Energy subsidies - Environmental Audit Committee Contents

4  Eliminating harmful and inefficient subsidies

62.  In his research for us, Dr Blyth identified the extent of subsidy in the UK and how we compare with other countries. He concluded that "the UK has progressively reduced subsidies to fossil fuels over the past 30 years" but that there are still subsidies for all types of energy. His analysis showed subsidies totalling at least £12.7bn, with the most significant levels being for gas (£3.6bn), nuclear (at least £2.3bn) and renewables (£3.1bn).[138] In terms of subsidy relative to the energy output involved, nuclear and renewables are the most subsidised:

  • Coal: 20p per MWh
  • Oil: 55p per MWh
  • Gas: £4 per MWh
  • Domestic electricity: £6 per MWh
  • Nuclear: at least £33 per MWh
  • Renewables: £50 per MWh[139]

The main elements of these subsidies were the reduced rate of VAT (£6.2bn), renewables (£3bn) and legacy nuclear costs (at least £2.3bn).[140] The latter figure is the Government's net contribution to the Nuclear Decommissioning Authority, but there is uncertainty about the eventual size of the decommissioning liability which could increase this figure.[141]

63.  International comparisons are difficult. Subsidies are defined by reference to the particular tax regime of the country involved, measuring deviations from whatever is deemed 'normal' rates of tax in that country.[142] Nevertheless, Dr Blyth's analysis indicated in particular that coal and oil subsidies in the UK are low compared with other countries, and gas subsidies in the UK are higher than other European countries and rising, but less than in Canada and the US.[143]

64.  The Government told us that its policy is to incentivise the energy industry "to bring forward investment where there is a market failure that would act as a barrier to do so in the absence of those incentives." It also stated that "the Government is open and transparent about where, how, and to what extent it provides support to incentivise the energy sector to help deliver the Government's objectives, regardless of what that support is called."[144] The Government drew distinctions between the methodologies for calculating subsidy applied by different institutions:

The IMF and IEA use versions of a methodology known as the price gap approach, which, similar to the EU definition, compares prices to world market prices. The OECD uses broad measures of Producer and Consumer Support Estimates (PSE & CSE), based on metrics used by the OECD in other sectors, such as agriculture. These measures take account of where lower rates of tax are applied than elsewhere in the economy and so give different results to assessing purely whether fossil fuels are subsidised.[145]

For G20 purposes, the Government, along with other EU G20 members, defines a fossil fuel subsidy as "any Government measure or programme with the objective or direct consequence of reducing, below world-market prices, including all costs of transport, refining and distribution, the effective cost of fossil fuels paid by final consumers, or of reducing the costs or increasing the revenues of fossil-fuel producing companies."[146]

65.  It was on the basis of this focus on comparison with world market prices that the Government in several areas rejected the proposition that it provides subsidies. On the reduced rate of VAT on domestic and small business heating fuel and electricity (paragraph 18), for example, the Government highlighted that because it was a tax, it "increases the price above the world-market prices."[147]

66.  That world-price view of the extent of the Government's subsidies shapes its approach to the Rio+20 Summit commitment "to phase out harmful and inefficient fossil fuel subsidies that encourage wasteful consumption" and to the G20 commitment couched in similar terms of eliminating 'inefficient' and 'wasteful' fossil fuel subsidies (paragraph 3). The Government told us that it "does not consider that any of its energy policies are 'harmful'."[148] The UK government is not alone. An ODI analysis notes that 10 of the G20 countries, including the UK, have reported to the G20 that they have no 'qualifying emissions'.[149]

67.  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 heating fuel and electricity bills, and to claim that it has no 'harmful' or 'inefficient' subsidies despite fossil fuel consumption contributing to our greenhouse gas emissions. However, the reality is that energy subsidies in the UK are significant, cover all types of energy technology and run to about £12bn a year. Much of this is directed at fossil fuels.

68.  The Government must use the Autumn Statement as an opportunity to provide a clear and comprehensive analysis of all 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. It would also provide an evidence base for developing and refining policies for tackling climate change.

69.  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.

70.  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 that these will depend on. In the Autumn Statement, the Government should make a start on that path by making it clear which minister and which department will be responsible for fully delivering our climate change obligations in a way that avoids maintaining harmful fossil fuel subsidies and protects the fuel poor.

71.  The Government has a target to increase the proportion of environmental taxes as a proportion of all taxes, which we examined in 2011.[150] In that report we criticised the way that the Government has defined 'environmental taxes' and how that excluded fuel duty and other particular taxes which are included in the Eurostat[151] definition used by all European countries (including the UK) to report environmental tax revenues. The Government should also use the Autumn Statement to introduce a new target: to reduce the proportion of energy subsidies that support fossil fuel, rather than low-carbon, consumption.

138   Ev 64, para 2.7 Back

139   ibid; Q23 Back

140   Ev 64, para 2.7 Back

141   Ev 64, para 2.3.1 Back

142   ibid Back

143   Ev 64, Figures 10 & 11 Back

144   Ev 110, paras 8 and 12 Back

145   Ev 110, para 111 Back

146   Ev 110, para 112 Back

147   Ev 110, para 90 Back

148   Ev 110, para 13 Back

149   Time to change the game: Fossil fuel subsidies and climate, op cit, Table 1 Back

150   Environmental Audit Committee, Budget 2011 and environmental taxes, Sixth Report of Session 2010-12, HC 878 Back

151   'Eurostat' is formally the Statistical Office of the European Communities Back

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Prepared 2 December 2013