POLICY BRIEF

1

INTRODUCTION

The low carbon transition plan1 (LCTP) sets government policy to meet renewable

energy and carbon-related targets. The report outlines how policy costs are

distributed.

LCTP:A “TRIPLE INJUSTICE” FOR THE POOR

I. Heavier Burden

Climate change policy costs are borne

predominately by consumers.

Corporations enjoy autonomy over

where costs are recovered,

emphasising commercial

considerations, whilst ignoring wider

equitable issues of distribution.

1 HM Government, (2009). The UK Low Carbon Transition Plan. National strategy for climate and energy.

2 Preston, I., White, V., and Guertler P, (2010) Distributional Impacts of Climate Change Policies, Final

Report to EAGA Charitable Trust at p.8

Costs are passed on uniformly to

consumers, regardless of income.

The highest income households

experience a 0.2% increase in energy

costs as a proportion of income, whilst

the lowest income households

experience a 2.1% change. 2

EXECUTIVE SUMMARY

Costs of climate change policy are distributed

regressively

Recovering costs through income tax or a

financial transaction tax is progressive, but not

politically viable.

A rising block tariff, implemented in tandem with

relief for low income “priority groups”, is the best

alternative to mitigate regressive impacts.

The rising block tariff promotes climate change

policy goals, by incentivising energy

conservation

Fuel poverty could increase under a rising block

tariff, whilst still making low income homes

better off.

Page 2 of 14

Lower income households bear the

heaviest burden as a percentage of

their income.

II. Least Responsible

Wealthier households emit more, both

directly and indirectly, comparative to

poorer. The graph below shows the

surge in emissions per person as

income increases.3 The wealthiest

individuals pollute three times more

comparative to the poorest

III. Less Likely to Benefit

Under LCTP, 1 in 5 of households are

“winners”, seeing a reduction in their

energy bills.

3 Gough I et al. The distribution of total greenhouse gas emissions by households in the UK, and some implications for social

The main characteristics of “winners”

are:

100% received insulation +

A Power or Heat technology4

However, for power technologies, only

5% of low income households

benefited from the measure.

Consequently, low income

households are significantly less

likely to see falling bills.

CURRENT POLICY

CONCLUSION

The current situation is an inequitable

way for dealing with carbon reduction.

Poorer households carry the heaviest

burden, although being least culpable

for emissions, and least likely to

benefit.

POLICY RESPONSE

I. Costs Recovery through

Income Taxation

policy. London, Centre for Analysis of Social Exclusion, 2011

4 Ibid at p.60

Page 3 of 14

Progressive

The lowest income households will see

an increase in disposable income of

£96, whilst the richest would carry the

heaviest burden, and see a decrease

of £1378.5 Therefore, it is progressive

as the richest pay more.

Politics

The U.K. is currently reducing a large

structural deficit. Therefore, using

income taxation to pay for climate

change policy may face political

opposition.

II. Rising Block Tariff “RBT”

The RBT forces energy companies to

change their pricing plans, so that the

first block of energy, which is essential

for civilised existence, does not

embrace any policy costs. This block is

sold at a cheaper rate. Thereafter, for

additional energy, which is optional, a

higher price will be charged.

5 Preston, I., White, V., and Guertler P,(2010) Distributional Impacts of Climate Change Policies, Final Report to EAGA Charitable Trust at p.56

6 Gardner, Richard L.,and Robert A. Young. (1984b] Effects of Alternative Energy Rates And Rate Structures On Electricity and Water

This is a purely regulatory measure,

administratively feasible, with low

impact on public funds.

Promotes Consumptive Frugality

The current prevailing energy tariffs

have decreasing prices with

consumption. This approach does not

incentivise consumers to conserve

energy.

On the contrary, with RBT, an

increasing cost of energy will

incentivise consumers to conserve

energy,6 promoting carbon reduction

goals.

Progressive

Higher income households consume

greater amounts of energy, and thus

will be subject to the higher rate,

incurring additional expenses.

Lower income households stand to

benefit, because their energy

consumption tends to fall below the

basic amount, Therefore, they will

enjoy the lower rate, and see their bills

fall.7

Use On the Colorado High Plains. Fort Collins: Colorado Water Resources Research Institute Completion Report 135 at p.9 & 10

7 Preston, I., White, V., and Guertler P,(2010) Distributional Impacts of Climate Change

Page 4 of 14

RBT Detrimental To Low Income

High Consumption Households

15% of all low income households have above average energy consumption.8

Therefore, 15% of low income households, of which the RBT sought to make better off, will be subject to the higher rate, and be made worse off.

