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OECD Recommends Higher Energy Tax

By Katie Anderson on August 23, 2011

At a time when many households are struggling to afford the ever-increasing cost of domestic energy, the Organisation for Economic Cooperation and Development (OECD) has published a study advising the UK Government to increase the rate of VAT on gas and electricity.

Currently fixed at 5 per cent to shield low-income households from even higher energy bills, VAT on gas and electricity should rise to 20 per cent, according to the OECD study.

It is argued that increased taxation would generate substantially higher revenues for Government, which could then invest wisely in carbon-saving technologies and initiatives to fulfil its billing as the ‘greenest ever’ administration.

OECD researchers noted: “The lower VAT rate on household energy should be abolished to achieve more uniform carbon taxation, with more targeted tools being used to ameliorate the distributional consequences”.

Clearly, the effectiveness of the “targeted tools” would have to be extremely high to soften the blow for lower income households, which would be at risk of paying vast sums of additional money to subsidise the Government’s climate ambitions.

Co-author of the OECD report, Alex Bowen, commented: “The government is clearly making efforts in the right direction to reduce substantially the UK’s annual emissions, but it needs to take a look at all its climate change policies as a whole to make sure they are working together as effectively as possible.

“Making the costs of greenhouse gas emissions consistent across all sectors of the economy through a uniform carbon price is the best way of ensuring the fairness and cost-effectiveness of reductions. At present, the implicit carbon price varies greatly between business and households and between different sectors of the economy”.

Following recent price increases by five of the leading six energy suppliers, there is arguably no worse time than the present for the OECD to recommend abolishing the 5 per cent VAT rate on energy.

Millions of homes in Britain are already defined as fuel poor and many more are expected to suffer this winter. Households can help to control energy usage by installing smart meters, loft insulation, double glazing and many other such measures.