Taxing carrots and sticks: Incentivising efficiency through property taxes

Darryl Croft
Director World Sustainable Energy Days 2013 Wels, Austria 27 February 2013

Outline
Key barriers to uptake of energy efficiency Use of Energy Efficient Stamp Duty (EESD) Integration with financing approaches

Why lack of motivation for EE?

Key Barrier 1

Energy efficiency doesnt add value to property

Why lack of motivation for EE?

Key Barrier 1

Energy efficiency doesnt add value to property

Energy efficiency measures must pay back through fuel bill savings

Why lack of motivation for EE?

Key Barrier 1

Energy efficiency doesnt add value to property

Energy efficiency measures must pay back through fuel bill savings

Key Barrier 2
Period of occupancy typically shorter than lifetime of measures

Why lack of motivation for EE?

Key Barrier 1

Energy efficiency doesnt add value to property

Energy efficiency measures must pay back through fuel bill savings

Risk over payback: Expensive measures excluded, risk over cheaper measures

Key Barrier 2
Period of occupancy typically shorter than lifetime of measures

Why lack of motivation for EE?

Key Barrier 1

Energy efficiency doesnt add value to property

Energy efficiency measures must pay back through fuel bill savings

Finance mechanisms (eg. UK Green Deal)

Risk over payback: Expensive measures excluded, risk over cheaper measures

Key Barrier 2
Period of occupancy typically shorter than lifetime of measures

Why lack of motivation for EE?

Key Barrier 1

Energy efficiency doesnt add value to property

Property taxes (e.g. Purchase, Municipal)

Energy efficiency measures must pay back through fuel bill savings

Finance mechanisms (eg. UK Green Deal)

Risk over payback: Expensive measures excluded, risk over cheaper measures

Key Barrier 2
Period of occupancy typically shorter than lifetime of measures

Stamp Duty Land Tax

Charged as a percentage of the value of property purchased

Up to 125,000 125,001 - 250,000 250,001 - 500,000 500,001 to 1 million Over 1 million

Zero 1% 3% 4% 5%

Precedent for using SDLT to deliver additional objectives: From 2010, 0% rate extended to properties worth up to 250,000 for first time buyers Since 2007 all new Zero Carbon homes are fully exempt from SDLT

Proposal: Use SDLT to address first barrier: Adjust rate of SDLT paid by the purchaser based upon the energy efficiency of property being bought = Energy Efficient Stamp Duty (EESD)
www.ukace.org

An Illustration

300,000

An Illustration
-1.5 -1.0 -0.5
Stamp Duty Land Tax adjusted based on EPC rating A B C D E F G

0 300,000

+0.5

+1.0

+1.5

EPC Band B Standard SDLT: EE adjustment: Final rate: Cost: 3% -1% 2% 6,000

EPC Band E 3% +0.5% 3.5% 10,500

Theoretical Impact
EE property requires 4,500 lower tax payment
EE property more attractive to purchaser since invokes a lower tax payment EE property has increased value as a result Incumbent household has confidence that improving efficiency will increase value Household chooses to invest in energy efficiency immediately: in addition, they benefit from lower fuel bills until point of sale

Installation costs vs tax reduction

For 44% of households SDLT reduction would exceed the installation cost required to move up one EPC band 80% when including 5 years of fuel bill savings

Financing with Energy Efficient tax

Case becomes compelling when twinned with financing mechanism:
removes upfront capital requirement Energy Efficiency Stamp Duty is a motivation, encouraging energy efficiency take-up via Green Deal

Financeable improvements
EPC ratings of English homes under financing scenarios:

Relevance for financing

Concern is that a finance charge will be viewed negatively by purchasers i.e. depress house price. Energy Efficient tax is designed to increase value of efficient properties: may have a finance charge attached but will invoke a lower tax payment
=>

Efficient properties with finance are more attractive improving efficiency through the Green Deal seen as adding value.

Conclusions
Reflecting energy efficiency in value of property is desirable merely reflects running costs EE property taxes are a mechanism that could help deliver this Could drive uptake of finance mechanisms Would address the perceived concern that a property with finance is unattractive due to repayment charge

- For further details see:

Croft and Sunderland (2011) Addressing Key Barriers in the Delivery of Domestic Energy Efficiency Improvements - The Case for Energy Efficiency Property Purchase Taxes
http://www.ukace.org/wp-content/uploads/2011/07/ACE-Research-2011-06-5-214-Croft.pdf

Croft and Preston (2013) Taxing carrots and sticks: Incentivising efficiency through property taxes

Thank You
Darryl Croft Director, Abelscroft EI
darryl@abelscroft.com