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ECO scheme - carbon reduction or wealth redistribution?November 2013


Andrew Eastwell, Chief Executive (September 1998 - April 2014)
The issue of retail energy prices is now THE political hot potato.  The invisible green taxes attached to household energy bills have suddenly become glaringly revealed and politicians of all hues are now looking at these supplements as serious vote losers.  But are they such a bright idea anyway?

The question really is about the use of hypothecated funds harvested from energy bills and used to create a kind of wealth redistribution in favour of energy-poor households.  Under this scenario there is a transfer of wealth from richer households to improve the lot of lower earning households by improving the energy signatures of their homes. The ECO (Energy Companies Obligation) scheme is not so much a carbon reduction scheme as a wealth redistribution tool.   The scheme does however have the twin benefits of deriving a relatively secure revenue stream and, by increasing the costs to “donor” households, acts as an additional incentive for them to be efficient with energy too.

The problem, as always, lies in the continued confusion between issues associated with energy (and cost) and the release of carbon.  If carbon is the real enemy (as I believe it is) then this scheme is at best sub-optimal.  This is because although renovation of homes will undoubtedly improve the comfort of energy-poor households there is little compelling evidence to me that the costs involved (including the not insubstantial cost of administering the schemes) provide the biggest carbon reduction bang for the buck.  This is partly because improvements in dwelling performance are likely to be taken as comfort gains rather than energy saving.

We have just seen that it has been necessary to use Chinese money and what is widely regarded as a substantial central support mechanism in the fixing of a strike price for generated new nuclear electricity in order to stimulate the building of new nuclear (non carbon generating) capacity.  It is the very high up-front costs of building these facilities that is the problem.  Would it not be better to use the ECO funds as cash support as low carbon generation building programme – nuclear, wind, tidal or whatever gives the best CO2 return per pound?

This then begs the question as to who should fund the improvement of poor dwellings. Actually this is not so much a carbon issue as a social equalisation programme.  In all normal circumstances this has historically been met from general taxation in the form of grants and I can see no reason why this should not be the case in the future.   Perhaps, rather than distributing a £200 annual winter fuel allowance this might better be used in improving dwelling energy (not necessarily carbon) performance.  The private market for Green Deal products simply does not seem to have become excited at adding debt to the household for what are perceived as intangible gains.  Households understand cash and a more direct approach to funding Green Deal improvements through this means or indeed other mechanisms such as stamp duty may be a more efficient means of getting to the problem homes.

In summary:  Use hypothecated funds, such as ECO for the purpose they were intended  – getting carbon out of the system.  Use the money to support the most cost efficient means of doing this irrespective of mechanism for delivering this objective.

Don’t confuse wealth re-distribution with carbon saving – it distorts process and gets caught up with political weather cocking.

Andrew Eastwell
BSRIA Chief Executive (September 1998 - April 2014)

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