(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Dec 2 (Reuters) - Imitation is the sincerest form of flattery. So the package of measures designed to cut average British household gas and electricity bills by around 50 pounds ($82) a year, outlined by Conservative and Liberal Democrat ministers on Sunday, is a compliment to the opposition Labour Party.
Labour had successfully made the rapidly escalating price of energy a central political issue, part of its focus on the “cost of living crisis”, and drawn a clear distinction between its policies, which would halt price rises for 20 months after the next general election, and those of the ruling Conservative and Liberal Democrat parties.
Ministers have responded by shifting from utility bills to general taxation some of the costs of providing subsidised electricity to older and poorer customers, and slowing down remedial work on badly insulated homes that utilities are required to pay for, in exchange for a commitment that the utility companies will pass the savings through to their customers.
The government hopes these and other measures will hold fuel bills down long enough to neutralise the issue at the next parliamentary election, due in May 2015.
Britain has a bewildering array of policies designed to cut greenhouse emissions by increasing the amount of renewable generation, support nuclear power, raise the cost of energy and insulate old and energy inefficient dwellings, while limiting the impact on vulnerable groups such as the elderly and low income families.
Current government interventions include: the carbon price floor (CPF), climate change levy (CCL), climate change agreement (CCA), carbon reduction commitment (CRC), emission performance standards (EPS), feed-in tariffs (FITs), contracts for difference (CfD), carbon emissions reduction target (CERT), community energy saving programme (CESP), energy company obligation (ECO), warm home discount (WHD), winter fuel payment (WFP), cold weather payment (CWP) and the Green Deal - to name only some of them.
The full list of interventions is explained in a handy report on “Energy use policies and carbon pricing in the UK,” published by the Institute for Fiscal Studies (IFS) earlier this year.
However, it is not clear if anyone - including ministers, officials and the energy companies - actually understands this complicated alphabet soup and how the policies interact with one another.
In addition, the government subsidises bills for all customers by levying value-added tax (VAT) at a special reduced rate of just 5 percent on domestic gas and electricity bills rather than the standard rate of 20 percent imposed on other items.
The VAT subsidy is worth over 5 billion pounds a year, according to the IFS. But many other policies are paid for through customer bills rather than from tax revenues.
For politicians, paying for energy and climate change policies through additions to customer bills has the great merit that it does not appear in the budget and can help disguise the true costs.
It also respects the user pays or polluter pays principle: those who use most energy and contribute most to greenhouse emissions should bear the heaviest burden remedying the problem.
But it is also strongly regressive. Households in the lowest part of the income distribution spend the highest share of their incomes on gas and electricity.
Households in the bottom 10 percent of the income distribution spend as much as 15.8 percent of their total expenditure (excluding mortgage payments and rent) on power and gas, compared with just 3.3 percent for households in the top 10 percent of the income distribution, according to IFS.
In fact the share of household expenditure on gas and electricity bills declines steadily as household income increases. The richest households spend far more on energy in absolute terms (they have larger homes and more energy-consuming appliances). But they spend far less on fuel bills as a share of total spending and income.
It would be much more progressive to fund energy and climate policies from general taxation.
“A five percent rise in energy prices ... would increase living costs for those in the poorest spending decile by 0.8 percent on average, but less than 0.2 percent in the richest decile,” IFS wrote in another study on “Household energy use in Britain: a distributional analysis” also published in 2013.
“Policies that increase energy prices ... place a greater burden upon poorer households,” IFS found. “This, combined with concerns over carbon emissions, has led to a complicated multitude of policies, with multiple (and sometimes conflicting) objectives, resulting in rather opaque distributional consequences.”
A blunter interpretation is that British governments have been gerrymandering utility bills, using them to fund pet climate policies and energy efficiency projects, while attempting to shield selected groups of voters from some of the associated costs.
Under Labour administrations, interventions have tended to favour those on low incomes. Under Conservative-led governments, interventions have tended to favour the old. In both cases, the pattern of interventions has pandered to the parties’ core constituencies.
Unfortunately for the government, the gerrymander has broken down over the last 12 months, as the costs of all these interventions have risen faster than the various discounts can protect politically important groups of swing voters, especially in the middle of the income distribution and in the electoral battleground of the English Midlands.
In its reports on energy use and income distribution, IFS recommended many of these complicated schemes should be axed and VAT imposed at the standard rate on gas and electricity bills. “The current structure of policy is unnecessarily complicated and costly,” according to the institute.
The net result would be regressive. But according to IFS: “it is possible to compensate (and indeed overcompensate) poorer households on average through a targeted set of increases in means-tested benefits.”
However, that would be not be politically expedient. Instead, ministers intend to redraw the gerrymander yet again by shifting some of the costs from bills (where they are highly visible) to taxes (where they are far less noticeable), and deferring some of the more expensive measures by a couple of years, all under the heading of “government action to help hardworking people with energy bills.” ($1 = 0.6105 British pounds)