Poor consumers

Speaking of the IEA (see previous post), Richard Wellings, their excellent Deputy Editorial Director, has posted a piece on their blog, on the recent slew of climate-change policies and targets from the Government. It is mostly well-judged, but there is one point where we diverge. I need graphics to illustrate why he is mistaken, so I'm posting here rather than in the comments section on his site.

Richard rightly criticizes the impossibly ambitious targets, the delusional claims about the benefit to the economy, and the impact on what remains of our industry of increasing the costs of energy. But he overstretches when he brings domestic consumers into the picture:

-"Then there is the impact on the less well off. People on benefits, for example £64 per week Jobseeker’s Allowance, may already be using around one third of their (non-housing) incomes to pay utility bills inflated by existing environmental policies."-

Actually, we have the cheapest domestic energy of the EU-15 countries. Here is the comparison for gas (from European Commission, DG TREN Staff Working Document, -Report on Progress in Creating the Internal Gas and Electricity Market,- 11/3/1009, SEC(2009) 287):

 

Notice that only 6 New Accession countries had cheaper domestic gas than us (on old, unsustainable, subsidised Russian prices), so not only all the other EU-15 countries were dearer, but several of the New Accession countries as well. And notice that the reasons why domestic gas is so cheap are not only that the untaxed price is competitive, but significantly that we apply less tax to our domestic gas than any country except for Latvia. Doesn't look like domestic gas prices are too inflated by existing environmental policies, does it?

Of course, comparing prices between European countries with different costs and standards of living, wages, etc. based on exchange rates is widely recognized not to be an accurate comparison. Here is how those same prices work out if compared on the basis of Purchasing Power Parity:

 

If that's inflated, they need a better pump. (Incidentally, Denmark is missing from these graphs, presumably because the data weren't in on time, but if it were there, it would significantly exceed even the Swedes).

How about domestic electricity prices?

 

That's more middle-of-the-road, but if you look closely, most of those to the left of us are those New Accession (e.g. ex-communist) countries again. Of the EU-15 countries, only Spain, Finland, France and Greece are cheaper than us. The other 10 EU-15 countries are more expensive, as are a couple of New Accession countries. We are below the average for the EU-15 and EU-27. And why? Have a look again at the amounts of tax we apply. Only Latvia and Malta apply as little tax as us.

Here's how domestic electricity prices look, compared according to PPP rather than exchange rate:

 

We're pretty near the bottom of the class again.

UK domestic energy consumers are not hard-pressed, they are cosseted. They get a special low rate of VAT. The Climate-Change Levy is not applied to them. Their gas supplies do not incur the cost of the EU-ETS, and the cost of the EU-ETS on their electricity supplies is around 0.4p/kWh. Their gas supplies also do not incur any cost for the Renewables Obligation, and the cost of the RO on their electricity supplies is under 0.4p/kWh. So that's around 0.8p/kWh out of the typical 12-14p/kWh for domestic electricity, and near enough nothing on domestic gas, set against a VAT rate that is 10% lower than standard at the moment (12.5% lower normally). Yet despite this (or because of it, as we shall learn), the UK has a very high level of that arbitrary notion to which Richard seems to be referring: "fuel poverty".

Conversely, countries like Denmark and Sweden, with much higher energy costs than the UK thanks to very heavy carbon and fossil-fuel taxation, have so little "fuel poverty" that the concept is barely known to them. That is because they have very high-quality housing, which keeps the bills down even though the prices are high. And why do they have high-quality housing? Because energy is expensive, so it pays to insulate and double-glaze and be careful about how you use energy, and for businesses to invest in more-efficient technologies to supply consumers, such as CHP and district heating networks. The costs of building and upgrading the infrastructure (energy and building-stock) to a high standard are justified by the savings that can be achieved.

In the UK, even the most cost-effective improvements and the most mediocre of building standards are hard to justify by the savings that can be achieved. Builders know it and know that their customers won't notice if they go for the lowest common denominator. So we carry on with low standards and lousy houses, and fritter away our money and resources heating the atmosphere through our leaky walls and windows.

Poverty is a welfare issue, not an energy issue. Fuel poverty is not a separate phenomenon distinct from generic poverty, any more than child poverty is, or other pseudo-concepts invented by socialists who want to justify interfering in the details of people's lives. The problem for the poor is the totality of their costs (relative to their income), not certain aspects of them. The way to deal with poverty is not to try to suppress prices of some of the goods they buy. Special low rates of VAT and differential treatment of carbon (so industry pays high prices and domestic consumers pay little) are lousy ways to deal with poverty. They distort everyone's (not just the poor's) purchasing and behavioural decisions, and perpetuate exactly the things that cause the poverty. Low prices encourage inefficiency and over-consumption, which inevitably drives prices higher regardless of how low the tax is set. It's a question of who is going to get the cash from the inflated prices - the UK government or Russian oligarchs and Arabs sheikhs. If we want to reduce dependency on and waste of energy, whether individually or nationally, we need to give people incentives to conserve. [Greg Mankiw has written an excellent paper on the Smart Taxes approach to this issue, which you can download from his blog.]

The myth of fuel poverty and the delusion that the way to deal with it is to keep domestic-energy prices as low as possible are fundamental causes of the complete failure of our energy and environmental policies. It's a shame to see lip-service paid to the concept at the leading free-market think-tank.

Richard has swallowed the VILE companies' line. They tried to blame the cost of green measures when prices spiked last year, when in reality it was an insignificant factor compared to the rise in fuel costs provoked by inflated demand (in which low consumer prices were important as well as monetary, regulatory and fiscal policies) and inelasticity and insecurity of supply. This provided a useful smokescreen as they used the fuel-cost rises to hike their prices more and faster than their raw costs had gone up, and then to bring them down slower and less than the raw costs came down. And they could use susceptibility to the fuel-poverty delusion and the failure to improve efficiency in the UK (thanks to the specially favourable treatment of domestic energy) as a reason why they should be given more market power, as the organizations through whom the Government would exclusively try to push efficiency measures, in spite of the economic unviability, and ignoring the fact that these are the very organizations who have the most interest in inhibiting efficiency and selling as much energy as possible at as high a price as possible, in a spectacular example of appointing the foxes to guard the hen-house. Our political parties' energy policies, the VILE companies' evil genius in pursuit of their rent-seeking objectives, and the ignorance and gullibility of the commentariat on the issue, are a sick joke.

The right policy is to have one rate of VAT for all goods, one carbon-price applied to fossil fuels at point of production or import, and scrap the myriad of micro-managing mechanisms that are currently inflicted on us at great cost but to no great effect. That will probably increase the cost of energy to domestic consumers and airlines, keep costs about the same for industrial users (but massively reduce the complexity, bureaucratic overheads and rent-seeking opportunities), and reduce the cost to road-users.

It may be necessary to use some of the revenue from the carbon-tax to assist the poorest households whose energy bills increase as a result. But the rest of the revenue could be used to reduce taxes on economically-beneficial things, like work and productivity, so we can start to build our way out of the hole we are in, rather than continuing down the current line of increasingly penalizing the productive sector of the economy, whilst subsidizing the inefficient and wasteful parts. The encouragement of householders to burn energy to heat the atmosphere through our leaky walls and windows is perhaps the most nonsensical in that perverse current approach. It is akin to encouraging people to heat their houses by burning ten-pound notes, and then dealing with the consequential costs to consumers by making sure that the ten-pound notes only cost consumers a fiver (and cost businessmen and drivers twenty quid).