UK has biggest fossil fuel subsidies in the EU, finds commission?

44833099_2052946934770229_3277484643019915264_o Sez the Graun. Anyone with any experience of these matters will be unsurprised to discover that the calculated size of the subsidies depends on what exactly you consider a subsidy. In this case, you have to go a few paragraphs down before you come to A significant part of the UK fossil fuel subsidies identified by the commission is the 5% rate of VAT on domestic gas and electricity, cut from the standard 20%. This is the Graun; quantification is not their thing; they do not trouble themselves with how large a share "significant" might be.

Now "cut from the standard 20%" is an interesting phrase, implying - to my mind - something recent. And definitely implying that it once was at 20%. But no, this is not true at all, not even a tiny bit. As VAT on fuel & power, Research Paper 97/87, 9 July 1997 will tell you,
When VAT was first introduced in 1973 supplies of fuel & power were charged the zero rate. On 1 July 1990 'non-domestic' supplies to industry and commerce became liable to VAT at the standard-rate, leaving the zero rate covering supplies to final consumers only: ie, supplies used in houses, flats, dwellings, etc, as well as supplies used by a charity for its non-business activities. On 1 April 1994 domestic supplies of fuel & power became liable to value added tax (VAT) at the reduced rate of 8%. It had been the Conservative Government's intention that these supplies would be charged the standard rate of VAT - currently 17.5% - the following year. However in December 1994 the Government was defeated on a Budget Resolution vote on this question, and was required to introduce amending legislation so that these supplies continued to be charged VAT at 8%. In October 1995 the Labour party announced its intention to cut the rate of VAT on domestic supplies of fuel & power from 8% to 5%, a commitment included in their election manifesto. On 2 July 1997 in his Budget speech the Chancellor, Gordon Brown, announced that the new 5% rate would come into effect on 1 September 1997.
So the question becomes, is charging VAT on domestic G+E at 5% rather than 20% a subsidy to fossil fuels? Maybe, but not obviously.

And so we have The UK government did not dispute the data but denied that it provided any subsidies for fossil fuels under its own definition and that of the International Energy Agency. “We do not subsidise fossil fuels,” a government spokeswoman said. Whether that is true of not depends on your defns. So what are we to make of the unparliamentary language of Shelagh Whitley, also at ODI, was dismissive of the UK government’s claim to provide no fossil fuel subsidies. “They are lying,” she said. “It’s absurd..."? SW is lying in asserting that the UK govt is definitely lying. You may, if you wish, dispute the UK govts interpretation of the definitions.

What of the report?

The Graun, of course, is only picking snippets out of a long report which is mostly about other things. I, of course, am not going to read the whole thing, I'm just going to ctrl-f for "subsid". The first interesting quote is It is important to note in any discussion of subsidies that there are multiple legitimate reasons for intervening in the energy sector with financial or regulatory support, to correct imperfect markets and to give long-term strategic direction not provided otherwise. I should have expected that; this is the EU; they are always going to provide themselves a let-out for subsidising things that they like for reasons that please them. Notice what they don't have to say, though: that what is a subsidy depends criticially on your defn. This is definitely not an aspect they wish to consider. Figure 10 shows that whilst UK "subsidies" are higher than France's, ours have fallen from 2008 to 2016, whereas theirs have risen.

Unfortunately the report provides no detail of the break down of the subsidies, only Subsidies to petroleum products (mainly tax reductions) account for the largest share within fossil fuels, so just for once I can't fault the Graun for providing an irritating lack of detail: that's the EUs fault.

Other reactions

Craig Bennett, the Friends of the Earth CEO, said: “Spiralling climate change is going to cost people and our economy huge sums of money, through the damage, disruption and instability it causes. So it’s astonishing that the UK government is still throwing taxpayers’ money at... Which makes it clear that people are going to "misinterpret" this stuff. Because whatever charging a VAT rate of 5% rather than something higher is, it certainly isn't throwing taxpayers money at anything. Quite the reverse: increasing the tax rate would be flinging the money at the govt :-).


The emergence of modern astronomy – a complex mosaic: Part I


PaulS said...

So the question becomes, is charging VAT on domestic G+E at 5% rather than 20% a subsidy to fossil fuels? Maybe, but not obviously.

Seems pretty obvious to me - it's a tax cut for energy consumption, which is primarily produced from fossil fuels. What would be your argument against it being a subsidy?

William M. Connolley said...

Err, because of your assertion that it is a "tax cut". That implies there is some god-given level of VAT which is correct, and that anything above that is a "cut". But since the max rate it was ever charged at was 8%, it has only been "cut" by 3%, so all the calcs are wrong.

Is there some reason why 20% is the god-given correct rate? Why 19% represents a subsidy, but 21% is too high?