Protecting Low Income High

Consumption “LIHC” Households

It is necessary to understand the

driving characteristics for LIHC

households, in order to effectively

target them to grant relief from the

higher block rate.

Analysis reveals that this group largely

consists of pensioners, living in large,

Policies, Final Report to EAGA Charitable Trust at p.10

8 Ibid. at p.19

9 White, V., Roberts, S. and Preston, I. (2010), Understanding ‘High Use Low Income’ Energy Consumers, Final Report to Ofgem, Bristol: Centre for Sustainable Energy at p.25

10 Priority Group is defined according to the

CERT definition of vulnerable and low‐income households, including those in receipt of eligible benefits and pensioners over the age of 70.

under occupied homes.9 More specific,

the data reveals that:

76% of LIHC households, are also

classified as “priority group”10

households.11

Integrating an exemption from the

higher block rate, for low income,

“priority group” households, would best

mitigate the detrimental effects on

LIHC households under RBT.

Fuel Poverty

Large, inefficient homes, will have

higher than average energy

requirements. RBT will increase the

cost of bringing these households to

an adequate level of warmth. This

increases the likelihood that

households will move into fuel poverty.

However, low income households tend

to have lower consumption, and under

heat their homes.12 They may now buy

more cheap energy, keeping

11White, V., Roberts, S. and Preston, I. (2010), Understanding ‘High Use Low Income’ Energy Consumers, Final Report to Ofgem, Bristol: Centre for Sustainable Energy at p.25 12 Committee on Climate Change (2008). First Report: Building a Low-carbon Economy.London: HMSO; see also Hills, John (2012) Getting the measure of fuel poverty: final report of the Fuel Poverty Review. CASEreport, 72. Centre for Analysis of Social Exclusion, London School of Economics and Political Science, London, UK

Page 5 of 14

expenditure constant, resulting in

warmer homes.

Therefore, although low income

households stand to gain, they are

“theoretically” worse off in the

definitional sense of fuel poverty.

Adopting RBT may cause fuel poverty

targets to be missed, resulting in

political fallout.

Regulation

RBT requires governmental

intervention within the liberalised

market, which is in tension with the

neoliberal ideology that has prevailed

over the last three decades.

III. Financial Transaction Tax

Progressive

LCTP is regressive because of a

corporation’s ability to pass on costs

downstream to consumers. These

costs form a larger proportion of low

income budgets.

FTT is progressive because

distributional impacts are minimal, for it

is difficult to pass costs on

13 Baker et al (2009), A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal

downstream, as FTT is only levied

upon transactions between financial

institutions. It could raise

approximately £8 billion.13

Arguments For Implementation:

Financial institutions are largely

responsible for the 2008 recession,

causing the deficit to increase. This

has prevented more progressive

measures such as cost recovery

through income tax. As consequence,

the poorest suffer.

As such, the financial sector should

shoulder some of the burden.

Politics

The UK is heavily reliant upon the

financial sector. FTT could affect

competitiveness. For this reason, the

conservative government has opposed

FTT proposals at the EU level.

Page 6 of 14

CONCLUSION &

RECOMMENDATION

Political opposition to FTT, and cost

recovery through income taxation may

be insurmountable, and thus their

adoption unlikely.

However, neoliberal ideology, or

pursuits of political targets, are not

strong enough arguments to block

RBT, which may instil fairness into a

regressive and unfair system.

Page 7 of 14

EXECUTIVE SUMMARY

Costs of climate change policy are distributed

regressively

Recovering costs through income tax or a

financial transaction tax is progressive, but not

politically viable.

A rising block tariff, implemented in tandem with

relief for low income “priority groups”, is the best

alternative to mitigate regressive impacts.

The rising block tariff promotes climate change

policy goals, by incentivising energy conservation

Fuel poverty could increase under a rising block

tariff, whilst still making low income homes better

off.

TECHNICAL BRIEF

INTRODUCTION

The low carbon transition plan,14 “LCTP”, sets government policy to meet carbon-

related targets, by internalising externalities associated with carbon emissions,

through a carbon price.

LCTP:A “Triple Injustice” For The Poor

I. Heaviest Burden

Adjusting income for household size

and composition to obtain “equivalised

income,” and then regressing the log

of per capita emissions per £ of

income upon equivalised income

provides the following result.15

Increasing weekly income by £100,

causes an 8.6% reduction in

emissions as a share of income. The

14 HM Government, (2009). The UK Low Carbon Transition Plan. National strategy for climate and energy.

15 Gough I et al. The distribution of total greenhouse gas emissions by households in

the UK, and some implications for social policy. London, Centre for Analysis of Social Exclusion, 2011 at p.33

Page 8 of 14

coefficient is statistically significant at

the 1% level.

