Environmental Audit Committee - Minutes of EvidenceHC 61

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Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 10 July 2013

Members present:

Joan Walley (Chair)

Peter Aldous

Martin Caton

Caroline Lucas

Dr Matthew Offord

Mr Mark Spencer

Dr Alan Whitehead

Simon Wright

________________

Examination of Witness

Witness: Professor Paul Ekins, Professor of Resources and Environmental Policy, and Director, Institute for Sustainable Resources, University College London, gave evidence.

Q88 Chair: Professor Ekins, you are no stranger to this Committee, and it is a pleasure to invite you back again to give evidence on the paper that you have been working on, funded by the Joseph Rowntree Foundation. I think it is something which, in its detail, is very pertinent to our current inquiry on subsidies. To begin with, if you would like to tell us, this full 20% rate of VAT on domestic energy bills and transport fuels-just how that proposal that your paper has come up with would work in practice and link that to the whole agenda of fossil subsidies.

Professor Ekins: Yes, good morning, and thank you very much for asking me to come and share this work with you. You will know that the OECD and other definitions of subsidies include reduced levels of taxation. In the UK, the lower rate of VAT on household energy-that is gas and electricity-is effectively the largest subsidy to fossil fuel use; in other words, it is an environmentally harmful subsidy. There is a lot of work on environmentally harmful subsidies around the world. It is estimated that they result in substantially higher emissions, especially of carbon dioxide, and bodies like the OECD and the European Commission recommend that they should be removed. That was the rationale for this piece of work.

We know that there is political history here in this country. The Conservative Government in the 1990s indeed tried to raise the VAT on household energy to then 17.5% and was not able politically to do so. The reason often given for giving such subsidies-and in particular this subsidy-is that low-income households would find it difficult to pay and therefore energy bills need to be kept low. Less than 30% of the subsidy goes to the three lowest-income deciles because higher-income households use rather more energy than lower-income households, and therefore it is the seven higher-decile income groups that get most of the subsidy. In principle, therefore, it should be possible to raise the rate of VAT to 20% and with just 30% of the revenues to fully compensate low-income households for the increase in their energy bills that would then take place. In practice, it is very difficult. Work that we carried out in the early 2000s-with the best data then available that we could find and the benefit system as it then was-suggested that it was administratively impossible to find enough of low-income households really to say that you had carried out this comprehensive compensation. You had to give very large over-compensation to low-energy using low-income households in order to adequately compensate the low-income high-energy-using households.

The single biggest thing that I discovered doing that work was that there is enormous variation in energy use within low-income households. Even the lowest decile of incomes-that is, the 10% of households that get lowest incomes-have energy use that varies by a factor of six or more and very often, with some households within that group, is the same as the energy use in the top-income deciles. We came back to this issue with this piece of work because more data had become available. We were using a new model constructed by the Centre of Sustainable Energy called DIMPSA, which had much finer granularity of household energy use, but I think particularly because of the Government’s proposals to move to Universal Credit as a benefit system, which is much simpler, we wondered whether it would be possible to target low-income households more effectively. We were using the IFS (Institute for Fiscal Studies) TAXBEN model that had been reconfigured for Universal Credit, and we did indeed find that it was much easier to target low-income households.

Our results were that if one spent all the money from increasing VAT on these compensation schemes and on tax allowances-we also had the policy to increase the tax allowance to the Government’s then target income tax allowance of £10,000-then only 5% of households would lose out, 16% of low-income households, so 84% of low-income households would be made better off, some of them substantially better off. The bottom three deciles, on average, would be £400 a year better off. This would be, on average, a very significantly progressive-

Q89 Chair: Okay. There is a lot of statistics and figures in all of this, but I wonder if you could just encapsulate why, in strategic terms, you believe such a change would be necessary.

