Britain’s confused approach to carbon pricing

Last Friday, Insulate Britain, a campaign group demanding that the government explains how it plans to make the country’s homes more heat-efficient, launched its tenth day of protests. Much to the irritation of motorists, the group has blocked arterial roads around London, going as far as to glue their hands to the road surface to prevent their being taken away by the police.

While their tactics may alienate more than they persuade, the protesters have a point: Britain’s attempts to fix its draughty, poorly insulated homes are hamstrung by a lack of joined-up thinking, embodied in inconsistent carbon taxes and bungled grants.

That is not the only reason Britain will struggle to reduce emissions from homes and hit its relatively ambitious environmental targets. An inconsistent hodgepodge of different taxes, subsidies and regulations, however, has left Britons facing multiple different carbon prices that, if anything, discourage investing in insulation.

Carbon prices, probably the most popular means among economists to tackle climate change, aim to disincentivise production of greenhouse gases while still allowing the market to do its work. Individuals and businesses, rather than ministers, can set their own priorities — making their own judgments of what will be the most effective form of renewable energy or deciding what kind of environmentally-unfriendly activity is still worth it.

Reducing the carbon output from electricity generation — by replacing coal power stations with less carbon-intensive natural gas as well as wind farms and other renewables — has accounted for the bulk of the country’s decline in greenhouse gas emissions over the past three decades. That has been funded partly through a surcharge on electricity bills that pays for subsidies. A side effect is that now-greener electricity generation carries a heavier rate of carbon taxes than the gas mostly used to heat Britain’s homes. That clashes with the goal to switch heating from the fossil fuel to, potentially renewable, electricity.

An analysis by the influential Institute for Fiscal Studies think-tank, published this weekend, shows that Britons face a carbon price of £137 per tonne of carbon dioxide equivalent for household electricity compared with an implicit subsidy of £24 per tonne on natural gas for home heating, taking into account lower rates of value added tax on the fuel than normal goods.

It is therefore a welcome first step that, as revealed by the Financial Times last week, ministers are planning to shift green surcharges that pay for renewable energy subsidies from households’ electricity to gas bills. That will help to get rid of the perverse incentive that those who switch to electrically heated homes from natural gas may face higher tax bills for trying to do the right thing by the environment.

It does not, however, go far enough. Successive governments have botched attempts to encourage investment in insulation. The latest, the Green Homes Grant, was cancelled in March of this year after less than six months. A too-speedy rollout and alack of consultation with industry increased the scheme’s cost and left would-be insulators facing along wait.

A reluctance to raise the cost of natural gas is understandable, given that poorer households spend more of their income on heating their homes. But it only further underscores the importance of joined-up, coherent thinking about how Britain can hit its net zero emissions target by 2050. A properly designed insulation programme that reduces bills will have the biggest benefits for those same groups, as well as for the environment.

This article was originally shared by The Financial Times.