DEFRA: Effect of Fiscal Measures on Domestic Lamps

BNDL12: Effect of Fiscal Measures on Domestic 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 Briefing Note estimates the effects of three alternative economic instruments relating to household lamps:

Option 1: Increasing VAT on tungsten filament (GLS) lamps to 25%;

Option 2: Charging a flat rate of 50p on certain lamps;

Option 3: A combination of reducing the VAT on compact fluorescent lamps (CFLs) to 5% and introducing an inefficiency charge of 85p on tungsten filament lamps.

2. Cost and benefits of economic instruments

2.1 Increasing VAT on tungsten filament lamps to 25%

Increasing the rate of VAT to 25% on the less efficient tungsten filament lamps will increase their prices only marginally, due to the very low price of these lamps (an average price of 50p). As compact fluorescent lamps (CFLs) have a much higher price relative to tungsten filament lamps (an average price of £3.00), it seems unlikely that this change to VAT alone will result in a noticeable increase in the sales of CFLs.

From the Treasury’s point of view, each sale of an extra CFL would net 45p in VAT (at 17.5%) from the CFL sale but would lose 5.5p in tax per annum from the equivalent tungsten filament lamp sales for the next 12 years on average – 66p in all (assuming that each CFL lasts six times as long as a tungsten filament lamp which itself lasts 2 years on average).

At present 18 million CFL lamps are sold each year, netting about £8 million in VAT. 223 million tungsten filament lamps are sold each year netting about £16.7 million pounds in VAT. This figure would rise to £24.5 million per annum under the proposed increase if no extra CFLs were sold.

In the best case scenario (in energy efficiency terms) if all 480 million tungsten filament lamps the changed to CFLs the net cost to the Treasury would be £206 million.

2.2 Charging a flat rate of 50p on tungsten filament lamps

Adding an extra flat charge of 50p on the less efficient tungsten filament lamps will effectively double their price. Although CFLs are still about 300% more expensive, CFLs would then become a cost-effective alternative to tungsten filament lamps on purchase price alone: assuming that a CFL has a lifetime of at least 6000 hours, it would become more expensive to buy six tungsten filament lamps with a lifetime of 1000 hours.

If a tungsten filament lamp was replaced with a CFL the Treasury would gain 45p tax from the CFL sale but would lose an average of 30.5p per annum from ‘lost’ tungsten filament lamp sales tax revenue for the next 12 years £3.66 in all.

Therefore, in the best case scenario in which all the tungsten filament lamps are changed to CFLs, the net cost to the Treasury would be £1540 million over the 12 year life of the lamps. However, £1440 million of this represents taxes that the Government would not have had without the new flat-rate tax surcharge. The Treasury would actually be revenue positive from this measure until more than half the lamps (~260 million) have changed from tungsten filament to CFL.

2.3 Lower VAT for CFLs; flat rate surcharge for tungsten filament lamps

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.

Such a change would cost the Treasury more in the long term (32p per CFL lamp sold), but would still be revenue positive until about half of the tungsten filament lamps have been switched to tungsten filament lamps.

3. Energy savings from change from tungsten filament lamps to CFL lamps

It has not been possible to quantify the impact of such price changes on sales, but Table 1 does provide estimates of the unit energy savings which result from a switch to selling more energy efficient lamps. It also shows the current proportion of energy efficient sales, thus indicating the scope for increasing sales further.

Table 1. Energy savings associated with economic instruments

CFL
Energy consumption per year of product (GWh) = 1074
Energy saving per product (GWh) = 0
Annual Sales that could be effected by economic instruments = 18 Million
Current % of sales = 7%

Tungsten filament 100W
Energy consumption per year of product (GWh) = 6076
Energy saving per product (GWh) = 4557
Annual Sales that could be effected by economic instruments = 63 Million
Current % of sales = 26.0%

Tungsten filament 60 W
Energy consumption per year of product (GWh) = 6944
Energy saving per product (GWh) = 5208
Annual Sales that could be effected by economic instruments = 117 Million
Current % of sales = 48.0%

Tungsten filament 40 W
Energy consumption per year of product (GWh) = 1765
Energy saving per product (GWh) = 1324
Annual Sales that could be effected by economic instruments = 45 Million
Current % of sales = 18%

Notes:

Energy savings are calculated as the difference between the energy consumption of a tungsten filament lamp and an equivalent (in terms of light output) CFL. Savings depend on the usage of the lamp. The savings given here represent the average hours of use for each lamp type.

5. Other fiscal options

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: info@mtprog.com or call the MTP enquiry line on +44(0)845 600 8951, quoting the document reference.

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Labels: kWh, sales, surcharge, tax, Treasury, VAT