This Policy Brief was published by the Centre for Energy Policy, University of Strathclyde, in part with UKERC funding. Read more here: https://doi.org/10.17868/strath.00094709
A central concern in debates on delivering net zero is how the costs are distributed. A key issue is the burden on UK households and businesses where costs are borne through electricity bills, which raises two specific concerns:
Here we use economy-wide scenario simulation modelling to consider the impacts of recovering green costs from UK households in different ways. At this stage, the authors deliberately abstract from how funded actions might support economic expansion, focusing instead on how introducing additional green costs affects distributional and economy-wide outcomes depending on who bears the cost. They test three ‘who pays’ options for the introduction of an illustrative additional green cost:
The authors’ central finding is that recovering green costs through electricity bills produces the least favourable and most regressive economy-wide outcomes. Crucially, the results show that adding further green costs to bills will trigger a sustained increase in the user price of electricity. This will not only damage system wide decarbonisation activity and energy security by disincentivising the uptake of decarbonisation solutions in private transportation, residential heating, and industry, but exacerbate energy cost driven price pressures across the economy.
Recovering green costs through taxation (on income or consumption) limits further electricity price pressure and other negative effects across the economy and income groups. However, the precise impacts depend on workers’ ability or willingness to maintain real incomes amid wider economic change.