The UK currently has the second lowest gas prices compared to other countries in the EU15. In contrast, the UK’s electricity prices are the highest for both industrial electricity prices and domestic electricity prices among the EU15, largely due to existing climate policies.

The UK Government is consulting on a Green Gas Levy, which would increase gas prices and facilitate the decarbonisation of heat, currently responsible for one third of the UK’s greenhouse gas emissions. The Green Gas Levy will fund the Green Gas Support Scheme (the consultation on which closed on 7 July 2020), which aims to increase the proportion of biomethane, a renewable and effectively carbon neutral energy source, in the grid.

The levy

The levy would fall onto suppliers, who will be expected to pay the levy to Ofgem, the regulating entity, in quarterly instalments from April 2022. The levy rate is set three months in advance of each scheme year (with the exception of two initial levy rates, set six months in advance of collection), set on a pence per meter per day basis.

The UK Government foresees that suppliers will pass this charge onto consumers. The levy is applied according to the number of meter points a supplier has served during a period, rather than a volumetric basis which examines actual gas consumption. Therefore, the UK Government anticipates that suppliers will distribute the levy equally among all customers, regardless of gas consumption. If this is the case, the increase on gas bills will be £1.40 at start of levy in 2021, increasing to £6.90 at peak of levy on 2028 , representing an increase of 1% on domestic gas bills. The UK Government considered a tiered system, whereby small consumers such as domestic and micro-business customers pay less. However, the consultation document concludes that a tiered system would substantially disproportionately affect businesses already facing challenges from COVID-19 impacts.

The consultation document states, however, that it is the intention of the UK Government to switch to a volumetric approach in 2024/25. This will mean that the levy will correspond more closely to actual gas consumed, and would ensure that domestic and micro-business customers are not disproportionately affected by the measures.

How will the levy incentivise a reduction in emissions?

One key difference between the proposed Carbon Emissions Tax, UK ETS and existing EU ETS is that the Green Gas Levy is not tied to a supplier’s contribution to emissions, meaning that the levy itself will not serve as an incentive toward green activities. However, the Green Gas Support Scheme, which the Green Gas Levy funds, will provide further financial incentives to producers of biomethane. For example, biomethane producers currently receive quarterly tariff payments based on the volume of biomethane injected, including the highest “tier 1” tariff for the first 40,000MWh of eligible biomethane injected. The Green Gas Support Scheme will increase this to 60,000MWh.

Impact on emissions

The Green Gas Support Scheme, which will run from Autumn 2021 to Autumn 2025, is expected to generate 21.6 metric tons of carbon dioxide equivalent in savings over its lifetime. Putting that figure into perspective, the UK emitted 451.5 MtCO2e in 2018. The Committee on Climate Change dismissed the green gas levy, among other measures, as being “far too limited”. However, the Green Gas Levy stands alongside other green policies in relation to consumption of gas. For example, investing £2bn in a Green Homes Grant, which will fund two thirds of the cost of hiring tradespeople to upgrade to improve the energy performance of homes. The Prime Minister even suggested that, by 2030, wind farms could power every home.