Note: This article has been updated to include a response from IPPR
The Easter weekend saw the introduction of a new government policy which makes companies pay to emit carbon dioxide. The new levy, called the carbon price floor, is being implemented despite heavy criticism from industry and green groups that say it means higher household bills and massive profits to nuclear generators.
The policy is meant to encourage investment in low carbon energy sources, but the chief executive of E.ON UK claimed it’s “just a tax for the Exchequer”. The weekend’s media coverage was full of similar gloom.
The Sunday Telegraph said the price floor would add Â£50 to household energy bills, and the Sun and Daily Mail claimed it would force 60,000 homes into poverty. The policy clearly isn’t popular – but what kind of effect is it likely to have?
Carbon price floor and household bills
The carbon price floor is effectively a top-up tax. Companies already pay to pollute under the EU emissions trading scheme (ETS), buying permits to emit greenhouse gases. But the price of the permits crashed to record lows in recent months – meaning there’s much less of a financial incentive for companies to cut their emissions.
The carbon price floor is meant to solve this by putting a minimum price on how much companies in the UK have to pay to pollute. If the ETS price drops below this level, companies pay the difference to the UK Treasury.
The government has set the current price floor at Â£16 per tonne of carbon dioxide. The 2011 Budget outlined how the price will gradually increase to Â£30 in 2020, and up to Â£70 by 2030. If the ETS price stays at its current level of about Â£4 per tonne, the Treasury stands to gain over Â£4 billion in the next three years. The policy has been criticised because it isn’t clear what the money will be re-invested in – most likely is that it will just be used to boost the Treasury’s coffers.
The extra cost of the policy is expected to to push the wholesale price of electricity up by 17 per cent in the next three years, according to the thinktank the Institute of Public Policy Research (IPPR), with that cost passed on to the consumer – pushing more households into fuel poverty.
How much will it add?
The Sunday Telegraph says the price floor could add as much as Â£50 to household energy bills by 2020. The figure comes from DECC’s report on the impact of its climate change policies on energy bills released last week, which the Telegraph helpfully pointed us towards. But older Treasury calculations from 2010 suggest the cost is more likely to be in the region of Â£11. Why the disparity?
In order to assess policy impact, DECC compares the cost of its policies to a world without any policy. This allows policies to be considered independently of the way they interact with other policies, but it produces a larger estimate than the alternative method which is to look at the ‘marginal bill impact’ – the expected effect in the ‘real world’ where other policies are already in place.
The Treasury figures look at the marginal impact – suggesting the actual effect on consumers may not be quite as dramatic as Â£50 in 2020. (Although this is a prediction, not a definitive answer.) It also projects ‘jam tomorrow’ – the Treasury calculates households are actually expected to save money after 2030 as more low carbon electricity is generated, driving the wholesale price of electricity down, with savings passed on to consumers. Although that might seem like a long way off.
60,000 extra households in fuel poverty this year?
DECC says a household is in fuel poverty if it spends more than 10 per cent of its income on sufficient heating. The media reports claim an extra 60,000 households could find themselves in this situation because of the carbon price floor.
The figure comes from a 2010 Treasury document, via an IPPR press release, and there are a couple of problems with how it has been reported.
The Treasury does use DECC data to calculate that an extra 60,000 households could be put into fuel poverty this year because of the policy, as this table shows – but not with the price floor set at its intended level.
Source: HM Treasury, Carbon price floor: support and certainty for low-carbon investment
The figure in the reports is based on a Â£40 price floor in 2020 – ‘scenario three’ in the table above. But the government is actually targeting a price of Â£30 – ‘scenario two’ in the table above.
So a top-end estimate under a scenario that fits with reality could potentially see up to an extra 20,000 households put into fuel poverty – although picking out the effect of any one policy is not straightforward, as we have noted before. That’s obviously still a lot, but less than the Sun and Daily Mail say.
However, the Treasury adds the caveat that the calculation “does not take into account potential reductions in fuel poverty from other Government policies”.
While it is hard to work out exactly how many households government policies might keep out of fuel poverty, there are already some measures in place which reduce the number of households the price floor will impact. For instance, two million households can get a Â£130 reduction on their electricity bills under the warm home discount, and elderly households can get up to Â£300 to towards their energy bills with the winter fuel payment. Other government policies like the green deal and energy company obligation also help households reduce bills through energy saving home improvements.
However, it is clear that the carbon price floor is set to increase the cost of energy over the coming years in order to provide the government with general tax income. And that’s going to mean more upward pressure on energy bills. Given that the money raised doesn’t seem likely to end up directly reducing energy use, it’s perhaps no wonder the carbon price floor is unpopular.
IPPR has sent an interesting response on how it came to the 60,000 number the reported in the Sun and the Mail. It says:
“The article is correct to identify that we have used the Scenario 3 figures from the government’s consultation on the carbon price floor and that the Scenario 3 figures relate to a targeted price floor of Â£40 in 2020, whereas the government is targeting a price of Â£30. This was a deliberate decision and not an error as the article suggests.
The Scenario 3 fuel poverty estimates derive from an assumed carbon price support level of Â£3/tCO2 in 2013 ( p.30). The level of the carbon price support that will actually be introduced in 2013/14, as announced in the 2011 budget (p.32), is higher than this at Â£4.94/tCO2. If anything the impact of the policy on fuel poverty will therefore be higher than 30-60,000, and not lower as the article suggests.
In claiming that the Scenario 2 figures provide the best estimate for the impact of the policy on fuel poverty (other complications not withstanding) the article has overlooked that these are derived from a carbon price support level of just Â£1/tCO2 in 2013, significantly below the level that has actually been implemented.
Our estimate isn’t perfect but it is conservative and the best available using government publications.”