because Brexit would make the UK energy system more costly and less efficient. Michael Grubb and I covered this in our recent UCL paper. (https://britaineurope.files.wordpress.com/2016/05/einote_3.pdf ). A report by Vivid Economics for National Grid estimates that Brexit could put at risk benefits of up to £500m per year by the early 2020s. Energy and Climate Secretary Amber Rudd argues that construction of new electricity interconnectors “could save British households nearly £12bn over the next two decades by driving down the price of electricity”, and that Brexit would slow construction.
It is much better for the task of combatting fuel poverty to remain in the EU. The UK could then argue for rule change to make it possible to remove VAT on fuel, though there is no guarantee that this could be achieved. The British government should therefore look at energy taxes over which it does have complete control, including climate levies. Or, to use Cameron’s own words, “the green crap”.
The Telegraph’s Energy Editor, Emily Gosden, wrote in November 2014:
“The policies, which are intended to help tackle global warming, account for about 5 per cent on an annual energy bill of £1,369, Government documents show. But that sum is forecast to rise significantly in order to fund more wind farms and new nuclear plants, rising carbon taxes and a new scheme to ensure there are enough back-up power plants when the wind doesn’t blow. By 2020 such levies are forecast to total £141 a year – 11 per cent of an annual bill of £1,319.”
The UK government should cut domestic energy bills by 5%, not by quitting the EU but by financing low-carbon infrastructure via income tax rather than fuel bills. True, potential investors would not welcome the regulatory uncertainty caused by changes to subsidy systems. But the regulatory uncertainty caused by Brexit would be much much greater.
05/31/2016 at 10:47 am
Lifting VAT from fuel bills is actually a very poor idea, and a very bad way of helping poor people. If anything we should be looking to increase VAT on fuel to the full 20% rate. This is because rich people, who live in big houses which they keep warm and well lit, have much larger energy bills and are the principal financial beneficiaries of low VAT or no VAT at all on fuel. If we really want to help poor people, there is a simple solution: give them more money perhaps even with a ‘fuel bill support tax credit’ which reaches those struggling families etc that we want to help. Failing that, it would be better just to give every UK resident a fixed sum of money – say £100-200 per year to help with their fuel bill. The poor would then be better off and the rich, with their conservatories, swimming pools and multiple overheated houses would be the losers.
05/31/2016 at 10:56 am
Interesting idea – and more likely to happen if we stay in EU so economy is stronger and HMT has more money.
Another approach to combatting fuel poverty is Rising Block Tariffs – more you use, more per unit you pay. What’s your view of that Oliver?
05/31/2016 at 11:17 am
All in favour in principle. Most tariffs currently do the precise reverse, with standing charge and sometimes declining block rates, so the more you consume the cheaper it gets. But it may be hard to design such a system so it’s both effective and equitable and hard to ‘game’. The key I think is to ‘keep it simple stupid’ – and it may be that it’s easiest and simplest to use existing tax credit system. Maybe with the option to double / treble the benefit by selecting vouchers to spend on energy efficiency measures. If that’s not adding too much complexity!
05/31/2016 at 11:20 am
Yes, needs to be as simple as possible (though if too simple, consultants like me would be short of work…)
05/31/2016 at 10:18 pm
I blogged about Rising Block Tariffs in February Stephen, you can read it here http://www.remsol.co.uk/pricing-energy-like-mobile-phone-data-to-drive-efficiency/ I think it’s a sensible idea