Professor Ekins: The main argument against environmentally harmful subsidies is that it militates against the efficiency and conservation of whatever it is you are subsidising, in this case fossil energy. If we take the example of the Green Deal, if VAT on household energy use was at 20%, the number of insulation and conservation measures that would pass the Green Deal test, the golden rule, would be very greatly increased, and therefore households would be able to access Green Deal finance for more measures. They would have a higher incentive to access Green Deal finance and make more efficient use of energy. Indeed, all households would have that greater incentive.

Q90 Chair: Isn’t part of the issue that the VAT that is currently applicable at the moment is designed from the perspective of addressing fuel poverty, whereas what you and your colleagues are looking to do is to try to find a way that would address the issues about energy efficiency and changes towards a shift from fossil fuels to renewables? That is not a reason for the current subsidy that exists, so, if you like, the whole thing is that there is a disengagement between all the different factors that are part of the policy that exists at the moment.

Professor Ekins: Indeed. I think the purpose of this piece of work was largely to say that if one wants to reduce fuel poverty, you would do much better to increase the rate of VAT to 20% and use the revenues to give benefit increases to those households on Universal Credit.

Q91 Chair: Okay, so you think that a change is necessary from the dual point of view of both fuel poverty and environmental enhancement?

Professor Ekins: I think you would find that that policy had benefits on both those dimensions, yes.

Q92 Chair: I will bring in Caroline Lucas in a second. Can I add, just in terms of where you think public understanding is in all of this, given that the existing arrangements are seen and viewed and perceived by the general public, by and large, as a fuel poverty issue rather than as an environmental issue? Did your research look at that?

Professor Ekins: No, we did not do any work on public attitudes. I think that the communication of the policy change would have to start with saying that the reduced level of VAT is not a very efficient or effective way of reducing fuel poverty, that using those sums of money-and we are talking about nearly £5 billion a year-to target fuel poverty, you could get a much bigger fuel poverty benefit than we are currently getting because, as I say, more than 70% of it is going to households that are almost certainly not in fuel poverty.

Q93 Caroline Lucas: I was going to ask whether there is a comparison between the effectiveness of this policy in terms of the fuel poverty aspect, and obviously there are objectives around perverse subsidies as well, but has there been a comparison between what this would do for fuel poverty versus something like ring-fencing the carbon floor price revenues, for example, the ETS revenues? The NGOs have a big campaign-don’t they?- called the Energy Revolution Campaign, I think, that would look at ring-fencing the revenue that was raised through a carbon floor price or the ETS revenues. Do we know which would be more effective in terms of the fuel poverty objective specifically?

<?oasys [pc10p0] ?>Professor Ekins: I am not aware of any work that has specifically tried to compare those two policies. What this piece of work was explicitly setting out to do was to say that if your objective is to reduce fuel poverty and you would also like to reduce emissions, then one way of doing that more effectively than at present would be to increase VAT to 20% and use the revenues in the way that I have described. We stopped short in the report of recommending this, because I happen to think that there is a better way of using those or other revenues to reduce fuel poverty, but that was outside the scope of this particular piece of work. I think that-

Q94 Chair: Can I just say, we are not just necessarily asking you to give evidence to us based on this particular piece of work? If you have other-

Professor Ekins: Right. It is just that the broader issue of fuel poverty is not entirely linked to the subject of your inquiry, which is environmentally harmful subsidies or the issue of energy subsidies. This was a piece of work that looked specifically at that subsidy, which is the low VAT rate, and said, "What happens if we remove it? Do we then put more households into fuel poverty?" The answer is, "No, not necessarily, provided you use the revenues effectively." If you were to say, "How should we best reduce fuel poverty?" which you have probably had an inquiry about, which I will have missed or forgotten, then to me the long-term answer to that is to improve the energy efficiency of homes. That, as we know, is expensive. Simply diverting this £5 billion or whatever into benefits would have an effect on emissions, but we know that the price elasticities are relatively low and that people would save energy, but perhaps they would not save as much as if you were to increase those prices gradually and use the money for actual targeted incentives for fuel efficiency.

