The current fuel crisis is creating problems for governments in the UK and Europe. The conundrum is based on the combination of underlying energy costs, environmental taxation, poverty alleviation and climate policy all overlapping in a non-aligned mix. Finding a solution that keeps advocates of each policy and it’s raison d’etre supportive is challenging. Here we look at how Climate Income can be the sword that cuts the Gordian knot.

First let’s examine some of the main policy elements at play …

The political pressure is coming from the financial pain faced by families with rapidly rising fuel bills where energy use has already been reduced to a minimum with the bottom 50% of the population using energy consistent with a 1.5ºC pathway! Energy costs impact everyone, but low and middle income groups spend a higher proportion of their income on transport and household energy needs than the better paid.

The main carbon pricing mechanism in the EU and UK is the Emissions Trading Scheme (ETS). The UK left the EU ETS and established an independent ETS which began in January 2021. ETS is considered to be a revenue raising mechanism (tax) as well as a carbon pricing tool. The revenue should be used for appropriate purposes but it is not used as a dividend to the householder to mitigate and thus enable a predictably rising carbon fee as with Climate Income. 

The UK government has also historically put the burden of paying for the move to renewable electricity onto electricity bills, making this fuel, though increasingly greener than gas, considerably more expensive and adding about £200 to fuel bills. Environmental levies include the Renewable Obligation and the Contracts for Difference, which incentive and support renewable electricity generation, the Feed in Tariff to support solar panel installations, and the Energy Company Obligation, which has provided energy efficiency measures to more than two million households. EPC certificates have also compounded the injustice by rewarding the gas heating home owner over the electric heating owner!

The government does need to mitigate the effect of rising fuel costs this winter. It refused to implement a post Brexit VAT cut on fuel, claimed to be too much of a ‘blunt instrument’ – although is it fair to just help the very poorest households and not the struggling middle classes? Even if implemented however, 5% of the projected £700 bill rise amounts to a mere £35 and the saving on the average dual fuel bill is estimated to be around £89. Removing the VAT may be a fair and wise move because of what it represents politically but it is not a solution to the underlying problems in our current carbon pricing policies.

The suggested Warm Home Discount expansion will only target the very poorest and there are logistical problems in applying for the WHD –  meanwhile a targeted home upgrade grant for fuel-poor homes had been halved in the autumn budget! 

A windfall tax as proposed by the opposition parties looks like an easy solution but it would be hard to implement and it would only cover the oil and gas we produce ourselves (only 40% of our gas is domestic and we imported 20 million tonnes of oil in 2020). It has also been argued that the perceived punitive nature of the tax could be used as a reason for reducing investment in carbon capture and more renewables. Like the other solutions it would be short term and not contribute much to the real solution – more renewables and the price of fossil fuels reliably reflecting their true price to society.

The carbon price in the ETS (Emissions Trading Scheme) which is the main carbon pricing mechanism in the UK and EU is determined by the market, this led to it being too low to be effective during the recession and now so high that ‘Cost Containment Mechanisms’ has been and may be used to mitigate the immediate effects on industry. Cost Containment not only negates the claim that ETS is market driven rather than part of a command economy but also negates the effectiveness of ETS in encouraging decarbonisation. Under Climate Income Schemes the carbon price is designed to rise but in a predictable way which businesses can plan for.

The Government had proposed last year that the ETS scheme would be extended to cover the other ⅔ of emissions including building and transport. This was similar to the proposed EU Building and Transport ETS which is meeting resistance in the countries historically dependent on coal (and colder!) such as Poland. The UK proposal was watered down (2nd item) through fear ‘it could trigger a political storm’ in November 2021 and it is no longer described as being about to be ‘radically’ expanded. (Marine and waste incineration emissions are still being considered with the possibility of agricultural emissions in the future).

The Government had said it wouldn’t have a universal carbon fee back in February because it would raise the price of cheese and meat even though a universal carbon price would send a clear message on all products and eradicate most of the disincentives to electric heating and vehicles. In July the government seemed to be considering CI, which would of course offset the rising price of carbon dependent products while householders and manufacturers adjust, thus mitigating the problem of rising cheese and meat prices! In November at the debate prompted by the Zero C petition its briefing (current carbon charges 2nd para) referred not to the July proposals but back to the February statement on carbon pricing. That debate also took place when it had been decided to scale back the ETS extension but the briefing and government response doesn’t reflect that decision.  Please see Further information on the government response to the Zero C petition for a link to the government response to the petition.

The government decided against a universal carbon price because of the costs to the householder. The preferred carbon pricing policies however are proving equally unpopular – especially the tariffs on electricity bills to pay for renewables and the VAT on fuel even though the low rate could be considered to be a hidden fossil fuel subsidy like frozen fuel duty. ETS is less visible at the moment – but would have been about to become extremely visible if the government hadn’t scrapped the extension to buildings and transport because of its likely unpopularity! As it is the government uses Cost Containment, whenever the carbon price seems to get too high for comfort – thus rendering ETS far less effective. 

ETS  in its current form (without CI) can’t be effective without creating further problems for consumers, unpredictability for businesses and future short term cutting of the carbon price every time there is a fuel market crisis.

Climate Income would mitigate the costs of rising fuel prices without the need to cut the carbon price (and thus reduce incentives to decarbonise) every time the market spikes. The predictably rising price would also allow businesses and households to plan ahead to decarbonise, especially if future carbon dividend payments could be offered as loans for retrofitting and industries could, among other tactics, have fees offset against carbon capture, usage and storage.

It is unlikely that this current fuel price crisis is a one off – we need a carbon pricing policy which can weather this and future storms without having to be watered down each time. Climate Income is the answer!

Catherine Dawson and James Collis