Saturday, 30 August 2014

The cost to the tax payer of Green Deal subsidies is less than you think

Subsidies for home insulation generate revenue for the government. At a conservative estimate, half of the subsidy is paid back by income from VAT, corporation tax, income tax and avoided unemployment benefit. In fact it is quite likely that the income would completely offset the subsidy, meaning subsidies cost us nothing. This is mainly because home insulation and other energy efficiency retrofits are labour intensive and generate jobs. The analysis, published in Energy Policy, is by Jan Rosenow of Ricardo AEA, Reg Platt of the Institute for Public Policy Research and Andrea Demurtas of Oxford University Environmental Change Institute.

Rosenow et al evaluated the revenues from retrofitting solid wall insulation. Until recently this qualified for a subsidy of £6000 from the Green Deal Home Improvement Fund. However, the scheme was so popular it ran out of budget and has been suspended. Perhaps this was unnecessary because the net cost to the government - and hence our taxes - is much less than the face value cost of the subsidy.

Net cost of subsidy in the private householder scenario [1]

The study explored three scenarios. The worst case was the private householder scenario, in which the subsidy accounted for 2/3 of the cost of the installation. Insulating a 3-bed semi costs an average of £9000 so the GDHIP would have funded 2/3 of that. (In the other scenarios, the subsidy was only half or a fifth of the total cost).

The table below shows the revenue assumptions.

Low revenueHigh revenue
VAT5% of the total cost
Corporation tax paid at 21% on profits 4.36% of turnover, times 1.5 to allow for the supply chain1.3% of the total cost
Jobs createdDirect and indirect jobs: 33 per £millionDirect, indirect and induced jobs: 64 per £million
Unemployment savings$4300/person
Income tax (based on pay for a skilled trade £467/week)$4800/person

The difference between the two scenarios is how the number of jobs is calculated. In the low revenue (conservative case) the jobs created are the:
  • direct jobs (23) - people hired by the installer company
  • indirect jobs (10) - people hired by other companies in the supply chain.

In the high revenue scenario there is a third category
  • induced jobs (31) - generated by the direct and indirect jobs people spending their salaries on more goods and services. The figure for this is less certain and depends on the state of the economy at the time.
The number of jobs created for a given amount of spending varies between industries. The study used figures for the energy efficiency industry in general. They could be an under estimate for solid wall insulation because it is very labour intensive.

For comparison, the government recently announced tax breaks for the oil and gas industry leading to £6 billion of investment and 8000 jobs (direct and indirect) [2]. That works out at 1.3 per £million. This is 25 times less than the jobs ratio for energy efficiency. The tax breaks were worth £1.2 billion, so there were 7 jobs created per £ million lost in tax revenue. I'm sure those people got paid more than the insulation installers so there will be some more revenue from income tax - but not that much more.

If the government cares about jobs they should be subsidising energy efficiency before the oil and gas industry - and the cost to the tax payer will be minimal.

[1] Rosenow, J., et al., Fiscal impacts of energy efficiency programmes—The example of solid wall insulation investment in the UK. Energy Policy (2014),
[2] Maersk Oil and BG Group announce new allowance for ultra High Pressure High Temperature fields will help enable development of two new projects leading to investment of £6 billion. ( March 2014

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