Q95 Dr Whitehead: Since we are discussing slightly outside the scope of your research, I think I know the answer to this, but when you undertook the research this was based presumably on, as it were, a pre-discussed brief on VAT, so you did not look at indeed different methods of attaching flow-through prices to elements that presently are not covered by, say, the present carbon floor price and Carbon Price Support. I note, for example, that you have drawn attention to the fact that gas is not taxed or taxed at 5%, whereas electricity is 20% and therefore is a perverse incentive in terms of domestic uses, as you have mentioned. However, if you attached a carbon floor price to landings of gas or risings of gas, that would have the same effect-would it not?-as to equalise-

Professor Ekins: Yes. We looked at two ways of equalising taxes across household energy use. The first one, which is what we call the small carbon tax, was indeed applying a carbon floor price to household gas use, so that could be done upstream or it could be done downstream. That is one way, because at the moment the carbon floor price only applies to the fossil inputs into electricity, and this would be extending that to household use of gas because the electricity companies will pass that carbon floor price on to the electricity users.

The second, which we call the large carbon tax, was increasing the rate of VAT on both gas and electricity because they are both for households currently at 5%. That is the really large sum of money, and that is then what we used to compensate through the Universal Credit. We did two scenarios-a small carbon tax and a large carbon tax-with those different elements.

Q96 Dr Whitehead: In terms of the large carbon tax, have you calibrated that-and I suspect we might come back to this later on-against the very latest activities of the Chancellor in the budget of changing the rate of increase of Carbon Price Support to change the relationship in terms of the overall carbon price floor between EU ETS and Carbon Price Support?

Professor Ekins: No, we did this work when the only announcements from the Treasury were that they would aim for a carbon price floor in 2013 of £16 a tonne. That was the carbon price that we applied to gas, rising to £30 a tonne by 2020.

Q97 Dr Whitehead: So, you have made the overall assumptions of the envelope, but not the distribution-

Professor Ekins: Absolutely, not the distribution between the EU ETS price and the other.

Q98 Chair: Just finally from me, in terms of the report that you have done, what difference do you think it would make to overall energy consumption and also to transport emissions, the new arrangements that you are exploring?

Professor Ekins: Off the top of my head, I cannot remember. It will be a few per cent. It will not be enormous. It will be a few per cent on the basis of past elasticities.1 The long-term and the short-term effect are expected to be quite different, so that typically the long-term price elasticity of household energy uses is two to five times higher than the short term. But I think with a measure like the Green Deal and the fact that suddenly all sorts of insulation and conservation measures, which are currently outside the golden rule, would come inside the golden rule, one might find that therefore the take-up of Green Deal measures were substantially higher, but we have not done that analysis.

Q99 Chair: Okay. Just for the purposes of definition, in terms of who would benefit and in what circumstances from the changes that you propose, how do you differentiate between different use of energy that different families have, and particularly looking at the variation between low-income families and those who will be on Universal Credit, if you see what I mean? There is a difference-isn’t there?-between those who would be likely to receive credit and those who would be looking to reduce their energy costs but would not be eligible for Universal Credit.

Professor Ekins: There is. We were able to explore that in quite a lot of detail because of the granularity of this model of the Centre for Sustainable Energy in <?oasys [pc10p0] ?>Bristol. I said some 16% of low-income households, which is slightly less than 5% of all households, would be worse off. Hardly any of those are households that are eligible for Universal Credit, so they are precisely the group that you are talking about. The great majority of those are either people who are income poor but have substantial assets and therefore they do not qualify for Universal Credit or they are students and they do not qualify for Universal Credit. That is the majority of households that would not be better off from this measure.

Chair: Okay, we must move on. Dr Offord.

Q100 Dr Offord: You did mention a figure previously, but I got a bit lost among the statistics that you raised.

Professor Ekins: I am sorry.

Dr Offord: Would you be able to tell the Committee, for the avoidance of any doubt, how much your tax proposed would actually raise?

Professor Ekins: It is just short of £5 billion. This is the VAT element of it, which is the element I am focusing on today. That does not include the extension of the carbon floor price, which I have mentioned to Dr Whitehead.

Q101 Dr Offord: Okay. I understand in your report that is broadly cost-neutral, then.

