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  • 21st Nov 2023

Stamp out carbon emissions – would a retrofit rebate on stamp duty be a good idea?

The Chancellor will deliver the 2023 Autumn Statement on Wednesday. The details are under wraps but there are plenty of rumours about what the Chancellor will – and won’t – announce.

One such rumour published in the The Telegraph is the idea to offer a rebate on stamp duty to incentivise energy efficiency improvements. This was once a front-running recommendation from the Government’s Energy Efficiency Task Force (before the expert group got scrapped), and an increasing number of organisations have backed the proposal. Based on what we know about the behavioural barriers that households face when retrofitting their property, is this a good idea? And how much impact might it have?

We know that the current government approach isn’t working

Only 69k heat pumps were sold in existing UK homes last year, which paints a worrying picture when you consider the Government’s own target of 600k sales by 2028. Although we expect an increase in demand from the recent uplift of the government’s grant offering for heat pumps (the Boiler Upgrade Scheme), reaching the target looks very challenging. Uptake of wider energy efficiency measures tells a similar story.

How would the stamp duty rebate help?

A stamp duty rebate has broad appeal – a recent BIT survey found that 78% of people would support this policy. And it’s attractive from a behavioural perspective in terms of both timeliness and loss aversion. 

A timely intervention

One of the four principles of BIT’s EAST framework is Timely: prompt someone to do something when they are more likely to be receptive to it. For home upgrades, house moves provide that moment.

We estimate that around 25% of major home upgrades take place in the two years after a house purchase. This is a rough estimate, but suggests that new homeowners are more than twice as likely to be making home upgrades than at other points. Hassle is a big barrier to green home upgrades: a BIT survey found nearly 3 in 5 homeowners with a gas boiler cite installation hassle as a key barrier to getting a heat pump. But if you’re already considering building work, then adding a heat pump or some loft insulation isn’t going to cause too much extra hassle. It also comes at a point of time when you’re thinking about, and have information on the energy performance of your property (through your EPC). A stamp duty rebate is likely to be effective because it’s applied when barriers to home upgrades are already lower.

Loss aversion

We feel losses roughly twice as much as an equivalent gain, so reframing incentives as avoiding a loss can be much more powerful. For example, some employers have experimented with “loss contracts”, where employees are told they will receive a performance-based reward at the end of the month, but that it will be deducted if employees fail to hit their target. It is financially equivalent to offering a reward at the end of the month but, it turns out, considerably more effective

To see how this translates to stamp duty rebates, imagine you want to claim a standard government grant to install insulation. You apply and, if successful, get awarded the grant. This is a ‘gain’. In contrast, with a stamp duty rebate, you are eligible for the rebate as soon as you purchase the property. But, if you don’t make upgrades in time, you are no longer eligible. You will lose your benefit. 

“Use it or lose it” is an oft-used phrase. But it turns out, it is also a very effective one.

What’s the potential impact of the policy?

This policy won’t hit everyone: it only applies when stamp duty is paid. Last year, this was 2.4m residential sales, or around 9% of households. Some of these will be new builds, many of which are already efficient. It also limits the size of the incentive. Even for those who do pay stamp duty, around half of purchases attract less than £2.5k – substantially less than current heat pump incentives of £7.5k. 

This policy won’t, single-handedly, lead to efficiency improvements across the UK housing stock. But that doesn’t mean we should overlook it. As part of a programme of incentives that encourage home upgrades, why would we not offer an incentive that, by its design, is likely to be more effective at lower cost than many of the others? If a quarter of house sales that incur stamp duty make an upgrade as a result, we could improve around 10% of the housing stock in five years. It doesn’t complete the jigsaw, but it’s an important part of the puzzle.

What could we do instead? 

The Energy Efficiency Infrastructure Group have put forward a more sophisticated version of the policy, where in addition to a rebate, the amount you pay in stamp duty changes is dependent on the energy performance of your property. So someone buying an inefficient property would pay more stamp duty, but they could choose to claim back that additional cost by improving the property. This could start to create market incentives for energy efficient properties, adding incentives for sellers as well as recent buyers.

Key to its success will be the detailed design of the scheme and its implementation. How much percentage rebate is needed to drive action? Should the scheme use a simple list of energy improvement options, or be based on EPC ratings for eligibility? Would funding a specific grant for homes sold not eligible for stamp duty be good value for money?

We’re working with colleagues at Nesta on future government subsidy schemes for heat pumps, and are currently talking to stakeholders to understand what might work well. Please get in touch if you’ve got thoughts on this, as we’d love to hear your ideas.