Does the Government understand its own Green Levies?

As reported by the Sunday Telegraph (25.06.23), the government is silently reapplying the cost of green levies to domestic consumer energy bills, reversing the decision taken under the Truss government to fund these costs from general taxation.

While it is our view that these levy costs should be cut entirely, rather than shuffled from one place to another, it is obviously preferable that they should funded from progressive taxation rather than drawn from consumer energy bills, where the effects are sharply regressive, since energy bills are a much larger part of a low-income household’s total expenditure than that of a better off household.

It is difficult to believe that Mr Sunak would knowingly revert to direct levies with regressive impacts on low-income households, and it may be a simple mistake arising from misunderstanding of the character and scale of the climate change policies.

Certainly, the remarks of the Prime Minister’s official spokesman in defence of this decision suggest that the No. 10 advisors do not understand the issues. Mr Sunak’s spokesman has been quoted in the press (Telegraph 27.06.23) as remarking that:

The crucial point is that the levies not only help bring down energy bills over time – they drive investment in renewables – but they also help the public, those hardest hit: so the £150 in the warm homes discount, those on pension credit, those on low income, so that’s providing that.”

Firstly, only the most naïve would now think that investment in renewables will reduce costs. As is well known, at least outside Downing Street, the capital and operating costs of both wind and solar remain stubbornly high, their productivity is very low, and the grid expansion and system management costs of randomly intermittent wind and solar are also very high (Balancing Services now amount to about £4 billion per year, largely due to wind and solar). Renewables are, as anyone familiar with their physics would expect, extremely expensive and certain to remain so.

Secondly, the Prime Minister’s spokesman appears to be confused about the character and scale of the £150 Warm Homes Discount on the electricity bills of low-income households. This is a cross-subsidy funded by levies on the bills of other consumers, but it is not a green levy in the strict sense, and is no longer included amongst the Environmental Levies as listed by the OBR.

In any case, the Warm Homes Discount amounts to only about £475m a year in total and is awarded to only around 2 to 3 million households, a benefit which pales into insignificance besides the scale of green levies proper: the Renewables Obligation, the Contracts for Difference, the Feed-in Tariff, the Capacity Market and the Green Gas levy.

Together, these levies cost consumers approximately £8.5 billion a year, and affect all 26 million households, both through their electricity bills and through general cost of living, as industrial and commercial consumers pass on their share of these costs in the prices of goods and services, a total impact of over £300 per household.

On top of this there is the UK Emissions Trading Scheme, currently adding about £6 billion a year to the costs of doing business in the UK, depressing wages and rates of employment and adding yet another layer of indirect green taxation to the cost of living.

Dr John Constable, NZW’s energy director said: 

The Government’s decision to silently reapply green levy costs to bills is in itself a retrograde step and a mistake, but the misinformation in defence of this decision suggests a negligent lack of engagement with the reality of their own climate policies. Carelessness of this kind is crying out for punishment at the ballot box.”