Professor Ekins: Yes. We recycled all the revenues, both by increasing the personal income tax allowance and through the Universal Credit increases.

Q102 Dr Offord: I will try to wade my way through those. In terms of being cost-neutral, that is obviously quite a selling point. Is that in order to receive buy-in from the public, or is it because you have identified the amount that you believe that poorer and lower-income households need in order to address the issue?

Professor Ekins: It was really to do with the project design, if I am to be honest, that it makes a project like that neater if you say, "All the revenues are coming from here, and they are all going there," because you are not interfering with balances of public spending and the macro-economy and all that other kind of stuff. You are trying to keep as much constant as possible. Obviously, it is a political choice, given that the average increase in income of the lowest three income deciles is just short of £400 a year. That is a substantial increase in income.

Overall, incomes would become much more progressive under this measure, and whether that is a good thing or not obviously depends on your perception of how good progressive income outcomes are. There are some losers, and obviously they are the ones who will always cause the political problems when the media picks up measures like this. I think one would need to be saying two things. One would need to be saying that this was a better way of tackling fuel poverty than the status quo and that overall the distribution of income was much better and that applied to everyone who is effectively on Universal Credit.

Dr Offord: That is very helpful, thank you.

Q103 Peter Aldous: Professor Ekins, why would you channel the redistributed revenue to the Universal Credit? Do you think that is a good match with the sort of households who will otherwise lose out under the increase in VAT?

Professor Ekins: It is a much better match for low-income households than any other method we could find. It is certainly a much better match for low-income households than the previous benefit system. As I said, that was so complicated that if you were using the various elements of that benefit system to give compensation, in order to get people who are only getting one benefit, you inevitably had to give it to people who were already getting compensated through different benefits, so that you ended up spending all the money well before you had managed to compensate these high-energy-using households.

We used Universal Credit for administrative reasons because that seems to be what is going to exist and there is no point advocating a reform of VAT and saying, "You can compensate low-income households in general." You have to look at what the administrative means are for compensating low-income households, and the best we have is Universal Credit, so that is why we chose that.

Q104 Peter Aldous: Do you think there would be any low-income losers under your proposals and, if so, how would you seek to safeguard them?

Professor Ekins: There are low-income losers: some 16% of households in the first three income deciles. The majority of those are in the third income decile, so they are not very low-income losers, and they are effectively people not on Universal Credit. Practically any reform in anything is going to lead to some losers and they would be losers, I am afraid, because that is what reforms lead to. That is why you get the tyranny of the status quo, even when you can improve things on average and overall, because it is quite impossible to target things so exactly that you get no losers at all and obviously their plight is amplified.

Q105 Peter Aldous: Could there also, by the same token, be some people who would benefit from this, the beefed-up Universal Credit, when they previously were not paying significant energy bills?

Professor Ekins: I think everyone pays some sort of energy bills, but 84% of the lowest three income deciles do benefit from this measure. As I say, on average, they benefit quite a lot, so they are £400 a year better off on average. So 84% have that average figure, whereas the 16% that lose out overall are worse off by about £170 a year.

Q106 Peter Aldous: I think you did touch upon this: did you look at other routes that you could channel the money effectively to the poorest households and why not the Government’s proposal of taking more low earners out of tax altogether?

Professor Ekins: We did raise the personal income tax allowance to £10,000, which was then the target for that policy, so we did do that. That was why the <?oasys [pc10p0] ?>small carbon tax, when we just did that, effectively that policy measure swallowed up all the extra revenue that we got, so there was not any left for Universal Credit. If you were just to do that, then you would not be able to compensate low-income households for the increased energy costs that they face.

Q107 Peter Aldous: Just coming back, were there any other routes that you considered or-

Professor Ekins: No, there were not. As I say, in other work that I have done for the Joseph Rowntree Foundation that was published about six months before this piece of work, we did explore mechanisms that were more explicitly focused on energy efficiency but made use of the greater targeting that was carried out between the Department of Work and Pensions and the energy suppliers for the purposes of the Warm Home Discount. If I was going to craft a full policy proposal in this area, I would be using increases in VAT and channelling the revenues from the increases in VAT through the Warm Home Discount kind of mechanism, rather than through the Universal Credit kind of mechanism.

