Increases in fuel prices for residential heating due to a carbon tax will raise the proportion of people experiencing fuel poverty, according to research by the Economic and Social Research Institute (ESRI).
The institute said the inability of households to afford a warm home is a “growing concern” across the world. The European Commission has established the Just Transition Fund to protect households most affected by the climate transition.
The fund will invest in measures to protect vulnerable households and reduce fuel poverty. However, environmental policies such as carbon taxation “could increase the challenge of reaching this goal”, according to the ESRI.
“Little is known about the effects of carbon taxation, improvements in energy efficiency, changes in energy consumption and lump-sum transfers on fuel poverty or poverty in general,” it said.
“The results of this research add to our understanding of how increases in carbon taxes via energy prices, changes in fuel efficiency, and energy consumption levels affect fuel poverty and income poverty.”
The research found that being a single adult with dependent children, having low education levels, low income levels, and having darkness or dampness in the dwelling “increases the probability” of being fuel poor.
“Among income-poor households, fuel-poor households have the lowest income levels, have issues with dampness, and are less likely to have double glazing in their dwellings compared to other income-poor households,” it said.
“The estimates show that a 1 per cent increase in fuel prices for residential heating due to carbon taxation will raise the proportion of people experiencing fuel poverty from 11.5 per cent to 12 per cent.”
The research also found that while increases in lump-sum transfers benefit lower-income households, increases in energy prices and in the amount of energy required to heat a dwelling have a relatively larger negative effect on lower-income households.
The results show that losses in real income as a result of increases in carbon taxes on fuel are key to understanding the link between fuel poverty and income poverty. Previous ESRI research shows levels of deprivation and dwelling quality are key to explaining fuel poverty.
“In line with that research, the results of this analysis show that reducing general levels of income poverty of the most vulnerable households is an important step toward reducing fuel poverty,” the ESRI said.
“In addition, improving energy efficiency levels will also have an important contribution to reducing fuel poverty.
“When designing policies to tackle fuel poverty, it is important to consider dwelling quality, a broad range of retrofit measures, and to avoid regressive funding mechanisms.
“In addition, it is important to consider that while carbon taxes can increase the number of fuel poor, this can be overcome by using the additional revenues to finance lump-sum transfers and to encourage investment in energy efficiency by vulnerable households.”
The ESRI added that the “public acceptability” of low-carbon policy instruments partially depends on how distributional effects are addressed.
“Increases in carbon taxes can increase income poverty through a number of different channels: current energy consumption, energy prices, the existing level of poverty, and changes in the number of households experiencing fuel poverty,” it said.
“Understanding the distributional effects of environmental policies is therefore important for a better-informed public debate, and for the design of effective policies to counter negative distributional impacts.”