Poorer households have a higher ratio

of emissions to income, therefore, an

increase in the price of carbon will

effect these households the most.

II. Emit Less

Regressing log of per capita

emissions, upon equivalised income

produces the table below.16

Increasing weekly income by £100

causes a 6.9% increase in

emissions.17 The coefficient is

statistically significant at the 1% level.

III. Least Likely To Benefit

22% of households will see a reduction

in energy bills, defined “winners”.18

Chi‐squared automatic interaction

17 Gough I et al. The distribution of total greenhouse gas emissions by households in the UK, and some implications for social policy. London, Centre for Analysis of Social Exclusion, 2011 at p.25

detector analysis shows that all

“winners”, benefited from insulation

measures, complimented with either a

power or heat technology.19

The graph20 above shows that only 5%

of low income households21 received a

power technology.

Low income households are severely

underrepresented in the “winning”

category.

18 18 Preston, I., White, V., and Guertler P,(2010) Distributional Impacts of Climate Change Policies, Final Report to EAGA Charitable Trust at p.71

19 Ibid at p.60

20 Ibid at p.45

21 Decile 1-3

Page 9 of 14

POLICY RESPONSE

I. Policy Cost Recovery

Through Income Tax

Progressive

The graph, below, shows changes in

disposable income when recovering

costs through income taxation. The

declining line shows that this measure

is progressive.22

22 Preston, I., White, V., and Guertler P,(2010) Distributional Impacts of Climate Change Policies, Final Report to EAGA Charitable Trust at p.56

23 Gough I et al. The distribution of total greenhouse gas emissions by households in the UK, and some implications for social policy. London, Centre for Analysis of Social Exclusion, 2011 at p.41

Politically Unpalatable

Due to the large structural deficit,

recovering costs from income taxation

will not be political palatable. This also

precludes policies which include fiscal

transfers and large scale

investments.23

II. Rising Block Tariff (RBT)

Energy providers are barred from

recovering policy costs below some

“basic requirement” amount, thereby

lowering the marginal costs of initial

units of energy. After the mandatory

level, marginal cost of successive units

may be higher. It is essentially a

subsidy from high to low energy

consumers.24

Promotes Consumptive Frugality

The current energy pricing system is of

a decreasing block tariff, “DBT””.25

24 Gough I et al. The distribution of total greenhouse gas emissions by households in the UK, and some implications for social policy. London, Centre for Analysis of Social Exclusion, 2011 at p.42; See also BRE (2009), An Investigation Of the Effect Of Rising Block Tariffs On Fuel Poverty. Committee For Climate Change.

25IAN GOUGH (2013). Carbon Mitigation Policies, Distributional Dilemmas and

-1500

-1000

-500

0

500

1 2 3 4 5 6 7 8 9 10

Change In Gross Disposable Income By

Income Decile)

Page 10 of 14

Total bills increase with consumption,

but at a decreasing rate, due to the

marginal cost diminishing.

Thus the incentive to conserve

declines as lower rate levels are

reached.26

Under RBT marginal costs increase

with increasing consumption, therefore

the total cost of electricity also grows

at an increasing rate.

Social Policies. Journal of Social Policy, 42, pp 191-213 at p.198

26 Gardner, Richard L.,and Robert A. Young. (1984b] Effects of Alternative Energy Rates And Rate Structures On Electricity and Water Use On the Colorado High Plains. Fort Collins: Colorado Water Resources Research Institute Completion Report 135 at p.9

27 Ibid at p.10

The incentives to conserve

increases as higher rate levels are

achieved.27

Detrimental To Low Income High

Consumption Households

Regression analysis reveals that

income itself explains only 25% of the

variation in log per capita emissions.28

Therefore, there is considerable

variation in emissions within income

deciles, shown below.29

Bubble width represents total count of

households. The red box shows

28 Gough I et al. The distribution of total greenhouse gas emissions by households in the UK, and some implications for social policy. London, Centre for Analysis of Social Exclusion, 2011 at p.29

29 White, V., Roberts, S. and Preston, I. (2010), Understanding ‘High Use Low Income’ Energy Consumers, Final Report to Ofgem, Bristol: Centre for Sustainable Energy at p.9

Page 11 of 14

households with an energy

consumption above average.