Q108 Peter Aldous: Finally, just taking that point and going back to what you said at the beginning, that the Conservative Government in the 1990s did look at something similar but shied away for political reasons-this is possibly a question for ourselves-but do you think it would be any different today? Why are things different, that you might be able to look at this-

Professor Ekins: I remember that time very well and I was very interested in what was being proposed, so I tried to study what was going on. I think the mistake of the Government of the day was that it highlighted the revenue-raising potential of the measure, and indeed there was a need in the economy for public revenue at that time. The proposals to compensate low-income households came forward very late in the day. They were not part of the initial package. By that time, a very substantial head of public opposition to the measure had been built up.

This would clearly be a politically-sensitive proposal if it were to be introduced again. I think it would be essential for the Government to emphasise that this is a better way of tackling fuel poverty than the status quo and would make a very substantial difference to the great majority of low-income households and help them pay their energy bill, while also giving incentives for non-low income households to save energy through mechanisms like the Green Deal. That sort of messaging would be very different to the messaging that was carried out in the 1990s and could be politically more effective.

Q109 Mr Spencer: Clearly, you have done a lot of analysis on different levels of income. I just wondered if you had considered demographics within households and if you had compared households that contain children and households that did not contain <?oasys [pc10p0] ?>children and compared the amount of energy that those households consumed-in my experience, children require a lot of energy-and whether there would be a positive impact in terms of the amount of actual Universal Credit or a negative impact because of the extra energy costs.

Professor Ekins: I am just looking through the report because the answer to your question is yes, because this model contains very large numbers of nodes, as they are called, so that we were able to distinguish between household types, "Couples, no children, under 60; couple, no children, over 60; couples with children; lone parents; multi-person houses; one adult under 60; one adult over 60". That was the household types that we were able to distinguish between and there were a number of other criteria combined with those.2

When one digs down into the detail we were able to identify quite specific kinds of households that, as you rightly say, you would expect to be differentially affected because they have differential energy use because each of those types of households is tied to a particular use of energy. You are getting a quite different cut across the population than if you simply work in averages, and indeed, that was one of the purposes of doing that. If you are interested in that, then your researcher might like to have a look at some of the detail of the sorts of households that were going to be better off-

Chair: I think we are more interested in getting the information to the Committee as a whole, so we consider it as part of our inquiry.

Professor Ekins: Okay. I am sorry. There is a lot of detail there that I could obviously go into, but I doubt there is time.

Chair: I think it is your time constraints that are perhaps greater than ours, but anyway, we must move on to Caroline Lucas.

Q110 Caroline Lucas: I just want to look at it from the perspective of the householders’ energy bill; what they see on their energy bill at that point when it gets sent to them. Have you calculated how much energy bills would rise from the combination of the carbon price floor and the higher VAT?

Professor Ekins: I think we did but, to be honest, the numbers are not off the top of my head and I would need to look back through the report in order to find those.3

Q111 Caroline Lucas: One of the sub-themes that we have touched on a few times already this morning is about how this gets sold to people in terms of being communicated and indeed sold to Government. Given that, at least up until very recently, fuel poverty was measured in terms of the proportion of household income that has to be spent on energy, would it not have the effect, at least on the surface, of appearing to put a lot more people into fuel poverty?

<?oasys [pc10p0] ?>Professor Ekins: No. I now have the relevant numbers. I did not quite understand your question, but I think I now do. As I said before, the 84% of low-income households that benefit from the measure, on average, are £400 a year better off. So their energy-

Q112 Caroline Lucas: But it does not appear on their fuel bill, does it?

Professor Ekins: Yes, because VAT would be paid on the fuel bill, their bill would show the number of kWh, cost of energy plus VAT and that would be the total. Then through their benefits, they would get that £400.

