The answer to housing’s stubborn carbon emissions problem: green offsets
Paul Cheshire and Christian Hilber propose ‘green offsets’ to reduce property taxes in a way that is strictly scaled to energy efficiency, as a simple intervention to address the UK’s urgent need to reduce its residential carbon emissions.
Britain’s housing has a lot in common with the antique US gas guzzlers on the roads in Cuba. We keep older houses going when they are obsolete and unfit. That is because Britain builds so few new ones and does not systematically upgrade the old ones. It is also why the country has, over 30 years, developed a crisis of housing unaffordability. Comparing the most recent 30 years with the previous 30 we built 4.1 million fewer houses, and in that time the contribution of the residential sector to the UK’s total carbon dioxide emissions increased from 13 to 18.5%. If the UK is serious about its net-zero target, it desperately needs effective policies to reduce residential CO2 emissions.
We recently published a report on reforming our system of residential property taxes: Home truths: options for reforming residential property taxes in England. Our proposals are designed to be fairer, more efficient, more transparent, encourage building more houses by ensuring local communities get revenues they need to provide services for new residents, and systematically to incentivise investment in carbon reduction. This would tackle two of the root causes of the damaging carbon emissions from housing in the UK: not enough modern, energy-efficient homes, and the need to upgrade older ones. To date neither historic schemes, such as the Green Deal, nor proposed schemes, such as pressurising lenders to record the energy performance of the houses on which they make loans and to ‘help owners’ make improvements, have had any real impact. The last of these is a typical piece of symbolic action: government passing significant costs to the private sector and then relying on voluntarism.
Reforming residential taxes to reduce emissions
We suggest two reforms to residential taxes that would have a real impact: fiscal incentives to local communities to make new homes not just acceptable but welcome; and systematic incentives to improve the energy efficiency of existing homes. In the most favourable circumstances and even abstracting from their embodied carbon, building new houses cannot go far towards achieving the goal of net-zero by 2050: doubling house building from the average of the last five years would still mean the flow of new houses was only about 1.3% of the stock. When it comes to the built environment, the sheer size of the stock relative to that of the flow of new buildings means change is a lot slower than the melting of glaciers.
To have any acceptable impact on the energy efficiency of housing within the time frame necessary to combat carbon emissions it is essential to devise policies that will really accelerate the rate of upgrading the existing housing stock. Just imposing higher standards on new ones may even be counterproductive since it could slow the rate of building and make new houses even more expensive. New homes built to current standards are orders of magnitude more energy-efficient than old homes.
Our proposal is to introduce ‘green offsets’: that is, to adjust property taxes, strictly to reflect each building’s energy efficiency. This is not an entirely new idea. John Muellbauer recommended something comparable in his proposal to replace Council Tax with a land value tax. Our proposal is just much simpler. And there are precedents in other contexts: for example, local councils often charge fees for residents’ parking tied to the energy efficiency of the cars.
While not beyond criticism in terms of its accuracy, we are fortunate in that we already have a system in place rating the energy efficiency of houses – the Energy Performance Certificate (EPC). At present, however, this is not much more than informative and the EPC rating is not regularly updated. Government has a proposal to require lenders to include data on the energy efficiency of the houses they are lending on, using EPC information. This change might be coupled with making lenders engage with owners to improve energy efficiency. This will have no impact on older mortgage-free owners nor on young renters and at best is still not much more than informative, however, and any contribution to carbon reduction in homes would depend on the enthusiasm and scrupulousness of individual lenders. Nor would it address the issue of EPC accuracy.
Abstracting from how green the energy used may be, there are two separate aspects of energy use in houses. There are the intrinsic properties of the house – the quality of its insulation, its lighting and heating systems, external surface area and draft excluding properties; then there is the actual amount of energy used by the occupants of the house. These are imperfectly correlated. EPCs relate only to the first aspect and our proposal addresses only this.
Incentivising home-owners and landlords to act
The significant merit of green offsets for property taxes is that they would provide a systematic incentive for all home-owners and landlords (assuming they pay the property tax, as we propose) to invest in measures to improve the energy performance of their homes. They would also generate a systematic incentive for home-owners and landlords to make sure their home’s EPC was up to date and accurate. One criticism of EPC ratings at present is that they do not change to reflect improvements in energy use.
Schemes for home insulation have been ineffective. They have been complex and bureaucratic requiring home-owners and landlords to both be aware of the schemes and how to apply for them, and to be able to evaluate the costs and benefits of improving home energy performance. If property taxes were directly related to EPC ratings then home-owners and landlords would be alerted every time they got a tax demand and it should be easy for local governments to offer an online ready reckoner to help estimate exactly what the savings in tax would be if they took the necessary steps to improve their home’s EPC rating. There would also be a continuous incentive to ensure any investments the home-owner or landlord made were reflected in their EPC rating.
Such green offsets seem, on the face of it, a no-brainer. No significant new agencies or systems would be needed. They would just coordinate the existing EPC system and whatever system of property tax was in force to incentivise the reduction of carbon emissions from our entire stock of houses.
Avoiding negative impacts on poorer households
Apart from being novel, what could be the objections? The most plausible are that government would be in danger of losing revenue and that the net effect would be regressive.
Neither objection stands up to examination, however. It would be relatively easy to design the system so that it was revenue-neutral – providing rebates for more energy-efficient houses and a surcharge rate for the least energy-efficient.
Poorer people probably tend to live in less energy-efficient houses (but bear in mind on average Council houses are more energy-efficient than are comparable private homes) but this is difficult accurately to document. What can be documented is the relationship between energy efficiency as measured by EPC ratings and the price of a house, as recorded by the Land Registry. These are positively and statistically significantly correlated but the relationship in economic terms is very weak. The unconditional correlation coefficient between price and EPC ratings for all houses sold in England and Wales in 2019 was only 0.0145. Better quality design and materials may reduce the energy use of more expensive, often detached, houses but being a terrace or a flat reduces external surfaces and almost completely negates those potential energy advantages of more expensive houses.
The views in this commentary are those of the authors and do not necessarily represent those of the Grantham Research Institute.