Energy subsidies - Environmental Audit Committee Contents


Globally, subsidies for fossil fuels exceed $500 billion a year. They are inconsistent with the global effort to tackle climate change, providing incentives for greater use of such fuels and disincentives for energy efficiency. Energy subsidies in the UK are running at about £12bn a year; much directed at fossil fuels. There is no single internationally agreed definition of what constitutes energy subsidy, which has provided a way for the Government to reject—erroneously, in our view—the proposition in some areas that it provides energy subsidies.

In the UK, the Government's proposed change of definition of 'fuel poverty', and the weakening of the legislative commitment to 'eliminate' it, will place a greater imperative on the Government to demonstrate that it is committed to making fuel poverty a thing of the past. Unless the Government is prepared to make that commitment and show how it will be delivered, the changes should be stopped.

The Government is undertaking a review to examine the scope for reducing 'green levies' in energy bills. While such levies currently account for 9% of bills, in the longer term they will not increase bills. The biggest proportion of such charges is currently already directed at supporting the poorest bill-payers. If the review does find some levy savings in energy bills, perhaps by shifting them to general taxation, the imperative for energy efficiency measures must remain the priority because of the underlying need to tackle climate change by reducing our emissions. In the Autumn Statement, the Government should make clear how any changes to green levies will change the amount that those in fuel poverty will have to pay, by how much and how soon.

The Government uses energy subsidies to support some new technologies, but also some long-established and high-carbon ones. Subsidies for renewables are an essential lever to provide certainty to industry and drive investment in those technologies. The Government should rethink its hostility to a separate continued European target for the deployment of renewables. New nuclear is being subsidised by what the Government prefers to call 'support mechanisms' and 'insurance policies'. The Government's policy of 'no public subsidy for new nuclear' requires it to provide only 'similar' support to that provided to other types of energy, but even on that basis the deal for Hinkley Point C is 'dissimilar', notably on support for decommissioning and waste.

The Government's capacity payments regime constitutes a subsidy for gas-fired electricity generation because in practice it will be the only eligible technology, as do field allowances for North Sea oil and gas despite the Government's assertion otherwise. Fracking does not warrant subsidy through a favourable tax treatment.

The variation in definitions of subsidy allows the Government to resist acknowledging subsidy in many areas, particularly on nuclear energy and the lower rate of VAT on domestic and small business bills. It also allows it to claim that it has no 'harmful' or 'inefficient' subsidies—those in the firing-line of the UN Rio+20 Summit and the G20—despite fossil fuel consumption contributing to our greenhouse gas emissions.

The Government should use the Autumn Statement as an opportunity to provide a clear and comprehensive analysis of energy subsidies in the UK, to present its methodology and calculations, and to show how these figures differ from those produced using the methodologies of the main international institutions. This would bring much needed transparency and provide a basis for an overdue debate on the rationale and justifications for energy subsidies in the UK. The Government should introduce a target to reduce the proportion of energy subsidies that support fossil fuel, rather than low-carbon, consumption.

We do not believe there is any case for treating subsidies to mature energy technologies where there is little likelihood of cost reduction in the future in the same way as technologies that can, over time, compete in the market place without long-term subsidy. We consider that the Government should present a case for subsidy, and hence for the application of EU state aid rules, separately for each energy category.

More fundamentally, the Government needs to demonstrate leadership in increasing the deployment of renewables and in promoting energy efficiency through the careful and targeted use of subsidies and levies, to provide certainty over the longer term for the investment in the technologies on which these will depend.

With overseas aid often globally directed at countries which also have fossil fuel subsidies, and export support going to fossil fuel projects, DfID and UK Export Finance should assess how UK support in these areas correlates with fossil fuel subsidies in support-recipient countries and set out why continued support in each case overrides the need for eliminating fossil fuel subsidies.

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Prepared 2 December 2013