Subsidies create distortions. They alter the natural balance of supply, demand and fair competition in the marketplace. The Government’s Net Zero target has resulted in millions of pounds of taxpayer money being spent on subsidising ‘green’ projects, and, unsurprisingly, the distortionary effects are enormous.
In some cases, the subsidies are not simply distortionary, but they are actively counterproductive to the intended aim. The latest of these was revealed in a report by the Public Accounts Committee today. The report says that the home retrofit scheme, which cost £4.6bn of taxpayer money, had ‘failed at every level’.
The scheme has left more than 30,000 properties with defective insulation. In some cases, the damage has been so severe that properties have become unsafe to live in. External wall insulation, one of the most heavily subsidised measures, has reportedly failed in the vast majority of cases, causing damp, mould and structural problems that will now cost billions to fix.
The committee looked at Ed Miliband’s Department for Energy Security and Net Zero, where the scale of the problem had been left unrecognised for two years. The first scheme is the Energy Company Obligation scheme, requiring suppliers to install insulation in homes with poor energy efficiency. The second scheme is the Great British Insulation scheme.
According to the report, more than £4.6bn is estimated to have been spent on the two schemes, which have been entirely derailed by poor-quality installation. The costs, which are borne by energy suppliers, will ultimately be passed on to consumers in the form of higher energy bills.
The fraud itself is particularly concerning. The energy regulator Ofgem has identified a fraud rate of 1.75% of the work conducted, equivalent to more than £80m.
This is an embarrassing footnote for Government climate policy. It is a textbook example of what happens when the Government backs the wrong horse, with taxpayer funded subsidies and box-ticking. Is it any surprise that the result is poor workmanship and alleged fraud?
At the heart of the problem is the Government’s insistence on pursuing Net Zero through centrally planned interventions. Energy companies were forced to fund insulation measures to meet regulatory obligations, and installers were paid per job completed. Oversight was fragmented across departments, regulators and certification bodies, none of whom bore responsibility when things went wrong.
Everyone was rewarded for volume, speed and compliance. No one was rewarded for successful outcomes. The subsidies caused a distortion, and the incentives were entirely off.
This is precisely the consequence of government subsidies that free-marketeers have always warned about. When the Government subsidises specific technologies or outcomes, and delivery is outsourced to a web of contractors that want to extract as much money as they can from subsidies, poor outcomes are practically inevitable.
A market-based approach to decarbonisation would look very different. Instead of mandating technologies and subsidising installations, households would be free to choose energy-efficiency improvements because they make sense financially. A competitive market, where outcomes matter and price signals indicate whether a technology is worth spending money on, would almost certainly produce better outcomes at a lower cost.
The insulation fiasco should serve as a stark warning. Climate policy that ignores incentives wastes taxpayer money and actively harms the people it claims to help.
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