Turn energy pricing on its head and save the planet

Here’s an interesting idea, although the first sentence is transparently false:

Nobody has noticed that today’s tariff schemes actually encourage consumption. Instead we need tariff schemes that encourage conservation.

One option is “reverse pricing”, a simple framework that would increase the marginal cost of energy without introducing new taxes or raising average prices. This is important because marginal prices affect our behaviour, but total expenditure affects our wealth. So if we can increase one but not the other, we will create incentives to consume less without leaving households worse off overall.

At present, marginal prices are as low as they can be… you are paying about 23p each for your first 500 units, and 10p or 11p each thereafter. So your marginal rate is about half your starter rate. The same is true for gas pricing. It is not rocket science, just a version of the bulk buy discount you see on the high street every day. But the result is that your energy gets cheaper and cheaper, the more of it you use.

This is madness. And the more so, since a better pricing scheme is available which is equally simple. Consider the effect of a government requirement that energy tariffs be organised in three tiers, with prices rising in each tier. For argument’s sake, we could have prices double from one tier to the next, instead of falling off by 50 per cent as at present. This is an example of a “reverse pricing” regime.

The government or regulator would have to impose such a scheme (there is a sound business logic behind bulk discounts) and I have not been able to think through the ramifications on whether competition would work well. A carbon tax is still the first-best approach. Still: interesting. The source is an FT comment piece by Sam Arie, who claims to answer all questions here.

Tim Harford’s blog

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Tim, also known as the Undercover Economist, writes about the economics of everyday life.