If FF was being charged a lower rate than Nooks, I could understand. But this is a rate that applies across the board. Actually there's some kind of fossil-fuel-levy too, dunno quite where that comes in or whether it is being counted.

PaulS said...

HMRC = Her Majesty's Revenue and Customs. Her Majesty = God's representative on Earth. Have some respect.

It's not about what is the "correct" rate. It's about the relative rate compared to other goods and services. What's your explanation for why G&E are charged at a lower VAT rate, other than to make the prices cheaper (which is what a subsidy is)?

If the standard VAT rate were reduced to 5% it would no longer be a subsidy but since the standard rate is 20%, having a specific exemption at 5% in order to reduce consumer costs is clearly a subsidy.

William M. Connolley said...

I think it is about the "correct" rate. Because the "standard" rate of VAT (https://www.gov.uk/vat-rates) is just a name. How do you tell the difference between the 5% stuff being subsidised, and the 20% stuff being over-taxed?

If you call it an unambiguous subsidy, then idiots like Craig Bennett will say stuff like "it’s astonishing that the UK government is still throwing taxpayers’ money at..." which is obviously wrong. The UK govt isn't doing that. Because that *is* the classical subsidy, which this isn't.

Graeme said...

If you look at the cash flows it does begin to look like a subsidy but for the supplier rather than the end customer. I presume that the likes of SSE pay 20% VAT on their inputs. So if the domestic part of their outputs is only charged at 5% VAT then it is possible that the government will have to repay a proportion of input VAT to the company. Obviously it depends on the ratio of domestic to non-domestic supply. I think it is acceptable to claim that a government repayment of VAT to SSE could be claimed as a subsidy.

William M. Connolley said...

That's a good point, if true. Indeed if true I'd have to take back my throwing money slur. OTOH, I have a hard time seeing HMG handing back a vast pile of money, so I'm not convinced.

crandles said...

>not convinced

Why not?

Lots of businesses get VAT refunds with every quarter: mainly farmers whose food sales are zero rated. I would expect utilites supplying domestic customers would be the same. First utility accounts I looked at were for Innogy SE and showed less than 8% profit and less than 5% staff costs. Some other costs will be exempt/zero rated, but I expect standard rated supplies will be around 85% of revenue. If commercial represents 80% and domestic supply only 20% then I would estimate 0 VAT payable. But I would expect domestic to usually be more than 20% of most utilities and the business to get regular VAT refunds.

However, I don't really see it that VAT refund amount is a subsidy.

>"I think it is about the "correct" rate."

Nor do I see it as the 'correct' rate mattering (whatever correct means). Whether the correct rate is 3% 10% 30% the reality is that the 5% is 15% less than 20%. If the vast majority of things people spent money on was zero rated or exempt and only small parts of the economy charged at 5% and 20%, then I could see the argument that 5% rate wasn't a subsidy.

This then leads to suggesting: If 20% of economy is zero rated or exempt, 1% charged at 5% and 79% charged at 20% then I could see an argument for calculating average rate as 15.85% then saying domestic supply is getting a 10.85% subsidy, standard rated goods getting extra charge of 4.15% and zero/exempt getting 15.85% subsidy.

OK, that isn't the full 15% being a subsidy but most of that 15% does look like a subsidy to me.

Of course, you can then move on to say that essentials like food, rent, domestic heat and light deserve to be subsidied to help the less well off and everything else are luxuries that deserve to be taxed at higher rates. Then there are other objectives, like wanting to tax goods with externalities like fossil fuels. As you bring these in, you soon get to the point where you realise you could continue arguing over it for the rest of the year without making much progress. Maybe this is getting towards your 'correct' rate mattering?

David B. Benson said...

I always call that organization the Fiends of the Earth, mispelling intentional.

Phil. said...

Surely subsidies on fossil fuels would be with respect to the rates charged for other energy sources? Is the VAT rate charged on electricity from wind, nuclear or solar higher than that from FF?

Graeme said...

"In 2016, the UK pumped more than €12 billion into fossil fuel support, closely followed by Germany, France, Italy and Spain. However, those countries actually then spent more on renewable energies like wind and solar than on coal, gas and oil."


From the graph, it looks as if the UK spent about 50% on fossil fuels and 50% on other stuff such as renewables and nuclear. However this half also includes something called electricity which seems to muddy the waters. The level of subsidy for renewables given their lack of output is of concern to me

William M. Connolley said...

Hmmm: "Energy subsidies in general, which include clean energy sources and nuclear, continue to rise, having already increased from €148 billion in 2008 to €169 billion in 2016. The Commission report concluded that this “was driven by the growth in renewable energy subsidies”". So since FF "subsidies" are E55 B, that implies renewable subsidies are about E110 B. Since the proportion of power from renewables is about 30%, It would seem that subsidies are in inverse proportion to power; though most of that is Germany.