The government's commitment to achieving net zero by 2050 is an
ambitious one that will involve costs to households and firms.
The tax system has a key role to play in incentivising households
and firms to reduce their emissions.
Our current tax system imposes wildly different effective tax
rates on emissions from different sources. Emissions from
electricity are taxed much more heavily than emissions from gas,
especially if the energy is used by a business: a tonne of carbon
dioxide arising from (non-carbon-intensive) business activities
is taxed £249 if it comes from electricity and just £52 if it
comes from gas. This creates a clear incentive to prioritise
reducing emissions from businesses' electricity use, even if
(ignoring the tax) there are cheaper ways to reduce emissions by
cutting their use of gas.
Households too face a higher effective tax rate on emissions from
electricity than from gas, which discourages them, for example,
from switching to heat pumps. This is working against the
government's ambitious target of installing 600,000 heat pumps
annually by 2028.
The government should reduce the tax gap between emissions from
gas and electricity, ideally applying the same tax rate to all
sources of carbon dioxide emissions. Equal tax rates on all
emissions would allow households and firms to choose the cheapest
way to reduce their emissions without tax incentives biasing the
decision, resulting in a less costly transition to net zero.
Bobbie Upton, Research Economist at IFS and an author of
the briefing, said:
‘The tax system has a crucial role to play in reducing emissions
and achieving net zero as painlessly as possible. Unfortunately,
the current design of the tax system taxes emissions from
electricity far more than emissions from gas, meaning households
and firms are incentivised to prioritise cutting down on
electricity, even when there are cheaper ways to cut down on gas.
‘Much of the tax gap between electricity and gas comes from the
choice to fund green subsidies through taxes just on electricity,
instead of a tax on all energy sources, for example. If the
government wants to help households and firms with the costs of
net zero, rethinking these taxes on electricity would be a good
first step.'
ENDS
Notes to Editor
The tax system is making net zero more costly than it has to
be is an IFS briefing by Lucie Gadenne (IFS/QMUL) and
Bobbie Upton (IFS).
