Monday, 2 October 2017

How to ramp up energy efficiency without subsidies

There are many things we can do to save energy at home but some of them take so long to pay back we can't afford to think that far ahead. If you factor in other benefits such as reduced carbon emissions and improved air quality that benefit society as a whole, then the finances look much better. But those costs (often called social costs) are not included in our energy bills and we would be very unhappy if they were, at least without some other compensation. Adding in the carbon cost to my gas bill would mean an increase of 25%! [1] We need a way of adding these costs to our bills without leaving us out of pocket. Maybe we need something like the Carbon Fee and Dividend. This would make a great deal more energy efficiency savings financially viable for households and businesses without subsidy.

Here is a chart from a recent report by UKERC on the costs and benefits of energy efficiency measures in homes. For each measure, the corresponding bar shows what proportion of the total technical potential is viable (benefits greater than costs) in different accounting schemes. The dark blue shows the viable emissions saving taking only energy bill savings into account. The light blue shows how much more is viable when you add the social benefits into the equation. Most of these are avoided carbon emissions with a little more from improved air quality and comfort.

Figure from UKERC 'Unlocking Britain's first fuel' [2]. 'Limited ambition' means only measures where energy cost savings offset installation costs, 'Cost-effective' means energy and social costs offset installation costs, 'Remaining potential' means energy savings are possible but costs outweigh benefits.
Some measures such as energy efficiency lighting and installing A+++ efficient energy appliances are already cost effective without taking social benefits into account. However, for most of the insulation measures there is only a small proportion financially viable on this basis - and the potential doubles if you count the carbon costs too.

I have discussed carbon fee and dividend before but here is a short summary (thanks to my friend Patrick for this succinct version).

Carbon Fee and Dividend (CFD) is a policy whereby:
  1. A fee is levied on fossil fuel producers, per CO2 equivalent extracted (or imported, if from countries without a similar scheme)
  2. The fee starts low, and escalates each year (thus avoiding serious economic shock).
  3. The proceeds are returned to the entire population.  An equal amounts for all adults, probably an adjusted amount for children.  The actual mechanism for this payment is to be decided, but for example it could be via the welfare or revenue systems.

The advantage of (3) is that the process is transparent (the money doesn't just disappear into the treasury) and will make people aware of the cost of energy.  Fuel prices rises will be compensated by the payments, so will not disrupt the economy and below-average energy users (i.e. the majority of the population) will gain at the expense of high energy users.

If a scheme like this were implemented in the UK it would increase our energy bills but we also get a dividend that, on average, would cover the difference. If we then install insulation, or switch to low carbon heating, we get bigger savings on our bills but only a tiny reduction in our dividend - until everyone else does as well. As time goes on the carbon fee increases making it more and more worthwhile to reduce emissions. Eventually the fee will be very high but the total cost will be close to zero because we will be close to zero carbon.

While we are in the EU it is difficult to implement carbon fee and dividend because it overlaps in functionality with the EU Emissions Trading System that covers carbon emissions from industry. However, we won't be in the EU for much longer.

British Columbia in Canada have had something similar to this since 2008. Differences include: the tax level only increased for the first few years, not all the revenues were redistributed and then they were in the form of tax relief so only benefited tax payers [3]. However fossil fuel use decreased without impacting on economic growth and the popularity of the tax has increased over time, after an initial slight dip [4].

If you like the sound of the carbon fee and dividend system, there is something you can do about it right now. The Citizens' Climate Lobby UK have a campaign to show the climate minister Claire Perry that there is widespread support, in advance of the UN Climate Change Conference in Bonn. We need to write to Perry via our MP, saying why we thing that carbon fee and dividend is the quickest, most effective, fair and simple way to reduce emissions in line with the UK’s own targets based on the Climate Change Act. If you agree, please make sure she knows it too.

[1] Based on the guidance from the UK government Valuation of energy use and Greenhouse Gas Emissions  Current price is £64/tonne and emissions from gas use is 184g/kWh so carbon adds 1.1p/kWh. On my last gas bill I was paying 4p/kWh, so carbon costs would add more than 25%.

[2] Unlocking Britain's First Fuel: new report on energy efficiency (UKERC) Sep 2017

[3] The BC Carbon Tax vs Carbon Fee and Dividend (Citizens Climate Lobby Canada) Apr 2016

[4] BC’s revenue-neutral carbon tax experiment, four years on: It’s working (Skeptical Science) Jun 2013


  1. Nice post, and I'd vote for a CFD. Presumably, introducing this in the UK would push the dark blue ("limited ambition") bars in Figure 1 further to the right, so that more of the interventions become viable without factoring in the social costs.

    I would like to see Figure 1 shown with absolute values, not percentages. This would make it easier to compare between overall impacts of the interventions. I would also be interested to see an absolute Figure 1 with a hypothetical CFD applied - say, 25% on top of the cost of gas and electricity.

  2. CFD must not be called a tax!

    I am told the minister has already rejected carbon fee and dividend because it violates the principle that all tax revenues are put into a single pot and used according to government spending priorities. It seems that if the carbon fee is a tax then the treasury gets the money. (This is not a party political issue. It is a longstanding principle in UK government).

    So let's not think of it as a tax. In practice it is a correction to the incorrect functioning of energy markets. It is a way of making people who burn fossil fuels and generate carbon emissions pay the social costs, and distributes the payments as compensation to people who bear the social costs (i.e. everyone).