Q113 Caroline Lucas: Maybe I am misunderstanding, sorry, but when you literally get the fuel bill through the post or on your internet or whatever, the fuel bill will look higher under this proposal, even though by the time it has been compensated by your benefits it is going to be reduced.

Professor Ekins: Now I understand.

Caroline Lucas: If we still have a way of measuring fuel poverty-and obviously there has been a statement just yesterday from Edward Davey that changes this a little bit-but to the extent that until now, fuel poverty has been measured by the number of people who are paying more than 10% on their fuel bills, would it not initially look as if we are putting more people into fuel poverty?

Professor Ekins: That would depend on how you accounted for that £400. If effectively you said that you were reducing the fuel bills of those people, then that would obviously have a much greater impact on fuel poverty than if you simply said you were increasing their incomes, because if you are increasing their incomes, that has a lower effect on fuel poverty than if you are increasing their fuel bills because of the way that fuel poverty used to be defined. I am aware that that definition is likely to change. I do not see at the moment the actual amount that you would increase the fuel bill by, but it certainly will have been in the model and in the report.4

Q114 Caroline Lucas: Just in terms of communicating this to the public as a gain-because obviously the whole issue of fuel prices is a very deeply concerning one, and people are concerned about the Big Six and all the rest of it, so fuel bills are going up and people are concerned-do you think that this proposal could be sold in a way that would get public support behind it because they would see the benefits?

Professor Ekins: I hope it could. I am not a politician, and so it is not my skill, but I think that is one of the reasons why, if I was going to design a policy of this kind, I would probably want to do it through the Warm Home Discount kind of mechanism rather than most explicitly through the benefit system, because the Warm Home Discount does explicitly reduce people’s fuel bills. But in order to do that, you would have to get better targeting than exists at the moment between those on Universal Credit and their energy bills.

<?oasys [pc10p0] ?>Obviously, there are all sorts of data protection issues. In order to get the Warm Home Discount targeting, you had to pass an Act through Parliament, so that DWP and the energy companies were able to share data. One of our recommendations in that earlier piece of work is that that approach should be broadened, so that it was possible to identify a broader range of low-income households with high fuel bills in this way and therefore target them directly through their energy bills, so that they would then see that this increase in VAT was coming back to them through lower energy bills.

Caroline Lucas: I think that is very exciting, but that has not been written up.

Professor Ekins: It has been written up as an idea in general in another piece of research that I did with the Joseph Rowntree Foundation with Matthew Lockwood, so that exists. What we did not do was combine the two things in the single project, so that we were able to work out the full implications of that.5

Q115 Dr Whitehead: Firstly, there has been a considerable volume of discussion on the measurement of fuel poverty relating to the point at which, post-rebate, the benefit income is taken into account as the 10% marker or, pre-rebate, the benefit income is the one that is taken into account. Have you looked at that distinction in terms of the effect on fuel poverty?

Professor Ekins: No. We were not explicitly concerned with calculating the numbers of households in fuel poverty as such. We were looking simply at the income distributions and the energy use within those distributions. What we did not do was relate that to the definition of fuel poverty. At least part of the reason for that was we were aware the definition was under review and was about to change.

Q116 Dr Whitehead: You mentioned on the big carbon tax scenario, which is the VAT raise, that you would raise about £5 billion. That would be a constant feature, I guess?

Professor Ekins: That would be annual, yes.

Q117 Dr Whitehead: Yes. If you did the small carbon tax route, and you mentioned that you could, for example, include upstream gas into the carbon support price, which of course rises or-

Professor Ekins: Indeed.

Dr Whitehead: Supposedly rises. What would be the result of that in terms of tax take?

Professor Ekins: It is just short of £2 billion.

Dr Whitehead: £2 billion, presumably rising with whatever floor price goes up-

Professor Ekins: The year at which-

Q118 Dr Whitehead: £2 billion in what year?

Professor Ekins: In 2017, which was the year of our analysis, because that was the year in which Universal Credit was said to be fully operational.

