BNDL12: Variation of the Rate of VAT on Lamps
This brief and referenced information is a public consultation document and will be used to inform Government decisions. The information and analysis in the brief forms part of an integrated, public domain knowledge base that is managed and held by Defra’s Market Transformation Programme [1]. The policy scenarios and action plans are illustrative, intended to stimulate discussion and do not imply commitment by Government nor by any other body.
1. Background
This note expands on a paper produced by the UK Market Transformation Programme (MTP) on economic instruments to improve household energy efficiency. This Briefing Note estimates the effects of two alternative economic instruments relating to household lamps: increasing VAT to 25% and charging a flat rate of 50p on certain lamps.
2. Cost and benefits of economic instruments
Two economic instruments are examined below:
- Increasing VAT to 25 % on less efficient lamps such as 100 W and 60 W GLS lamps.
- Adding a flat charge of 50p to the price of less efficient lamps such as 100 W and 60 W GLS lamps.
Increasing the rate of VAT to 25% on the less efficient GLS lamps will increase their prices only marginally, due to the very low price of these lamps. As compact fluorescent lamps (CFLs) have a much higher price relative to GLS lamps, it seems unlikely that this change to VAT alone will result in a noticeable increase in the sales of CFLs.
Table 1a. Costs and benefits of increasing VAT to 25%
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Estimated product price (£)
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Total current sales per year
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% of total sales (230 Mio)
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Cost to Treasury per additional EE sale (£)
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Cost to Treasury (£Mio)
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|
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Current price
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With VAT on GLS at 25%
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|
|
|
|
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CFLs
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3.00
|
3.00
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9 Mio
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1.5%
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0.0
|
0.0
|
|
100W GLS
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0.50
|
0.52
|
63 Mio
|
26%
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-0.02
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-1.26
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|
60W GLS
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0.50
|
0.52
|
117 Mio
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49%
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-0.02
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-2.34
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Notes:
- Sales for CFLs include lamps distributed/sold under EEC.
- Costs to the Treasury are negative i.e. they represent an increased tax take.
- Total lamp sales per year will drop as the proportion of CFLs increase, due to the longer lifetime of CFLs.
Adding a flat charge of £0.50 on the less efficient GLS lamps will effectively double their price. Although CFLs are still about 300% more expensive, CFLs would then become a cost-effective alternative to GLS lamps on purchase price alone: assuming that a CFL has a lifetime of at least 5000 hours, it would become more expensive to buy five GLS lamps with a lifetime of 1000 hours.
Table 1b. Cost and benefits of adding a flat charge of 50p
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Estimated product price (£)
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Total current sales per year
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% of total sales (230 Mio)
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Cost to Treasury per additional EE sale (3)
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Cost to Treasury(£Mio)
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|
|
Current price
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With £0.50 charge on GLS
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|
|
|
|
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CFLs
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3.00
|
3.00
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9 Mio
|
3.7%
|
0.0
|
0.0
|
|
100W GLS
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0.50
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1.00
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63 Mio
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26.0%
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-0.50
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-31.5
|
|
60W GLS
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0.50
|
1.00
|
117 Mio
|
49.0%
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-0.50
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-58.5
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Notes:
- Sales for CFLs include lamps distributed/sold under EEC.
- Costs to the Treasury are negative, i.e. they represent an increased tax take.
- Total lamp sales per year will drop as the proportion of CFLs increase, due to the longer lifetime of CFLs.
It has not been possible to quantify the impact of such price changes on sales, but Table 2 does provide estimates of the unit energy savings which result from a switch to selling more energy efficient. It also shows the current proportion of energy efficient sales within each product category, thus indicating the scope for increasing sales further.
Table 2. Energy savings associated with economic instruments
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Energy consumption per year of product (kWh)
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Energy saving per unit (kWh)
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Annual Sales that could be effected by economic instruments
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Current % of sales that are energy efficient
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CFL
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15 to 30
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0
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9 Mio
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3.7%
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|
GLS 100W
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96 to 120
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72 – 90
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63 Mio
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26.0%
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|
GLS 60 W
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58 to 72
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44 – 54
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117 Mio
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49.0%
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Notes:
- Energy savings are calculated as the difference between the energy consumption of a GLS lamp and an equivalent (in terms of light output) CFL.
- Savings depend on the usage of the lamp, estimates are presented for a both high and low use fittings (on-time: 3.3 – 2.65 hours per day).
- CFL equivalent for 100W GLS lamp uses 25W; CFL equivalent to 60 W GLS lamp uses 15W.
3. Other fiscal options
In a paper in 2003, the Energy Savings Trust suggested the following combination of fiscal measures for encouraging the sale of compact fluorescent lamps:
- the introduction of 5% VAT for energy efficient light bulbs, and
- an inefficiency change of 50p for incandescent bulbs.
In a revised paper published in October 2005, EST suggest that this inefficiency charge my need to be increased to 85p per bulb to account for the potential price increase of compact fluorescent lamps arising from a recycling charge applied to take into account the terms of the WEEE Directive on waste.
In addition, the Chairman of the All-party Group on Climate Change has suggested to the Treasury that the tax on incandescent lamps should be gradually increased until they are the same price as CFLs; the Treasury are looking at the proposal.
With feedback, questions or comments, please contact: or call the MTP enquiry line on +44(0)845 600 8951, quoting the document reference.
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[1] Further information and briefing on related issues at www.mtprog.com or follow the links if viewing on-line