15% of low income households have

above average energy consumption.30

RBT penalises low income

households with high

consumption.31

III. Exemption For Low Income

“Priority Groups”

Data, shown below,32 reveals the

characteristics of LIHC households:

76% are “priority group”33

40% are over 70 years’ old

30 Ibid. at p.19

32 White, V., Roberts, S. and Preston, I. (2010),

Understanding ‘High Use Low Income’ Energy Consumers, Final Report to Ofgem, Bristol: Centre for Sustainable Energy

33 “Priority Group” Is Defined According To The CERT; Includes Pensioners Over The Age Of

An exemption to the higher rate block,

for low income, “priority group”

households, would provide the best

proxy for targeting and protecting LIHC

households.

Fuel Poverty Increases Yet

Households Better Off

Large, inefficient homes, will have

higher than average “modelled

consumption” requirements to bring to

an “adequate level of warmth, thus

engaging the higher tariff price. The

equation below shows that the fuel

poverty ratio for energy intensive

households would increase, raising the

probability that households will

become fuel poor. Households in fuel

poverty tend to under consume

energy.34

Under RBT they may consume greater

amounts of cheaper energy, as

illustrated in figure (b), below, whereby

moving from DBT to RBT, low income

70.http://lsx.org.uk/docs/events/3539/British%20Gas%20CERT%20-%20Green%20DealECO%20-%20HANDOUTS.pdf

34 Committee on Climate Change (2008). First Report: Building a Low-carbon Economy.London: HMSO.

Page 12 of 14

households increase consumption

from 𝑄0 to 𝑄𝑍, resulting in a warmer

home.

This is true even if the household has

a high energy requirement, and

simultaneously slides into fuel poverty.

RBT may cause fuel poverty targets to

be missed, resulting in political fallout.

35 A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal; and Baker et al (2009)

Politics

RBT requires governmental

intervention within the liberalised

market, which is in tension with the

neoliberal ideology that has prevailed

over the last three decades.

IV. Financial Transaction Tax

Progressive

LCTP is regressive because of a

corporation’s ability to pass costs

downstream to consumers. These

costs form a larger proportion of low

income budgets.

FTT is progressive because the

distributional impacts are minimal, for it

is difficult to pass costs on to

consumers downstream as it is only

levied upon transactions between

financial institutions. It could raise

approximately £8 billion.35

Arguments For Implementation:

Financial institutions are largely

responsible for the 2008 recession,

Page 13 of 14

causing the deficit to increase. This

has prevented more progressive

measures such as cost recovery

through income tax. As consequence,

the poorest suffer.

With respect to the European

Emissions trading scheme, a cap and

trade mechanism for emissions

permits, the recession weakened

demand, causing an excess of

emissions permits, resulting in

deflationary pressure on the carbon

price. This has hampered the

effectiveness of the EU ETS.

As such, the financial sector

should shoulder some of the

burden.

POLITICS

The UK is heavily reliant upon the

financial sector. FTT could affect its

competitiveness. For this reason, the

conservative government has opposed

its proposed implementation at the EU

level.

CONCLUSIONS &

RECOMMENDATIONS

Political opposition to FTT, and cost

recovery through income taxation may

be insurmountable, and thus their

adoption unlikely.

However, neoliberal ideology, or

pursuits of political targets, are not

strong enough arguments to block

RBT, which may instil fairness into a

regressive and unfair system.

Page 14 of 14

Bibliography

Baker et al (2009), A General Financial Transaction Tax: A Short Cut of the Pros, the

Cons and a Proposal;

BRE (2009), An Investigation Of the Effect Of Rising Block Tariffs On Fuel Poverty.

Committee For Climate Change.

Committee on Climate Change (2008). First Report: Building a Low-carbon

Economy.London: HMSO.

HM Government, (2009). The UK Low Carbon Transition Plan. National strategy for

climate and energy.

White, V., Roberts, S. and Preston, I. (2010), Understanding ‘High Use Low Income’

Energy Consumers, Final Report to Ofgem, Bristol: Centre for Sustainable Energy

Gough I et al. The distribution of total greenhouse gas emissions by households in

the UK, and some implications for social policy. London, Centre for Analysis of

Social Exclusion, 2011

Gardner, Richard L.,and Robert A. Young. (1984b] Effects of Alternative Energy

Rates And Rate Structures On Electricity and Water Use On the Colorado High

Plains. Fort Collins: Colorado Water Resources Research Institute Completion

Report 135

IAN GOUGH (2013). Carbon Mitigation Policies, Distributional Dilemmas and

Social Policies. Journal of Social Policy, 42, pp 191-213 at p.198

Preston, I., White, V., and Guertler P,(2010) Distributional Impacts of Climate

Change Policies, Final Report to EAGA Charitable