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Energy costs crisis – what Cameron could do instead

David CameronTax the big emitters and use the £50bn a year raised to lower income tax and VAT. Result? Make energy bills more affordable by putting more cash in the pockets of ordinary households.

The answer to his energy woes is staring David Cameron in the face says Cambridge Judge Business School’s climate change economist Dr Chris Hope, former specialist advisor to the House of Lords Select Committee on Economic Affairs.

Chris says the current complicated mixture of levies and subsidies is not the best way to achieve reduction in greenhouse gases anyway, and politicians need to think more creatively about policies to tackle emissions and the rising cost of living:

A comprehensive, rising tax on all CO2 and other emissions may well be better, as both the OECD and IMF have suggested recently. Work that we have done here at Cambridge Judge Business School has shown that a tax of at least £60 per tonne of CO2 is justified by the damage done by climate change*.

This would be a better solution as the revenue raised by such a climate change tax could be used to reduce other taxes that are hurting hard-pressed families and holding back economic growth, such as income tax and VAT. With revenues of about £50bn a year from a climate change tax, the government could reduce both VAT and the basic rate of income tax from 20 per cent to 15 per cent, and still have £10bn a year left to protect vulnerable households and support new technologies.

We have to meet our legally binding targets in the Climate Change Act, which include halving UK emissions during the fourth carbon budget period (2023 to 2027). So, the Government’s review of green levies will have to include an analysis of alternative ways of meeting these targets. The substantial reductions in VAT, income tax and greenhouse gas emissions from a comprehensive climate change tax need to be part of the review.”

Cambridge Judge’s expert in the economics of energy policy, Dr Michael Pollitt, was recently invited to talk to a Special Adviser to David Cameron about energy prices. He says the Government needs to bite the bullet and call in the Competition Commission:

Politicians need to pay attention to basic economic analysis and listen to academic energy economists. Such academics have been remarkably consistent in agreeing that the political interventions we have had on energy over the past five years have been increasingly misguided.

Energy bills were at low point in 2004 and then started to go up, attracting consumer anger and politicians’ attention. But everything that successive governments have tried to do to tackle soaring prices was the wrong approach and made the problem worse. In 2008 I wrote a paper setting out what needed to happen with energy regulation; I said then that energy competition had matured to a point where ‘monitoring and investigation can increasingly be left to general competition authorities’, i.e. that the Competition Commission should be called in if need be. Instead it has been left to Ofgem, the regulator, to sort out. They don’t have the powers to make real change. Competition in such an important market should be the remit of the Competition Commission.’

The Competition Commission could split the current Big Six energy companies into more and smaller companies, creating more competition on pricing. They could also have had the power to identify and stamp out unhelpful practices in the industry. Equally, they could give the issues an airing and find the market to be competitive by the standards of comparable markets. Above all we would have had a proper independent analysis and a transparent investigation instead of the mess we have now.”

Download the working paper “How High Should Climate Change Taxes Be?” (pdf, 373KB)