Inconsistent taxes on energy use raise costs of meeting carbon targets and need to be overhauled

Recent headlines have focussed on energy prices faced by households. Government policy has increased those prices. It has increased prices faced by business by rather more. This has mainly happened because this government and the last have committed to legally binding carbon reduction targets to tackle climate change.

The best way to achieve these targets would include a single, consistent carbon price. But that is not what we have. Existing policies impose very different costs on different energy users. Businesses are taxed more than households. Electricity is taxed more than gas. A more rational and straightforward policy would impose a uniform carbon price. Instead the current system is complex and incoherent and less effective than it could be at reducing carbon emissions at the lowest overall cost.

These are among the findings of a new report published today by the IFS, in collaboration with the ESRC Centre for Climate Change Economics and Policy, and funded by the Esmée Fairbairn Foundation and the Economic and Social Research Council (ESRC). It suggests how taxes and charges could be rationalised, reducing emissions at no additional cost and without, on average, lower income households being made worse off.