UK climate change policies must be strengthened to meet targets for reductions in greenhouse gas emissions

Posted on 18 Aug 2011 in

UK Government policies on climate change are delivering reductions in national greenhouse gas emissions, but need to be strengthened and refined to achieve long-term targets, according to a report by researchers from the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy at the London School of Economics and Political Science, published today (Thursday 18 August 2011) by the Organisation for Economic Cooperation and Development (OECD).

The comprehensive review of UK climate change policies, which was commissioned as part of an overall assessment by the OECD of the UK economy, recommends that the Government should seek tighter emissions quotas in the European Union Emissions Trading Scheme, as well as a strengthening of the EU emissions reduction target for 2020 from 20 to 30 per cent compared with the level in 1990. However, the report points out that “EU emissions allowances may not provide sufficient price signals to achieve the UK’s major emission-reduction objectives”, and calls for the Government to apply a higher and more consistent carbon price across the economy, for instance by raising the rate of VAT on domestic energy use.

It calls for a more explicit assignment of the components of taxes to specific purposes, such as charging for road maintenance or congestion, to help to clarify whether implicit carbon tax rates are set at appropriate levels. The report points out that the implicit carbon price component of the duty on hydrocarbon fuels, such as petrol, has not been quantified by the Government. However, if the entire duty were treated purely as a carbon tax, excluding the combination of road user charge, congestion charge, tax on particulate pollution and means of raising revenue which probably make up the bulk of the charge, the implicit rate on unleaded petrol would be about £220 per tonne of carbon dioxide. However, the current carbon price within the EU Emissions Trading Scheme is less than £12 per tonne of carbon dioxide, and the implicit carbon tax on energy use in the home is also much lower, mainly because it is subject to VAT of only 5 per cent rather than 20 per cent. The report suggests that the lower rate of VAT on domestic energy is “reducing the incentive for households to increase energy efficiency and cut energy use”.

But the report warns: “However, any rise in VAT would impose significant new cost burdens on households at a time of slow real income growth, and may need to be accompanied by targeted support for the most exposed groups. The timing of any rise in VAT on energy use would need to be carefully considered to avoid undermining public support for climate policies.”

The report draws attention to the importance of the Government’s ‘Green Deal’, which is “designed to overcome market failures, especially in the provision of finance, and deliver a more comprehensive approach to household energy efficiency and micro-generation”. It notes that the ‘Green Deal’ incorporates a new Energy Company Obligation which will provide additional financial support for lower income and vulnerable households.

Overall, the report recommends: “The lower VAT rate on household energy should be abolished to achieve more uniform carbon taxation, with more targeted tools being used to ameliorate the distributional consequences, such as that proposed through the new Energy Company Obligation”.

Dr Alex Bowen, who wrote the report with Dr James Rydge, said: “The Government is clearly making efforts in the right direction to reduce substantially the UK’s annual emissions, but it needs to take a look at all its climate change policies as a whole to make sure they are working together as effectively as possible. Making the costs of greenhouse gas emissions consistent across all sectors of the economy through a uniform carbon price is the best way of ensuring the fairness and cost-effectiveness of reductions. At present, the implicit carbon price varies greatly between business and households and between different sectors of the economy.”

He added: “There is a strong case for reducing petrol duty but raising VAT on household electricity. While this understandably raises concern about fuel poverty, it should be remembered that poor people do not receive a reduced VAT rate on many other essentials, such as clothing, and it would be better if there was a strong signal in electricity prices that promoted greater energy efficiency. And it should be remembered that the reason for reducing emissions is to limit the impacts of climate change which, if unchecked, could impose a very heavy cost burden on future generations, which those on low incomes in particular would find very difficult to cope with.”

The report also indicates that UK Government expenditure on research and development on ‘green’ energy has lagged behind that of France, Germany, Canada and Japan, and is now at a lower level, in real terms, than 20 years ago. It recommends that the Government should “speed up the development and deployment of low-carbon technologies, focusing on correcting the inadequate private market incentives for innovation”.

The report calls for the Climate Change Levy and fuel duties to be adjusted to reflect more closely the intensity of emissions of greenhouse gases and other pollutants. It states that “given its carbon content, coal is relatively lightly taxed, which some commentators have ascribed to the desire of the previous Government to put less of a burden on the coal industry than other energy providers”.

Notes for Editors

  1. The Centre for Climate Change Economics and Policy was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council and Munich Re.
  2. The Grantham Research Institute on Climate Change and the Environment was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment.