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Subsidy cuts; VAT increases: threat or opportunity?

The news for energy efficiency in the past week has seemed grim: an EU ruling on VAT rates that will increase the cost of energy efficiency investments by 14% and the announcement of a £40 million cut in DECC’s subsidies for energy efficiency.

But let’s not despair. The French treat the issue of VAT differently; using general refurbishment of domestic buildings serving as an economic stimulus as their rationale for lower rates of VAT (10% for all retrofit works instead of France’s standard 20%), rather than the social benefits argument that the UK has used. If we adopt their approach, which additionally stimulates energy efficiency investment by lowering the rate of VAT even further (from 10% to 5.5% in France’s case) for energy-related retrofit, we’ll incentivise more action on the energy performance of our homes than the 5% VAT rate alone has done.

And there are better ways for DECC to deliver its energy security and climate change objectives, through cost-effective energy efficiency investments, rather than handing out market-distorting subsidies. ACE has long called for a more long-term, robust framework that will enable the market for energy efficiency to develop sustainably, and now is the perfect opportunity for DECC to develop this.

The French VAT reduction scheme is just one example of a more systemic incentive that could be offered. Revenue neutral stamp duty or council tax incentives for the domestic sector could lead to between 650,000 and 1.75 million additional retrofits every year. Similarly, differential business rates could encourage small business owners to invest in improving the energy performance of their buildings. If these incentives are combined with a long-term plan for minimum energy efficiency standards for all buildings, together with improved access to a range of finance options, we could begin to see the change in market demand for these measures that is needed.

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