Embargo: for publication after 00.01hrs Wednesday 27th October 2004
How the impact of ‘green’ taxes on the poorest homes could best be reduced

‘Green’ taxes – designed to protect the environment by cutting consumption of gas, electricity, petrol and other natural resources – are liable to hit the poorest homes hardest. But their negative impact on low-income households can be substantially reduced through carefully designed charging regimes or compensation schemes, according to research launched today by the Joseph Rowntree Foundation.

The study, by Professor Paul Ekins and Dr Simon Dresner of the Policy Studies Institute, shows that consumption of energy, water and waste disposal services in poorer households is disproportionately high in relation to their income. The same is true of petrol or diesel for those who own cars. Consequently, flat-rate environmental taxes or charges would be ‘regressive’ – claiming a greater share of income from poor people than from better-off households.

Most unintended social consequences could be removed by giving green taxes a structure that increased the tariff or charge for those most able to pay – or by making compensation available for low-income households through state benefits. However, the authors warn that use of environmental resources varies widely within income groups. This means that even if most low-income households were to be protected by charging or compensation schemes, a minority would still end up as net ‘losers’.

Energy use
Looking at the potential impact of a ‘carbon tax’ on household energy consumption, the researchers note that many low-income households already experience ‘fuel poverty’ (defined as needing to spend more than 10 per cent of their income on keeping warm). After analysing 13 different models for tax and compensation schemes, they conclude that it would be possible to design systems that, on average, benefit poor households.

Even so, the average consequences conceal wide differences between the net ‘winners’ and ‘losers’. None of the compensation packages under scrutiny managed to bring down the proportion of losers among the poorest tenth of households to much below 20 per cent. Given this difficulty, the report argues that an alternative approach would be to introduce a system of incentives by varying Stamp Duty and Council Tax on homes according to whether energy efficiency measures were in place. These tax incentives would encourage people to adopt simple energy saving measures that could reduce household energy consumption by 10 per cent and save households £19.7 billion.

Water
The researchers argue that water use in southern and eastern England is unsustainable and at the limit of water resources in most of the rest of England and Wales. The report investigates the effects of universal water metering and of 11 alternative charging methods, including a lower tariff for low-income households on benefit, a ‘free’ water allowance for some households and a variable tariff linked to the Council Tax band. All the metered tariffs were generally less expensive for low-income households than current non-metered systems that are based on a standing charge and the rateable value of properties. However, at least 6 per cent of the lowest-income households remained worse off by over £1 a week because their water consumption was relatively high.

Transport
Although petrol taxes do not affect poorer households as a whole so much – because they are less likely to run a car – they fall disproportionately on low-income motorists. The researchers conclude that if fuel duties were increased further as means of cutting emissions from traffic, the most effective way to compensate low-income drivers would be the abolition of vehicle excise duty. Congestion charging, if designed to prevent further traffic growth and fund improvements to public transport, would lead to low-income motorists in urban areas paying more. An alternative approach might be the use of domestic tradable quotas (DTQs) where every adult would be given an allocation of ‘carbon units’ to cover their emissions. Those who used less than their entitlement could sell the surplus to those who used more. The analysis found that a tradable quota system for motoring and aviation would benefit most low-income households, although 15 per cent would lose out.

Waste disposal
The UK is committed to reducing the amount of waste it sends to landfill sites and to increased recycling. Removing waste collection and disposal charges from the Council Tax and replacing them with a charge based on the weight of unsorted waste collected from homes would reduce waste production and make the majority of low-income households better off, assuming the same amount of revenue was raised.

A minority of ‘losing’ low-income households could be compensated for their extra waste disposal costs through the benefit system.

Professor Ekins, Head of the Environment Group at PSI and co-author of the report, said: “The results from this research can help policy makers ensure that, if environmental taxes and charges are introduced, they are designed in ways that prevent unintended consequences for people who live on low incomes. Our research demonstrates that, in general, it is possible to solve the disproportionate impact on poorer households sometimes associated with environmental taxes and charges.”

He added: “In theory, any broad but practicable compensation scheme will still create net losers among low-income households as well as a majority who gain. But in practice, households will also have the option of responding to the new tax or charge by cutting their consumption of the resource being taxed, further reducing the number of net losers. Further targeted compensation measures should be able to prevent unacceptable hardship among those who remain.”

Note to Editors

Green taxes and charges: Reducing their impact on low-income households by Paul Ekins and Simon Dresner is published by the Joseph Rowntree Foundation and available from York Publishing Services, 64 Hallfield Road, Layerthorpe, York YO31 7ZQ (01904 430033) price £13.95 plus £2 p&p. A summary of findings is available, free of charge, from JRF, The Homestead, 40 Water End, York YO30 6WP.

The report and findings summary are available by clicking the links in the left margin.

For further information contact:

Paul Ekins 020-7468 2276
Simon Dresner 020-7468 2265

Issued by David Utting, Associate Director (Public Affairs) 020-7278 9665 / david.utting@jrf.org.uk