A Post-Brexit Framework for Electricity Markets

Abstract

Electricity charges for households in England and Wales have risen by 50 per cent in real terms since 2001, partly as a result of policies designed to reduce greenhouse gas emissions.The decarbonisation policies adopted have been complex and inefficient, and have also been contradicted by other measures such as the reduced rate of VAT imposed on domestic fuel. Emissions reduction objectives could be achieved at much lower cost. The government should phase out the Climate Change Levy, the Energy Company Obligation, the Warm Homes Discount and the Carbon Price Floor. Utility bills should be taxable at the full VAT rate (20%) rather than the reduced rate (5%). Any help to vulnerable households should be in the form of electricity vouchers. If the goal is to reduce emissions, decarbonisation should be undertaken under a single market-based mechanism such as a cap-and-trade scheme or a carbon tax, which would apply to all CO2 emissions. Climate-change policy should be technology-neutral. The government should establish a decarbonisation target and allow energy markets to adjust to it in the most efficient way.