4 Eliminating harmful and inefficient
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).
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
The main elements of these subsidies were the reduced
rate of VAT (£6.2bn), renewables (£3bn) and legacy nuclear
costs (at least £2.3bn).
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.
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.
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.
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."
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.
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."
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
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'."
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'.
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
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.
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
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
ibid; Q23 Back
Ev 64, para 2.7 Back
Ev 64, para 2.3.1 Back
Ev 64, Figures 10 & 11 Back
Ev 110, paras 8 and 12 Back
Ev 110, para 111 Back
Ev 110, para 112 Back
Ev 110, para 90 Back
Ev 110, para 13 Back
Time to change the game: Fossil fuel subsidies and climate, op
cit, Table 1 Back
Environmental Audit Committee, Budget 2011 and environmental taxes,
Sixth Report of Session 2010-12, HC 878 Back
'Eurostat' is formally the Statistical Office of the European