The £2 billion VAT on domestic gas is a huge fossil fuel subsidy that mostly benefits wealthier households, according to a new report from Green Alliance.
The think tank is calling on the government to end the “regressive” 5% VAT rate on domestic heating fuels like gas and oil and redistribute the revenues from removing the subsidy to help those on low incomes to heat their homes.
Its analysis shows the government is subsidising domestic gas and other heating fuels to the tune of around £2.2 billion a year, through a discounted VAT rate, with the richest 10% households benefitting twice as much as the poorest as they use more than twice as much heating fuel as the poorest 10%.
The Green Alliance suggests bringing the VAT on gas up to the standard rate of 20% and ring-fencing the extra revenue to help those on low incomes to improve the energy efficiency of their homes and switch to low carbon heating to bring their fuel bills down.
It cites the recent recommendations from Climate Assembly UK, which made clear that fairness is key to public acceptability of net zero policies and showed that ring-fencing tax revenues for specific purposes makes taxes more acceptable.
Professor Paul Ekins, Director and Professor of resources and environmental policy at the UCL Institute for Sustainable Resources, said: “Like most fossil fuel subsidies, reduced VAT on household energy disproportionately benefits the wealthy because they use more energy than less well-off households.
“This not only makes no sense in itself, it also disincentivises richer households from making their own investments in energy efficiency, at a time when the government is making subsidies available for this too. This is bad economics that makes it harder and more expensive for the UK to reach its zero carbon goal.”
Libby Peake, Head of Resource Policy at Green Alliance added: “We now have the perfect chance to reconsider what taxes are for, including what is taxed and why.
“For the government to show it is serious about its promises to both green the economy and level up the country, it must end this massive subsidy to the fossil fuel industry and use the funds to ensure those who are less well-off have warm homes that are inexpensive to heat.”
