Draw Breath

I suppose there's going to be a lot of crowing about how Gordon Brown's failure to get energy companies to pony up £1bn worth of fuel vouchers for the least well-off. Certainly Brown has some serious problems with his, um, capacity to persuade (things are bad when I agree with classics-my-arse Clarke).

But on this occasion I'm not so sure that his failings are all that bad a thing. The government has an opportunity now to really think about a long-term energy policy. And I think that taxes can do some of the heavy lifting for consumers here. Instead of taxing on profit, we should tax energy companies based on how energy efficient or inefficient their customers are so that companies would have a huge incentive to focus on their customers' energy efficiency.

It's worth saying for a start that the vouchers were motivated by good reasons. While, for the average person in the UK, energy consumption makes up 10% of the household budget, poorer households spend 17% of their budget on energy.¹ Unfortunately those households are also the least likely to invest in efficiency measures like insulation. They are either too poor to invest or live in private rented housing and so have no incentive to invest (or both). 

Brown's failure to get the energy companies to cooperate strangely gives him an advantage. After all, he's just forgiven them an enormous windfall tax. So he should certainly be getting them to fulfil any vague commitments they've made about contributing to household efficiency. But I think Brown should take the next step and lock a commitment to energy efficiency into taxation.

It's not enough to focus on the efficiency of production because that might just lead to increases in consumption (as lower prices are passed on). Nor would it be enough to tax on price (because that produces no incentives but lots of costs all round). Properly designed,² taxing on efficiency would produce massive companies to invest in their consumers' energy efficiency. If they don't invest, the state could do so out of tax revenues. Whatever the shake-down, the consumer (and the environment) wins.

1. See Vanessa Brechling and Stephen Smith, “Household Energy Efficiency in the UK,” Fiscal Studies 15, no. 2 (1994): 44-5 (pdf). Return.

2. We would need a robust regulatory infrastructure so as to avoid companies gaming the system. For instance a company could set up a wholly-owned but separate (as in, off the balance sheet) company, sell off all their inefficient customers and then charge rent on infrastructure to ensure that the second company's profits got soaked up by the less taxed first. Return.