Prime Minister David Cameron may be regretting his previous husky-hugging this morning, after issuing a carefully worded response to claims in the Sun that he ordered aides to ditch “crap” taxes on energy bills. Whether or not he used the phrase, there are some good political reasons why ‘green’ subsidies on bills could be harder to cut than the Sun believes.
The Sun’s front page claims Cameron has performed “huge U-turn” on eco policies. In reality it’s a little bit behind the times. He promised last month to “roll back” subsidies for low-carbon power and energy efficiency, which are currently added to consumer energy bills.
The coalition’s early days, when the prime minister promised to lead “the greenest government ever”, may already feel like a long time ago. But the government’s commitment to reducing greenhouse gas emissions from the economy, and playing a part in tackling climate change on the international stage, in theory remain unaltered. And at the same time, it has to deliver on a major preoccupation of every government – keeping the lights on.
In practice, the PM may find that green crap is hard to cut.
What are green taxes?
The phrase ‘green taxes’ is commonly used to refer to a package of government measures intended to encourage expansion of low-carbon power, subsidise home insulation and tackle fuel poverty. The measures are paid for via levies on consumer energy bills.
The levies currently account for Â£112, or nine per cent of an average consumer energy bill, according to estimates from the Department for Energy and Climate Change (DECC).
Energy companies have publicly blamed recent price rises on increases in the subsidies over the last twelve months – although in reality the policies are only responsible for a portion of the recent price hikes. Numbers from SSE suggest increases in green levies accounted for only about 16 per cent of its price last last month, for example.
Green measures difficult to cut practically
Following Cameron’s announcement, George Osborne is expected to announce changes to green levies in December’s Autumn statement. The policies in the firing line have received a lot of publicity recently, but whether the government will be able to cut them is a different matter.
First up, the Energy Company Obligation (ECO). In reality, ECO isn’t really a ‘green’ policy – it’s primarily a social measure, requiring energy providers to subsidise home insulation for low-income households. The money needed to seek out the right households and instal the right insulation adds about Â£50 to consumer energy bills, according to government data.
The government has some options on ECO – it could remove the cost from consumer bills, and add it to general taxation instead, or it could weaken the measure. Perhaps unsurprisingly, the Treasury is reportedly not keen on the idea of bumping up the tax burden. In the end, the government may bow to energy company demands to weaken the targets they have been set under ECO.
Secondly, many commentators – from different parts of the political spectrum – are pressuring for a measure known the carbon price floor (CPF) to be scrapped. The CPF is a top-up tax to the carbon price, which is meant to ensure that power generators pay a set minimum price for their greenhouse gas emissions.
But the CPF could be tenacious. That’s partly because other measures depend on it – if the government gets rid of the CPF, it might need to recalculate the economics of decarbonisation, which could be a complicated process. Perhaps more importantly, the measure raises money for the Treasury – almost Â£1bn a year, according to Greenpeace. So it may not be top of Cameron’s list of policies to cut.
‘Wind farm levies’ = government energy policy
Finally, the Sun suggests that “wind farm levies” could be for the chop. This may be the most attractive possibility for Conservatives opposed to the spread of onshore wind, but it’s probably the most difficult cut to achieve in practice.
Why? First, because it would be extremely difficult politically. Energy minister Ed Davey has publicly reassured the renewables industry that the subsidies are safe. Attempts to cut them would prompt a battle within the coalition between Lib Dems and Tories.
The government is also just coming to the end of a tortuous debate over the latest parliamentary energy bill – due to be signed off before the end of the year. Subsidies for nuclear and renewables are an integral part of the government’s plans for its energy policy over the next decade. Getting rid of them would mean a big rethink.
Government commitments: keep the lights on, and tackle climate change
Politicians know that maintaining energy security and ‘keeping the lights on’ is one of their first duties. And the UK is facing a squeeze on energy capacity over the next few years which is going to make this more difficult.
Reneging on the government’s commitments to the renewables industry will further damage confidence. And with many of the country’s coal power stations closing down as a result of EU pollution legislation, more uncertainty over the next couple of years could pose a real threat to the country’s ability to maintain energy security.
Last week, the government’s Energy and Climate Change Committee warned Cameron that “backtracking on â?¦. legally binding contracts” with the renewables industry will damage policy credibility, seriously undermine investor confidence and ultimately increase the cost of renewables in this country – pushing up consumer energy bills.
The country could turn to gas power instead of renewables – an option chancellor George Osborne is certainly keen on. But turning to gas would also threaten the country’s targets for reducing greenhouse gas emissions. The UK’s 2008 Climate Change Act – the first in the world – sets a legal duty on the government to keep reducing emissions.
And Cameron doesn’t appear to have entirely abandoned his commitment to the issue. While (allegedly) making impolite remarks about ‘green’ policies at home, the Prime Minister has also calling for the world to act to tackle climate change on the international stage.
Other ministers – for example foreign secretary William Hague – remain committed to tackling climate change.
Cosmetic cuts could be deep
Political and practical realities mean that ‘cutting’ the government’s green policies is likely to be easier said than done. The only policy that appears to be genuinely in the firing line – ECO – isn’t really a green measure, as its aims are primarily social. Elsewhere, the government is going to face barriers.
But the political and media pressures to cut ‘something’ aren’t going to let up. As a result, we’re going to see some action in Osborne’s Autumn statement. And, despite the reassurances from Ed Davey, the renewables industry is worried. Trade body the Renewable Energy Association called today for all the government – not one department or another – to clearly restate its commitment to decarbonisation.
In the end, the cuts to ‘green subsidies’ announced in December’s Autumn statement may well be cosmetic – designed to pacify a restless media and backbench Tory MPs – than genuinely significant. But the political fight they have prompted, and the damage to the UK’s reputation as a good place to invest in low-carbon technologies, could have more long-lasting effects on the country’s energy policy.