Are Taxes The Solution to the Energy Crisis?
Shielding is a term we became familiar with during the Covid-19 pandemic and, as the chief executive of Scottish Power warns that soaring energy bills are “going to be bigger than the covid pandemic”, it is a term we will likely be hearing much more of as the government seeks to shield Britain's households from the effects of the energy crisis. The former chief executive of Centrica commented that the country is facing a ‘national crisis’ and that something has to be done quickly. He called for the government to intervene to dramatically reduce bills this winter, as the pace of price rises would be simply impossible for customers, whether they are individuals or businesses, to manage and afford. The head of EDF’s energy retail business said that households were facing a ‘dramatic and catastrophic’ winter and that, by January, many households will be in fuel poverty, defined as where energy costs are 10% or more of a household’s income.
What options can the Government use to assist households? One school of thought is that consumers should bear the full cost of the price increases. Households need to reduce their energy consumption and the best way for them to realise this and act upon it is when they are hit with higher costs of gas and electricity. On the other hand, prices are so high, that some may feel that trying to reduce their usage will have little effect. In addition, 62% of the poorest households are renters and higher bills are not going to incentivise their landlords to invest in better insulation.
Cash Payments
Targeted interventions, where cash payments or reductions in bills to specific sectors of the population, are seen as the best way to resolve the crisis and there are plans for a £400 payment to be made to households under the Energy Bills Support Scheme. However, the drawbacks of this approach are that the proposals may not sufficiently target those who require the support. Nor do they address how to determine who should receive the support, how much support should be provided, how it is paid to the recipient and how long the support should continue. Opponents of this approach also note that the current £150 council tax rebate has still not been made to all those who are eligible. It is also seen by some as 'short-termist' in that it doesn't seek to address the underlying issues of the crisis or encourage the longer-term changes which are required to be made.
Freezing the price cap
The energy industry favours a plan to reduce, or at least put on hold, increases in energy tariffs by having the price cap (the maximum rate which suppliers can charge households) frozen at around its current levels. They predict that this will cost the sector in the region of £100bn. Under these proposals, suppliers would cover the difference between the wholesale price at which they purchase gas and electricity and the price they charge customers by borrowing from a bailout fund arranged by the government. The funds borrowed would either be written off by the government or would be repaid gradually via price increases over a number of years. However, this option is expensive and involves government borrowing at a time when they are already under pressure.
A Windfall Tax
A Windfall Tax would be a super tax imposed on the profits made by energy companies and would be used to fund the cash payments to consumers. Energy firms oppose this and have suggested that a windfall tax would only raise enough to reduce the average bill by £30 per annum. It would also discourage investors who would otherwise contribute to the future viability of their businesses. Supporters of this approach argue that a well-designed tax which taxed historical profits rather than future profits, and which was a clearly defined one-off tax could reassure investors. However, others have noted that there are few things so permanent as a temporary tax and point out that UK income tax was introduced as a temporary wartime tax! Another way to encourage investors and investment by the companies could be to give tax credits for expenditure on investment. On the flip side, energy companies may use this loophole to reduce any Windfall Tax imposed on them to the point that it is not effective.
Reducing VAT and other levies on energy bills
Part of the cost of energy is made up of government ‘green levies’ which are intended to raise funds for investment in renewable energy sources and it has been suggested that this is temporarily removed.
The proposal to remove or reduce the current 5% VAT rate has been implemented in some European countries and has been suggested by certain politicians. The benefits of this proposal are that it is easy to implement and affects consumers directly. Whilst some have said that wealthier households with larger homes and higher energy bills would inevitably receive the greater benefit, it has been argued that, overall, energy usage is very flat across different income levels. It should also be noted that those who have older, less efficient boilers (perhaps because they can not afford to replace them) are using more energy than larger houses which are more energy efficient. A cut in VAT would reduce bills by an average of around £160 a year, and unlike reductions in petrol prices, which are not always passed on to the consumer, energy bills would be reduced immediately. On the downside, giving a small reduction to everybody does not sufficiently impact those who require help the most. It would also be difficult for the government to reinstate the VAT at a later stage.
A Solidarity Tax
The Resolution Foundation has recommended that energy companies introduce two tiers of tariffs. A ‘social tariff’ would be applied to low and middle-income households and a higher tariff for higher-income households. I think that this would be too logistically complicated to implement and would need some form of means testing which would take too long to put in place at a time when households need urgent support.
The foundation has also suggested that, as an alternative, a 30% price cap is put in place which would be funded by a ‘solidarity tax’ which would be achieved by increasing all income tax rates by 1%. This would have the effect of ensuring that higher-income households would contribute the most. The foundation acknowledges that the tax increases would not cover the entire cost of the support package and that it is not a popular option politically, but it posits that it is the fairest.
Ultimately the crisis is only going to be solved by increasing our energy efficiency and investing in renewable energy sources. We may be in a crisis now, but now is the time to act to ensure that the country is better equipped to deal with the challenges ahead.
If you have any further questions please don't hesitate to email me at yedidya.zaiden@raffingers.co.uk or click here.