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LONDON: The transition from a fossil-fuel dominated energy system to one with zero emissions would require trillions of dollars of investment in new production, distribution and consumption equipment worldwide.

New investments could support millions of new jobs in construction and manufacturing, but policymakers are struggling to decide whether to recover the costs from consumers or taxpayers.

In most countries, the cost of providing energy commodities and services, including gas, electricity, other heating fuels, and road fuels, is normally recovered from users in the same way as other services and merchandise.

But the proposed energy transition is likely to be expensive, with a high proportion of upfront capital costs for new generating units, transmission and distribution systems, and consumer equipment such as electric vehicles.

Lower-income households already spend a much higher share of their income on energy services and would be especially hard hit if costs are recovered in the normal way.

In the United States, for example, poorer households in the second of the fourth deciles spent an average of 10-14% of their post-tax income on gas, electricity, other heating fuels, and road fuels in 2019.

In contrast, richer households in the seventh through ninth deciles spent just 5-6% of their post-tax income on the same energy items (“Consumer expenditure survey”, US Bureau of Labor Statistics, 2020).

Precise details differ in other countries, but the poorest households almost always spend the highest proportion of their income on basic energy services for heating, cooking, lighting and surface transport.

As a result, cost recovery exclusively through utility bills and the private purchase of new consumer equipment, such as heating systems and electric vehicles, will hit the poor hardest unless they are given government support.

In many cases, the proposed transition would swap higher upfront capital costs for lower long-term fuel bills, for example by replacing gasoline-fuelled private cars by battery-driven vehicles charged by wind power.

But the poorest households are least able to afford upfront capital costs and risk becoming stuck with outdated and increasingly expensive legacy energy products.

Unless it is handled carefully, the energy transition could worsen energy inequalities and energy-related poverty.

The alternative is to shift some of the costs of the energy transition from consumers to taxpayers since most taxes are paid by households in the higher income deciles.

Broadly, governments have the option of subsidising expenditure on new generation, distribution and user equipment, or cutting taxes and boosting transfer payments to low-income households to offset higher energy costs.

The interaction between the energy transition and the rest of the tax and spending system is critically important - which is what makes it so politically controversial, and why plans for how to achieve it remain so vague.

Some supporters of ambitious emissions reduction have tried to separate transition policies from broader questions about tax and spending, including carbon prices and taxes, in order to reduce political opposition.

But the two issues are not really separable. To be credible, transition plans must spell out who will bear the associated costs and how.

This level of detail is just as important when considering plans for the mature energy systems of the United States, European Union and Britain as it is for China, India and other fast-growing energy consumers.

If consumers are left to pay the full costs of the transition, the poorest will have much less income to spend on other items, which is likely to be untenable for elected politicians.


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