Energy crisis solution requires a longer-term tax vision

16 August 2022
August 2022

‘Do we want to live in a country where the response to every question is: “what is the government going to do about it”? Where every time prices rise, every time a company gets in trouble, every time some new challenge emerges, the answer is always: the taxpayer must pay?’

So asked the then Chancellor Rishi Sunak in his Autumn Budget speech on 27 October 2021. The inference seems clear; the tone seemingly one of frustration at being lobbied to provide support when faced with every national challenge. It is a ‘groundhog day’ cycle that appears difficult to break as we emerge from the pandemic.

One danger of such an approach is that we risk treating only the symptoms with a sticking plaster, rather than dealing with the underlying cause of the issue. The current energy price crisis might not be so pronounced if there was already a clear, longer-term fiscal vision for dealing with the challenges of climate change and our reliance on fossil fuels.

Recent research from the consultancy firm Stonehouse highlights the desire for leadership on the issue, with 60 per cent of those surveyed agreeing that the government’s priority should be on a long-term plan to protect the UK from future energy shocks. In addition, 77 per cent agreed that the UK needs to be more self-reliant when it comes to energy.There are a number of possible areas the Treasury could explore, including:

  • Mr Sunak has proposed to remove VAT from all domestic energy bills for 12 months from October 2022 but a new prime minister could go further. The permanent removal of VAT, currently 5 per cent, on ‘green energy tariffs’ provided by suppliers could encourage more households to obtain more of their electricity from renewable sources.
  • The Treasury remains dependent on fuel duty with revenues in the year to 30 June 2022 just shy of £26bn. It needs a plan to replace these revenues as the numbers of electric vehicles on the road increase and the sale of petrol and diesel cars is banned from 2030. It’s a conundrum, but one the Treasury can no longer stick its head in the sand on. On one hand, the Treasury needs to continue encouraging taxpayers to purchase electric vehicles. On the other hand, the Treasury will want electric car owners to pay some sort of duty to fill the future revenue gap. The answer may lie in slowly shifting the tax incentives for electric vehicles so they are seen more as a one-off benefit, on acquisition for example, rather than baking in an expectation that there will be tax advantages throughout the ownership of the vehicle. The Treasury also needs to be upfront with taxpayers if a duty will be coming down the track and what that might look like, eg a duty related to miles driven.
  • One of the options to deal with fuel duty would be to scrap it entirely and replace it with a broader carbon tax, ie a tax that might discourage consumers from carbon intensive products. The UK has a system in place to limit emissions in certain industries, known as the Emission Trading Scheme, but environmental campaigners believe this does not go far enough. One of the key arguments in favour of a broader carbon tax, as expressed by the International Monetary Fund, is that of the various strategies to reduce emissions, ‘carbon taxes…are the most powerful and efficient, because they allow firms and households to find the lowest-cost ways of reducing energy use and shifting toward cleaner alternatives’.

In the current economic climate, with fuel duty already at peak unpopularity, the introduction of a new carbon tax is likely to be a political step too far. If it were to be given serious consideration, a way to sweeten such a bitter pill may be to ringfence the tax revenues and use those funds to help households become energy efficient. Even if a carbon tax is not the answer, the Treasury will likely face calls to financially support those wanting to make their homes more energy efficient with funding for insulation, draught-proofing and renewable energy and heat sources. The challenge will be balancing the needs of the short-term with longer-term solutions.