Reducing inequality resulting from UK low-carbon policy

In the UK, the cost of low-carbon policies, such as renewable energy subsidies, household retrofit and installation of smart meters, adds an additional 13% to household energy bills. Given that the lowest income households spend 10% of their income on heating and powering their homes, whereas the highest spend less than 1.5%., any increase in prices hits the poor disproportionately. Using an energy-extended multiregional input-output model combined with household expenditure survey data, we calculate the full supply-chain energy embodied in goods and services consumed by different households. First, we demonstrate that low-carbon policy costs are placed on a small percentage of household energy demand – perversely on items representing a higher proportion of expenditure for low income households. The lifestyles of higher income households require nearly five times more energy than the lowest, but because levies are only raised on energy bills, those with high incomes pay only 1.9 times more towards policy costs. Second, we evaluate alternative approaches to funding low-carbon policy: a household energy footprint approach, taking account of households’ full energy service demands; and funding the costs from general taxation payments. We explore the demographic characteristics of the households who would pay less towards funding policy costs and those who would take on a larger burden under these new proposals. While none of the approaches offer a ‘perfect solution’ in terms of distributional impacts, raising the funds through general taxation offers a fairer and practical solution.Key policy insights Low income households currently pay disproportionately more towards low-carbon policy costs in the UK.Funding low-carbon policy through general taxation would better align energy demand with policy costs, and would reduce costs for 65% of UK households.Households comprising women of retirement age living alone; single parent families; and households who have never worked or are long-term unemployed could see reductions in bills by recovering climate policy costs through general taxation.A general taxation approach requires leadership and long-term commitment to avoid leaving the policy vulnerable to short-term budgetary changes.