The recent sharp increase in energy prices is good news for the climate emergency, but bad news for household budgets. The solution is to support household budgets, not reduce prices. Is a £28bn fossil fuel subsidy the right energy policy for the Green Party?
Historically, the Green argument has been that the environment suffers under our current economic model because environmental damage is not factored into the prices people pay for goods and services. If it were, we would buy fewer harmful things, thus reducing the environmental damage.
In short, natural resources are presented as free, so we over-consume, leading to environmental breakdown.
Our previous policy responses to that have been to attempt to cap (ration), ban, or tax the use of nature, depending on how effectively and quickly we can reduce consumption to sustainable levels.
The Carbon Tax and Dividend approach
When it comes to Greenhouse Gases (GHG), it has long been party policy to introduce a ‘Carbon Tax’ to increase the price of GHG-emitting activity substantially.
This price increase does several key things:
- Reduces demand for polluting goods and services
- Increases demand for less or non-polluting goods and services
- Incentivises a shift in investment away from carbon and towards cleaner, sustainable alternatives (including efficiency measures like insulation)
Given that many of the polluting economic activities provide necessities like heating, transport, and food, we acknowledge that this price increase will make life much more expensive for many. Our solution? The Carbon Dividend.
This ‘dividend’ is a flat payment from the Government to all individuals to help meet the cost of this transition. It also, neatly, means that those who reduce their consumption to below-average levels actually end up better off financially, while those who maintain it above that level are worse off; thus compounding the incentives to change. This makes the policy not just climate-friendly, but economically progressive.
This combination of significant price increases with the substantial redistribution of income is the way in which our party has long committed to shifting market activity towards net-zero.
However, last week, it appears that approach was quietly abandoned.
Our co-leaders announced that we would:
- Increase taxes on fossil fuel extractors
- Ramp up investment in renewable energy and home insulation
- Nationalise major energy companies
- Differentiate pricing for domestic energy
- Subsidise energy prices across the board, down to October 2021 levels
The first two of these are no-brainers, with universal approval within the party. Number three is undoubtedly popular and likely to make long-term planning and investment in the transition to low carbon energy easier. Number four is likely to lead to means-testing of households' energy bills, if it is to be fair, but no detail has been provided for this, so let’s ignore it for now.
But the decision to subsidise energy prices is a serious error:
- The amount of money we commit to raising will only meet the cost of this policy for six months. What happens beyond that period if high energy prices persist?
- It removes the incentive for households and individuals to reduce energy consumption or move to non-fossil fuel alternatives
- It gives the biggest subsidies to the wealthiest and most polluting households
- It uses up all available revenues, but only tackles 50 per cent of the problem [1]. Low-income households will also be hard hit by the energy price increase in the transport, service and industrial sectors. This proposal will leave them completely exposed to that increase
The policy equates to a subsidy for fossil fuel consumption of at least £28bn per year [2]; clearly a massive breach of both the detail and spirit of Green Party policy.
The Greener alternative
There is another approach that aligns with party policy and maintains the right market incentives and disincentives: redistribution.
Despite the national ‘cost of living crisis’, not everyone is feeling the pain.
Corporate profits have increased by £60bn per year since 2019, but revenues from Corporation Tax look set to increase by only £7bn over the course of 2022. Increasing corporation tax to its old level of 28 per cent would raise about £21bn in tax (so companies would still be £32bn richer than in 2019).
Residential landlords have seen the value of their properties surge by around £250bn in the same period. Applying a one per cent land value tax to all private landlords (along with a rent cap to prevent any passing on of cost to tenants) would raise another £11bn.
The Government is also seeing a boost in incomes (tax revenues), and is expected to collect an extra £80bn or so in taxes this year, mostly from wages/income tax. Obviously, it has other costs to meet, but with pay rises as low as four per cent (while RPI is nearly 12 per cent), the Government is spending only about £10bn of that extra revenue on its workers. The Green Party should call for at least £30bn of that extra revenue to go to supporting households.
Added to that the £8bn that could be raised from backdating the Government’s own excess profits tax on oil and gas companies, plus the £14bn the Government has already committed to helping households financially, would give us £84bn to redistribute to individuals to help meet the cost of living crisis.
That would allow us to pay:
- £1,000 per year to every individual in the UK (adults and children)
- £1,000 extra to every household currently in receipt of benefits (admittedly, this involves current means testing, but does not expand it)
- £1,000 extra to every household in the private rented sector [3] who tend to occupy the poorest quality housing and therefore face higher domestic energy costs
- £500 extra for every person with a registered disability, who will be particularly vulnerable to cold and damp homes
Obviously, you might wish to share this out differently, but this would ensure that the poorest and those living in the worst housing conditions were in receipt of the most generous payments, but it will also ensure that everyone is supported and nobody is missed out.
Importantly, it will keep energy prices where they are but provide the resources for most households to meet those extra costs. Those who consume particularly high levels of energy will not be spared the additional costs that go with it, but those who use the average amount or less will likely be better off.
This will retain the right market incentives to use less energy and/or seek low carbon alternatives without burdening those who can least afford it.
The Green way
This approach is also much more aligned with actual Green Party policy:
- No subsidies for fossil fuel consumption
- Sending the desired signals to the energy and consumer markets
- (Almost) flat universal payments to ensure everyone is included and supported. No further means testing
- Higher taxes for those who can most afford it in the current economic climate
The rapid transition from fossil fuels to sustainable energy and practices can continue uninterrupted, and most households can begin to enjoy higher and more secure disposable incomes.
So the question we face is this:
Do we want to support the rapid decarbonisation of our economy and direct financial help towards those who most need and deserve it using our agreed ‘tax and dividend’ approach?
Or do we want to slow down the transition away from fossil fuels and direct most financial help to wealthy households and those causing the most pollution using the new ‘price reduction’ approach?
The Green thing to do is the first, but it will take robust political leadership on our part and a message that successfully changes the framing of this emotive and highly charged political debate.
[1] Only about one-third of UK energy use is by households (see here). This is complicated by the fact that ~40 per cent of that energy is from Oil, and not Gas/Electric, and only two per cent of that is used directly by households (see here). So, a rough calculation of household consumption of all UK Gas/Electricity use is about 50 per cent. Happy to be corrected if anyone has more reliable figures.
[2] In Q1 2022, Fossil fuels (excluding oil) made up 76 per cent of the UK’s energy use (see here).
So, I will assume 76 per cent of domestic energy use is from fossil fuels. The figures above represent 76 per cent of the likely cost of £37bn.
[3] These figures assume the average equivalised household. In practice, it might be easier to pay directly to individuals, or via the current tax and benefits system.