Ministers preparing to slash heat pump subsidies to fund defence spending

Creating energy independence is defence spending.

Madeleine Gabriel, a director at the charity Nesta, said: “Bills are soaring again because of high gas prices. Our reliance on gas is the reason we are in an energy crisis, so cutting funding for heat pumps makes no sense.

Mmm…I’d say that high gas bills—if they are high relative to electricity prices—are a good reason not to need a subsidy, because it means that people already have a potent incentive to switch to a heat pump.

You need a subsidy or a tax on something when there is a positive or negative externality, something that isn’t captured in consumer price information, because then purchasing decisions are made without incorporating that externality. You internalize the externality. But…in the case of a high gas bill, price information informing a consumer to switch is present. If they already want to switch on their own…shrugs You could maybe argue that the incentive isn’t as strong as it should optimally be, but I’d certainly think that the argument for a tax or subsidy is weaker if there is price information that would make a consumer want to switch than if there is not.

Not only that, but in general, for negative externalities, you normally want a tax, and for positive externalities, you normally want a subsidy. The issue with natural gas heating is the carbon emissions, which is a negative externality. You probably don’t want a subsidy on heat pumps to internalize that, but rather a tax on natural gas heaters. A subsidy to heating will tend to cause more use of heating relative to what would be optimal if the externality is negative.