<?oasys [pc10p0] ?>

Q119 Dr Whitehead: I take your point that you mentioned you had not looked at the latest effective decoupling of carbon floor price on the EU ETS. The collective level of Carbon Price Support on gas at that point would be considerably greater than £16 a tonne probably. Has that changed your-

Professor Ekins: No, we assumed that the carbon floor price on gas would be the one that the Chancellor announced on electricity, which was starting at £16 and going to £30 by 2020.

Q120 Dr Whitehead: That is a composite figure, though, is it not?

Professor Ekins: That was a composite figure, because obviously the EU ETS does not apply to gas or the household use of gas. We just used, "On a straight line going to 2017, that is going to be the carbon floor price that we apply to gas in that year."

Q121 Dr Whitehead: So you would include in that the Carbon Price Support as announced by the Chancellor, but you would not add to that, because it is not relevant, EU ETS, although it is relevant to have all-

Professor Ekins: We would simply have a single number that matched the single number that the Chancellor said he would be using in 2017, and the single number, he said, will include both of these elements, but we do not distinguish between them.

Q122 Dr Whitehead: Okay. So he has put as an indicative price £14.86, 2016-17?

Professor Ekins: Indeed, yes.

Q123 Dr Whitehead: Is that your number, or is that-

Professor Ekins: No, the number is the full carbon floor price going from £16 to £30.

Q124 Dr Whitehead: Yes, but my point is that then takes into account a possible variable EU ETS over and above that CPS price. Let us say EU ETS recovers somewhat.

Professor Ekins: Then obviously electricity would be more expensive, because if the Chancellor sticks to his announced thing two years in advance-

Q125 Dr Whitehead: But it would not be your purpose on the small carbon route to equalise prices?

Professor Ekins: On the work that we did, we simply assumed that the carbon floor price announced by the Chancellor would be that that applied to gas.

Q126 Martin Caton: Professor, if not unique, we seem to be very unusual in the European Union in choosing to try to tackle fuel poverty through effectively subsidy through VAT. Have other countries found ways of tackling fuel poverty, but targeting that in a much more effective way?

Professor Ekins: Yes, fuel poverty was almost exclusively a UK concept. I understand that the idea is now spreading in other countries as affordability of <?oasys [pc10p0] ?>energy bills becomes a bigger issue in other countries. Certainly the UK is unique in Northern Europe in having a reduced rate of VAT on the household use of energy. In Sweden, they not only have a 25% VAT rate on the household use of energy, they also have something like €100 per tonne carbon tax. Sweden obviously is colder than we are here. The clue to that is that Sweden has rather better buildings than we have here in terms of energy efficiency, and indeed if they had not, then they would have much higher winter death rates than we do have, which explains why they have them. In a sense, we are the victim of our temperate climate, which allowed us to build very energy-inefficient buildings for so long.

For most other countries, this is not an issue that has had anything like the political purchase that we have found in this country. The Republic of Ireland is an exception to some extent from that. There is a fuel poverty debate there. They have just introduced a carbon tax there that does apply to households, and they have the full VAT rate on household use of energy, but that is an issue. Obviously, the affordability of energy generally is an issue, given that energy prices have been rising, quite apart from anything the Government might like to do in terms of policy.

Q127 Dr Whitehead: One of your proposals is also to put a carbon tax on transport fuels at the rate equivalent to the Carbon Price Support.

Professor Ekins: Yes.

Dr Whitehead: I assume that is on the basis of completeness, for example, at the moment, the carbon price floor does not affect transport fuels, for rather strange reasons.

Professor Ekins: We were focusing particularly on aviation, which does not currently have any taxation there, but yes, it was the idea of saying that current tax rates on transport fuel are not intended really to reflect external costs there, they are revenue-raising. So if we are going to have a carbon price across the economy, then what would happen if you had the same rate, a quite explicit same rate, on transport fuels?

Q128 Dr Whitehead: That would be on, you mentioned, aviation. There are separate complications in terms of how you tax aviation fuel.

