Funding a low-carbon energy system: a fairer approach Anne Owen, John Barrett and Peter Taylor @dr_anneowen a.owen@leeds.ac.uk

Funding the UK’s Energy Policy In the UK, over £8bn is raised annually to fund energy policy. From this, £6.5bn is raised from taxing household energy bills. Represents 13% of energy bill (~£132 per year on average). Bills would be £490 larger today without the improved energy efficiency measures. Majority of fund used to support renewable energy. Some of the money raised may be returned to low income households through energy efficiency programmes.

A fair approach? The poorest households contribute £271 million per year towards energy policy costs. The cost of the Carbon Savings Communities and Affordable Warmth schemes is £220 million. Therefore, the poorest homes are self-funding these schemes. The poorest households spend 10% of their income on heat and power compared to 3% spend by the richest. Any increase in prices hits the poor disproportionately. In addition, we are not considering the complete energy service demands of households…

Full supply chain energy service demands The energy used to heat and power the home does not reflect the full energy service demands of UK households. Government raises the money it needs to improve the whole energy system from a levy on a limited number of energy service demands.

Full supply chain energy service demands Energy used for shelter and transportation account for 37% and 32% of the total, respectively. All the food, products and services delivered to households account for the remaining 31% of their energy demand. Household energy bills account for 12% of the total energy services. Therefore, if household energy bills are a large proportion of a household’s total spend, they will be unduly disadvantaged.

Distributional impacts We calculate the full supply-chain energy use according to the expenditure patterns of household income deciles in the UK. The richest 10% of households each consumed an average 12.7 tonnes of oil equivalen compared to 3.3 tonnes consumed by the poorest 10%. The lifestyles of the richest require nearly four times more energy than the poorest, but they only pay 1.8 times more towards the energy policy costs.

A new approach? Current approaches to funding energy policy are regressive and increase the risk that low income households are priced out of access to energy services. A fairer method might be for the household costs to reflect complete energy use. How can this be calculated? If energy policy costs were applied to businesses these would potentially be passed on to consumers through higher product prices.

Assessing the distribution effects of three funding approaches Option 1: Household energy bills – this is the current approach where all the costs are placed on heating and power. Option 2: Business energy bills – costs are added to the energy used or supplied to households by businesses. Businesses will pass on some of these costs to households who purchase their goods and services. Option 3: General taxation – costs are raised through household income tax.

Assessing the distribution effects of three funding approaches Option 2 saves the poorest homes £31 a year while increasing the burden on the richest 10% by £43 a year. Option 3 would reduce costs for 70% of UK households, while the richest 30% would see an increase. The lowest income group would save £102 a year with the highest income group paying an additional £410 a year.

In conclusion None of the funding approaches offer a “perfect solution” but raising the funds through general taxation offers a fairer and practical approach. The taxation approach requires leadership and long term commitment to avoid leaving the policy vulnerable to short term budgetary changes. Recommend that this approach and moneys raised are locked in for a decade to mitigate risks associated with changes in Government.

In the press

Next steps Extend analysis to explore distribution options over time and across different types of households. Energy Demographics - EPSRC postdoctoral fellowship. Explore the extent to which demographic change can be used to explain a change in overall energy use in the UK. Use demographic trends, GDP forecasts and expenditure predictions to produce a new model structure for UK energy demand forecasting.

Thank you Anne Owen, John Barrett and Peter Taylor @dr_anneowen a.owen@leeds.ac.uk