Realist, not conformist analysis of the latest financial, business and political news

A Simple Green Tax – Full VAT on Domestic Fuel

Energy production pollutes, therefore it is green to attempt to reduce consumption. Domestic heating accounts for 17% of UK CO2 output and as a rule of thumb turning the thermostat down 1 Degree reduces consumption by roughly 10%.

The easiest way that the Government can embed such a reduction is by increasing price. Domestic energy incurs a special low rate of VAT at 5% so that is the lever that is easiest for the Government to pull. For less overall consumption increase the VAT rate to the standard 20%. Such a 15% increase in price would automatically lower consumption by somewhere north of 5%.

If it does actually create that larger overall 10% drop in domestic energy we are talking around the scale of a nuclear power station, or all the wind energy harnessed in the uk. That’s some serious tree hugging kudos.

The extra VAT would cause superfluous Government revenue of c£6bn per year. That money should be given straight back by increasing welfare payments and tax free allowance in a way roughly equivalent to the average bill increase.

So we end up with a policy that looks like: 20% VAT on Domestic Energy, matched by welfare increase of £10 a month / Tax Free allowance up by £500.

The Energy profligate will pay more or use less and buy a jumper. The poorest are most price conscious and already use least. So they end up better off due to the extra cash. It is revenue neutral for the Government. 5-10 Million tonnes of CO2 drop from the UK’s output each year. Grumpy dads and Yorkshiremen get a good, logical, green reason for turning the heating down. Wins all round.

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