Professor Ekins: Indeed.

Q129 Dr Whitehead: But presumably that would cover road transport?

Professor Ekins: Yes.

Q130 Dr Whitehead: That presumably would not be compensatable in terms of rebate on the basis of fuel poverty for Universal Credit?

Professor Ekins: We still used all that revenue to compensate households through the benefit system.

Q131 Dr Whitehead: You included that when you invented the benefit system, then?

<?oasys [pc10p0] ?>Professor Ekins: We included that. You obviously get different distributional effects because you have the rural/urban divide or differences between rural car use and urban car use. Rural people, for obvious reasons, tend to use their cars more, so, other things being equal, they would lose out, relatively speaking, from such a change.

Q132 Dr Whitehead: Yes, but I presume then the same discussions would arise that arose with the imposition of the general fuel escalator when it was around in terms of how indeed rural use or heavy vehicle use under particular circumstances might be compensated separately?

Professor Ekins: Indeed.

Q133 Mr Spencer: Can I just finally ask, obviously there are certain sections of industry that get a double discount, like agriculture at the moment gets a discount on its diesel use? Have you considered the impact on food prices of some of these increased VAT costs on those types of industries?

Professor Ekins: No. This proposal was exclusively oriented towards households. Going back to the earlier question from Mr Caton about European comparisons, the UK is almost unique in that its environmental taxation on industry is higher than its environmental taxation on households. Most European countries tax households environmentally relatively highly, like Sweden and Germany, for example, and have relatively low environmental taxes on industry, for obvious competitive reasons. We have chosen to do it rather differently, but this piece of work was not looking at either agriculture or industry generally at all.

Q134 Chair: That is all very interesting. Just finally, you have done this piece of work that, as you have said yourself, has a fairly narrow remit, just looking at one aspect of it. Could you just set out for me how easy you think it is for a piece of research like this to be influential in terms of influencing Government policy for the future, particularly when the whole subject area that we are looking at is such a cross-cutting issue and the confines of this particular research study necessarily is so confined? How do you get the cross-cutting agenda to be a shift of awareness about that as far as Government is concerned?

Professor Ekins: I think the first objective of the research was to start the debate going again. After what had happened in the 1990s, this was politically off-limits and I knew that even as an academic, if I even suggested to someone who was involved in the real world that you might like to think about increasing VAT on domestic fuel, you were regarded as some kind of weirdo. So, because I believed that it would be possible to do some analytic work that showed that in respect of both the fuel poverty and the environmental agendas, leaving the economy in the same place, you could get a better outcome on average than at present, I felt it was important to get that work done, get it in the public domain and get it discussed.

<?oasys [pc10p0] ?>I do not imagine that one little piece of work is going to change the political climate overnight, but I think that fuel poverty with rising energy prices continues to be a concern, and Government will continue to look at ways of reducing that. It probably will not introduce measures such as we have discussed here, because the main conclusion that we came to was not that this was a policy proposal that should simply be rolled out, but that if you want to reduce environmentally harmful subsidies-which is something all Governments say they do want to do, including the UK Government-and if you want to reduce fuel poverty, then it is possible to do that through a measure such as this.

I think that using things like Warm Home Discount, you could tweak the kinds of proposals that we are talking about here in order to achieve even better outcomes, and perhaps I will be fortunate enough to get the funding to do some research into specifying that rather more sophisticated research programme at some point in the future. But what I think this piece of research does show is that it is not right to rule out increases in VAT on the grounds of fuel poverty, that there are better ways of reducing fuel poverty than the present, which could involve increasing VAT and doing something different with the revenues.

Chair: I think on that point we must leave it. Thank you once again for coming along and giving up your time and presenting your research to us, and also making us aware of the tyranny of the status quo. Thank you very much indeed.


[1] See supplementary written evidence from Prof Ekins.

[2] See supplementary written evidence from Prof Ekins.

[3] See supplementary written evidence from Prof Ekins.

[4] ibid

[5] See supplementary written evidence from Prof Ekins.

Prepared 29th November 2013