Cut household energy taxes: calculation note

Central fiscal result

+£7.0bn - Net fiscal impact in 2027-28

Low case: +£3.0bn. High case: +£14.0bn. Positive numbers are fiscal costs or borrowing pressure. Negative numbers are Exchequer savings or receipts.

Scenario and baseline

• Domestic energy VAT and policy levies are removed or taxpayer-funded.
• Ofgem price cap provides the household bill scale.
• Reform's current page gives direction, not a full schedule.
• No wholesale energy-price change is modelled.

Affected population

• Affected units are UK domestic energy households.
• The cap is £1,641 for a typical dual-fuel bill.
• Low-income households benefit if pass-through reaches bills.
• Energy suppliers face transition and billing changes.

Gross impact

• Central cost assumes roughly £7bn of receipts or levy funding lost.
• Low case cancels some schemes rather than replacing them fiscally.
• High case includes broader levy replacement and compensation.
• No reliable growth dividend is netted off.

Fiscal build-up, central case

• Domestic energy VAT loss: +£2.5bn
• Policy levy replacement: +£4.5bn
• Administration and billing changes: +£0.1bn
• Demand and tax offset: -£0.1bn

Central net impact: +£7.0bn in 2027-28.

Behaviour and pass-through

• Low case assumes partial scheme cancellation rather than taxpayer funding.
• Central case assumes high supplier pass-through to household bills.
• High case includes compensation for contracts and wider levy replacement.
• Lower bills may raise energy demand and weaken efficiency incentives.

Phasing

• 2026-27: +£1.0bn. Preparation or partial implementation.
• 2027-28: +£7.0bn. Main scenario year.
• 2028-29: +£7.5bn. Behaviour and pass-through develop.
• 2029-30: +£8.0bn. Steady-state uncertainty persists.

Main source groups

• Metcalf and Stock, "The Macroeconomic Impact of Europe's Carbon Taxes" (American Economic Journal: Macroeconomics, 2020): European carbon tax experience does not show large negative macroeconomic effects at observed levels; warns that cutting green levies may not deliver large growth gains.
• Stern and review team, "The Economics of Climate Change: The Stern Review" (HM Treasury and Cambridge University Press, 2006): Climate damages create an economic case for pricing emissions and correcting energy-market externalities; explains why short-run bill cuts can create longer-run costs.
• Ofgem, "Energy price cap explained" (2026): The April-June 2026 cap is £1,641 for a typical dual-fuel direct-debit household; scale check for energy-bill relief.
• Reform UK, "Our Contract with You" (2024): Reform pledges cheaper energy by scrapping net-zero policies, levies and taxes; defines policy direction but not details.
• Office for Budget Responsibility, "A brief guide to the public finances" (2026): Used for the macro-fiscal baseline, receipts and spending context, and relevant behavioural assumptions.
• Andersson, "Carbon Taxes and CO2 Emissions: Sweden as a Case Study" (American Economic Journal: Economic Policy, 2019): Sweden’s carbon tax reduced transport emissions relative to a synthetic-control comparison; shows that weakening energy-price signals can have real emissions costs.
• Reform UK, "Our Policies" (2026): Reform pledges cheaper energy by scrapping net-zero policies, levies and taxes; defines policy direction but not details.